Side Letter: Trafalgar Revisited

Why It Matters

These moves signal a growing appetite for direct PE exposure among institutional investors and hint at a potential rebound in defence‑related capital despite current headwinds.

Key Takeaways

• Texas Teachers raises co‑investment allocation despite higher fees
• Co‑investments aim to capture upside not reflected in fund returns
• European defence PE funding down roughly 15% year‑over‑year
• Regulatory incentives could reignite defence‑sector private equity
• Typical CV economics: 8% hurdle, 20% carry, 1.5% management fee

Pulse Analysis

Side‑letter analyses like the Trafalgar revisit provide a window into evolving investor tactics and fund‑level economics. In recent months, institutional capital has shown a pronounced shift toward co‑investments, a strategy that lets investors bypass traditional fund layers and negotiate bespoke terms. While this approach often carries a premium—higher transaction fees or reduced liquidity—it offers direct exposure to high‑performing assets, aligning with the risk‑adjusted return objectives of large pension plans such as Texas Teachers. The move underscores a broader industry trend where capital allocators seek greater control and transparency, even at the cost of added complexity.

For Texas Teachers, the decision to double down on co‑investments reflects confidence in its deal‑sourcing capabilities and a desire to capture upside that standard fund structures may dilute. The pension’s willingness to absorb higher fees signals that the expected incremental returns outweigh the cost differential, a calculus increasingly common among sophisticated investors. This pivot also pressures general partners to refine their side‑letter terms, offering more favorable economics to retain capital. As co‑investment activity grows, we can expect heightened negotiation around hurdle rates, preferred returns, and fee structures, reshaping the traditional GP‑LP dynamic.

Across the Atlantic, European defence‑related private equity has contracted, with capital commitments falling about 15% compared with the previous year. The decline is partly attributed to geopolitical uncertainty and tighter government budgets, yet a regulatory catch—new defence‑industry subsidies and tax incentives—could reverse the trend. Simultaneously, the report highlights that the most common CV economics now feature an 8% hurdle rate, a 20% carry, and roughly a 1.5% management fee, establishing a de‑facto benchmark for new fund formations. Understanding these evolving parameters helps investors benchmark deals and anticipate future shifts in capital allocation across sectors.