Co-investment
A chance for an LP to invest directly in a deal alongside the fund, usually at lower or no fees.
Managers offer co-investment when a deal is larger than the fund can hold or when they want to reward a major LP. LPs like it because it lowers their average fee, and managers like it because it lets them take bigger positions.
Co-investments are usually offered with no management fee and no carry, or reduced terms, so they lower an LP's blended cost. In return the LP has to move fast, often deciding in two to four weeks, and needs a team able to diligence single deals.
Managers should have a written allocation policy saying how co-investment is offered, since regulators and LPs look at whether opportunities are shared fairly. Side letters often promise co-investment rights to anchors, so keep a clear register of who is entitled to what.
Worked example
A $60M fund limits any single investment to 10 percent of commitments, $6M. A deal needs $10M of equity, so the fund invests $6M and offers $4M to two LPs with co-investment rights. They invest $2M each with no fee and no carry, and the GP leads the round in full.
Common questions about co-investment
Why do LPs want co-investment rights?
Co-investments usually come with little or no fee or carry, which lowers the LP's overall cost of private markets. They also let the LP build exposure to deals it likes and get to know the manager better.
Do managers charge fees on co-investments?
Often not, especially for LPs in the main fund. Some charge reduced fees or carry, particularly when they syndicate to investors outside the fund or run dedicated co-investment vehicles.