Lexington Targets $4 Billion to Back Private-Equity Co-Investments

Lexington Partners is raising its sixth fund dedicated to buying businesses in partnership with buyout firms when many investors are stepping back from the market.

The New York-based firm is looking to raise $4 billion of investor capital for Lexington Co-Investment Partners VI, which would make the fund 25% larger than its predecessor, according to documents prepared for Minnesota State Board of Investment, or MSBI. The $134.7 billion public pension fund’s investment advisory council approved a $300 million commitment to the fund on Wednesday. 

Lexington Co-Investment Partners V raised $3.2 billion in 2021 from investors that included MSBI and Florida State Board of Administration, according to the WSJ Pro Private Equity database of LP commitments.  

The fund as of March 2023 has produced a nearly 21% net internal rate of return, a common metric used to measure private-equity fund performance, and has returned 1.2 times investor capital, according to the Minnesota pension documents.

Lexington manages at least $64 billion of capital, more than $9 billion of which is held by its five co-investment funds. These vehicles buy minority positions in individual companies alongside a lead sponsor in a deal, with the aim of building a portfolio of passive holdings that is diversified by geography, industry, size and sponsor, according to the documents.

Diversification makes the portfolio less risky and brings a “significantly reduced” fee burden compared with typical buyout funds, which take a smaller number of control positions, the Minnesota pension manager’s investment advisory council said in the documents.

This is the first co-investment fund raised by Lexington since 2022, when the firm was acquired by financial services conglomerate Franklin Templeton in a $1.75 billion deal. The firm has also raised at least $18 billion so far for its 10th fund dedicated to acquiring secondhand private-fund stakes, regulatory filings indicate.    

Lexington declined to comment on the fundraising.

Co-investment deal volume has declined in the past year in line with a precipitous drop in activity across the buyout market, according to several buyers and limited partners who invest in these deals.

“There’s a steady flow of opportunities but it’s not like the fire-hose flow of 2021. It’s more like a garden hose,” said Brendon Parry, head of private equity at TIFF Investment Management, which manages around $8 billion of capital on behalf of endowments and foundations.

Deals that successfully close tend to require more equity because using debt for acquisitions has become more expensive since interest rates went up in 2022. The number of parties that can provide this equity is lower than it was 18 months ago, as investors who rushed into the market after the Covid-19 pandemic have been forced to retrench.

“Some are over-allocated to private equity now due to some combination of the denominator effect, although that has subsided a bit in recent months, and increasing their commitment pace too aggressively,” Parry said.

Write to Rod James at [email protected]