Global pension funds feasting on private equity coinvestments are poised to outspend sovereign wealth funds on deals in 2024 for the first time in five years.

Aggregate transaction value for pension fund-backed deals, including private equity coinvestments, totaled $65.42 billion globally between Jan. 1 and Dec. 4, already 71% higher than the $38.19 billion in full year 2023, according to S&P Global Market Intelligence data. The rebound reverses two straight years of declining pension fund-backed deal value.

Private equity was involved in seven of the 10 largest pension fund-backed deals announced through Dec. 4. Private equity firms have been offering more low- and no-fee coinvestment opportunities to the limited partners in their buyout funds, including pensions and other institutional investors, to make up for the slow pace of distributions, said William Barrett, co-founder of Paris-based placement agent and advisory firm Reach Capital.

"[Private equity firms] have to be more LP-friendly. One of the things you can do is to offer more coinvest with better economics on the co-invest," Barrett said.

Megadeal's impact

One significant coinvestment played an outsized role in the year-over-year increase of pension fund-backed deal value: Canada Pension Plan Investment Board's $14.5 billion acquisition of international schools organization Nord Anglia Education Ltd. in a consortium with private equity firms EQT Private Capital Asia and Neuberger Berman Group LLC. EQT initially invested in Nord Anglia in 2008 and upped its stake when it brought in Canada Pension Plan Investment Board as a co-investor in 2017. The Canadian pension fund reinvested a portion of its stake in the most recent deal.

The technology, media and telecommunications sector has been the main target for pensions funds, which participated in deals valued at $23.5 billion between Jan. 1 and Dec. 4, a total already 20% higher than the full-year 2023 total of $19.57 billion, according to Market Intelligence data.

Sovereign wealth funds take a breather

The aggregate global value of sovereign wealth fund-backed transactions stood at $43.43 billion as of Dec. 4, compared to the full-year 2023 value of $57.68 billion, and was tracking for a third consecutive annual decline, according to S&P Global Market Intelligence data.

While pension funds have leaned into deals in 2024, sovereign wealth funds by comparison have been slowing investment activity.

Sovereign wealth funds remained relatively active investors in 2022 and 2023, even as inflation and higher interest rates have kept global M&A activity in check, said Rush Harvey, a director on Raymond James' private capital advisory team.

"A lot of the sovereign wealth funds are funded by oil and gas, especially in the Middle East. That's been a pretty good market over the past four years. They've been awash in capital to continue to invest, to continue to do deals," Harvey said.

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Largest sovereign wealth fund deals

Half of the 10 largest sovereign wealth fund-backed deals between Jan. 1 and Dec. 4 have featured funds based in the Middle East. But it was Singapore's sovereign wealth fund, GIC Pte. Ltd., that participated in the largest deal over that period, a $7.47 billion coinvestment with TPG Capital LP in sustainable building service provider Techem GmbH.

The financial sector has been the top sector for deals involving sovereign wealth funds, with an aggregate global transaction value of $19.6 billion as of Dec. 4, according to Market Intelligence data.

Outlook

The outlook for coinvestment activity in 2025 is "absolutely positive," said Harvey, citing both a strong LP appetite for the deals and falling interest rates, which are expected to boost M&A activity in 2025. Private equity fund managers continue to use coinvestments as a tool to attract new LPs and keep current LPs close as difficult fundraising conditions persist into 2025, he added.

"We are in a market where LPs have the power," Harvey said.

A coinvestment program has been offered by 60% of the private equity firms surveyed by law firm Dechert for its 2025 global private equity outlook report, which describes a steady increase in coinvestment offerings over the past several years alongside rising demand for the deals from LPs. The rate was even higher among firms headquartered in North America, where nearly 73% reported coinvestment programs.

Reach Capital's Barrett said much of the increasing coinvestment flow is likely to go to the largest global pensions and sovereign wealth funds that have the investment teams and capacity to perform their own due diligence on the deals.

"If we think '25 is going to be a normal [M&A] year, that coinvestment volume is going to be taken by the big dogs, as always," he said.