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Pick the exposure, then the route
Exposure first, route second
Most organizations have one way to reach an investment, such as being an LP who meets managers and allocates capital. A platform with many routes can ask what exposure it wants across its whole business, then choose among direct deals, co-invests, club deals with other sophisticated investors, or an LP stake where the risk is so specialized that replicating it makes no sense.
The natural resources lesson
Natural resources show why the route matters. Liberty Mutual once had a meaningful amount of exposure there, as a way to get energy or an inflation hedge. But it lacked the capabilities to operate energy businesses, and the exposure was narrow. Once the focus is an operating business, it can be swamped by the macro backdrop: energy prices are up, yet the business isn't providing what was expected.
Today the energy and infrastructure vertical covers both credit and equity. It often owns assets without operating them, provides capital across the capital stack, sometimes lends with upside exposure through warrants, and backs partners in technical parts of the industry where it would never try to reproduce their insight. It benefits from energy exposure now, and the previous approach would not have produced the same benefit.
Why do co-investments often cost less?
A co-investment lets an investor put money into a deal alongside a fund without going through the fund itself. Such investments typically carry reduced fees or none, and sometimes no share of profits to the manager. The manager offers them to large clients because they let the deal reach a bigger size without raising a larger fund. Lower costs apply to the portion invested outside the fund.
How do warrants give lenders upside?
A warrant is a right to buy a company's shares at a fixed price during a set period. Lenders sometimes attach warrants to a loan, so that if the company's equity rises in value, the lender shares in the gain on top of its interest payments. The structure is common in venture debt and in lending to growing companies. If the shares never rise above the fixed price, the warrant expires with no value.
Why can energy prices rise while operators lag?
Many energy producers sell part of their future output in advance through hedges at fixed prices. When market prices jump, hedged volumes do not benefit from the increase. Operating businesses also face their own costs for labor, equipment, and maintenance, which can rise at the same time. Output from oil wells naturally declines over time, so a producer has to keep spending just to hold production steady.
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