Co-Investment

When a private equity firm finds a deal that is too large for its fund, or wants to limit concentration in one investment, it may offer its investors the chance to invest directly in the deal alongside the fund.

For example, a private equity fund buying a company for 2,000,000,000 might invest 1,500,000,000 itself and offer co-investment opportunities for the remaining 500,000,000 to some of its largest investors.

For investors, co-investments offer several benefits: lower fees, often with no management fee or performance fee, improving net returns; the ability to increase exposure to deals they find attractive; and closer insight into how the manager works.

For private equity firms, co-investments help complete large deals and strengthen relationships with investors.

Co-investments also carry risks. They concentrate investors’ money in individual companies rather than a diversified fund. Investors must often make decisions quickly and need skilled teams to evaluate deals. There is also a risk of adverse selection, if managers offer co-investment on less attractive deals. Co-investment has grown substantially as large investors seek to reduce fees.