Co-Investments in Private Equity

How can investors gain enhanced exposure to top deals while paying lower fees? The answer lies in one of the most sought-after privileges in the industry: co-investments.

A co-investment is a negotiated right (not an obligation) that allows a Limited Partner (LP) to invest directly into a specific portfolio company, alongside the General Partner’s (GP) main fund. This creates dual exposure:

• One investment through the diversified fund, and
• A second, concentrated position in a single deal.

This Why Co-Investments Matter

1. Lower Fees – The biggest attraction. Co-investments often come with a “no fee, no carry” structure, or at least significantly reduced fees. By avoiding the traditional 2% management fee and 20% carry, LPs can meaningfully boost net returns.
2. Accelerated Expertise – For investors like family offices or sovereign funds looking to build direct deal capabilities, co-investments serve as a powerful apprenticeship model. They provide a front-row seat to a GP’s due diligence, valuation, and structuring processes.
3. Access to Exclusive Deal Flow – Even the largest institutions, including CPP Investments and Ontario Teachers’ Pension Plan, utilize co-investments to gain entry into highly competitive transactions sourced through a GP’s network.
   

Key Due Diligence Questions for LPs

Before committing to a co-investment, savvy LPs should ask:

• Do I have influence over the timing of the exit?
• What governance rights will I receive (board seats, veto rights)?
• How much company information will be shared on an ongoing basis?
• What is the full, transparent fee picture across the fund and any third parties?
  

Co-investments can be a powerful tool for boosting returns, accessing premier deal flow, and accelerating investment expertise. But they require sophisticated evaluation and a clear understanding of the risks involved.