Brian Digney: Diversification is the cornerstone of long-term portfolio management.
At its core, diversification means spreading capital across different assets, geographies, sectors, and managers to reduce overall portfolio risk. In doing so, we aim to stabilise returns and avoid extreme volatility — creating a more predictable return stream over time.
We also want portfolios that can perform across different market regimes. With constant shifts — geopolitical, market, interest rate risks — we aim for structures that don’t require constant active management.
Traditionally, the foundation has been Strategic Asset Allocation (SAA): a rules-based approach that sets long-term targets – e.g., 60% equities, 40% bonds. It brings discipline and consistency to rebalancing decisions.
"TPA is a very important topic for institutional investors at present.
I suspect we will continue to hear more about it."
Many investors then apply an overlay — Tactical Asset Allocation (TAA) — which adds flexibility. It allows for short-term shifts in response to market moves — for instance, increasing equity exposure after a large drawdown to capture potential alpha.
More recently, the Total Portfolio Approach (TPA) has gained traction. Unlike SAA or TAA, it views the entire portfolio holistically, assessing each asset’s contribution to overall risk, return, and liquidity objectives.
Rather than focusing on asset class buckets like stocks and bonds, TPA emphasises risk-based factors — such as interest rate sensitivity or economic exposure — and takes liquidity into account as a core part of the strategy.
TPA is a very important topic for institutional investors at present. I suspect we will continue to hear more about it.
Brian: When thinking of traditional allocation approach to equities or bonds, most people will have done so with a predetermined understanding of how those asset classes should perform under different market regimes. Historical experiences have reinforced these beliefs.
I will say that has changed a little bit over the last couple of years. We are seeing some dislocation and whether that will continue to be the case going forward. We don't know.
Alternatives are not uniformly correlated with public markets, which is one of the key reasons why people allocate to alternatives to begin with. But by doing so, we introduce a range of additional risks. Such as manager or strategy specific risks.
Alternatives can provide a range of different benefits to portfolios to supplement allocations to equities or bonds. However, we need to be aware of aspects such as concentration that we can introduce into the portfolio by allocating to a small number of managers or additional concerns such as counterparty risk.
Brian: If we think about how people traditionally invest with external managers that will typically be in the form of allocations to commingled funds.
You, as an investor, are in a fund alongside a range of other investors or LPs, which the manager has structured and runs. You follow their strategy, with little, if any, control.
Co-investments are slightly different – here, we're talking about direct investments where you are investing as a partner alongside the general partner (GP), outside of the commingled fund. That introduces both opportunities and challenges.
Most investors are interested in co-investment opportunities for several reasons – a GP may be able to offer an idiosyncratic, well-diversified or potentially alpha-generating opportunity outside the portfolio or something that looks attractive across a range of metrics and may be too good to pass up. The GP may wish to offer this deal to the LPs because they may be constrained by risk limits and thresholds in the commingled fund.
"If you think of co-investments as speed-dating: the time to
make a decision is compressed."
Many investors also analyse these deals through the lens of management and performance fees, which in the co-investment world can be reduced or even eliminated. For investors sitting on large pools of capital, co-investments offer a way to deploy that capital efficiently and quickly. But that speed creates challenges.
If you think of co-investments as speed-dating: the time to make a decision is compressed. Unlike a traditional fund or co-investment vehicle where you might have a lengthy time to conduct due diligence and get to know the manager, here you're being asked to approve deals quickly, often with limited information.
In most cases, it's assumed the institutional investor already knows the GP. But that’s not always the case, which adds pressure to do due diligence with a partner you may never have worked with before.
You also need to consider the governance structure of the institutional investor. Traditional approaches to asset allocation, like SAA or TAA, are rules-based, which conflicts with the dynamic, flexible decision-making co-investing requires. That creates tension for boards or governance committees, who are often asked to make quick decisions with limited information and shortened timelines.
Brian: The investment and operational due diligence aspect is key for investors and has downstream implications if this is not undertaken correctly.
Several of our members have approached us about co-investments, asking, “How can we get comfortable with a manager on short notice? What questions should we be asking?”
In response, the SBAI is developing a draft due diligence questionnaire for co-investment opportunities. We’ve distilled the key questions investors should ask that can be provided to the GP. The goal is to get clear, quick answers to help investors assess potential risks in an efficient manner.
Brian: It’s about alignment of interest – how the GP sources deals, makes decisions, and structures those decisions to ensure alignment on time horizon, sector, terms, and fees. These factors shape whether you're truly aligned as partners.
Are you a partner? Are we building something together that is intended to last or are we considering a one-off deal in isolation. Do we look at things in the same way that we as LPs think internally? Are we signing up for the same understanding of our preferences and red flags? That trust and understanding is essential, especially when partnering on short notice.
"Co-investment activity is rising, reflecting a vibrant but
challenging private markets environment."
Most limited partners (LP) will have a pre-existing relationship with the GP, with clear expectations around transparency and disclosure – how deals are sourced, where opportunities come from, etc. But increasingly, GPs are approaching LPs without an established relationship, making quick decisions more difficult.
Co-investment activity is rising, reflecting a vibrant but challenging private markets environment. Many assets are going into continuation vehicles as GPs resist selling at current market values — co-investments can offer a strategic alternative to other LPs who may need cash raised through distributions and asset sales.
LPs, sitting on large pools of capital, can take on longer-term risk and are well-positioned to partner. But many of these opportunities arise because GPs face portfolio constraints – limits on asset concentration in commingled funds – so they carve out co-investments. That, however, introduces concentration risk.
Brian: Most people think co-investments are primarily for large institutional investors – and often they are, since these groups manage large pools of capital and have the resources to deploy, both from a capital perspective but also the size of their internal teams.
But these institutions are also slow-moving, with formal decision-making processes and governance frameworks. That opens the door for smaller investors, like family offices, which often have higher risk tolerance and can move faster.
Their ability to make quicker decisions means they may access co-investment opportunities before larger players can. They can benefit from the same investing approaches, without some of the constraints around concentration risk.
"It's a tough fundraising environment — interest rates remain high — and
co-investment offer managers a way to raise capital."
Family offices, in particular, may have deep sector knowledge — like in healthcare or leisure — which gives them added comfort when investing alongside GPs in those areas.
Brian: There are challenges in the industry. In private markets, especially private equity, we've seen reduced distributions and asset sales. Many institutional investors are struggling to get capital back from managers to reinvest in new opportunities, including co-investments.
We're also seeing more continuation funds, and some co-investment opportunities are tied to the need for additional capital. It's a tough fundraising environment — interest rates remain high — and co-investment offer managers a way to raise capital and maintain liquidity.
We need to understand the underlying issues. It's a difficult environment to sell assets, largely due to valuation concerns.
The SBAI is active in this area. From a research standpoint, we’ve released a consultation paper proposing updates to our standards on private market valuations. We encourage anyone interested to read it.
We also have guidance papers in our toolbox — available on our website — which outline key issues and challenges in private market valuations, including potential conflicts and important considerations LPs should be aware of.
