Why co-investment matters
It can lower blended fees and increase exposure to selected deals, but creates concentration, selection, speed, and governance risk.
How it is applied
Review each direct opportunity alongside the sponsoring fund, including valuation, leverage, governance, concentration, expected holding period, exit cases, and conflicts. Confirm allocation policy, fee and carry terms, information rights, follow-on obligations, and the time available for diligence. Assess it within the investor’s total exposure to the sponsor.
Portfolio example
A pension commits 100 million to a buyout fund and is offered an additional 15 million investment in one portfolio company with no management fee and reduced carry. The lower fee can improve returns, but the single-company position increases concentration and may duplicate exposure already held through the fund.
How to interpret it
Co-investments can reduce blended fees, increase exposure to selected deals, and deepen manager relationships. They also shift selection and execution responsibilities toward the investor. A strong result may reflect favorable deal allocation, while a weak program can arise from adverse selection or an inability to respond quickly.
Limitations and common misconceptions
Opportunities often arrive under tight deadlines with limited data. Sponsors control deal flow, may retain their most attractive capacity, and can have incentives to complete a large transaction. Follow-on capital, currency, illiquidity, and governance risk remain even when fees are low. Reported co-investment performance can omit declined opportunities. Evaluation should compare the full offered set, not only completed deals, and state whether costs at the vehicle or company level remain. Investors need a repeatable approval process, concentration limits, and resources for monitoring. A fee saving is valuable only if it compensates for the additional risk and operating burden. Portfolio accounting should attribute exposure to each underlying company across the main fund and every co-investment vehicle. Otherwise an investor can underestimate its true sector, sponsor, and single-name concentration. Governance also matters after closing: determine who receives board information, approves amendments, and decides whether to invest more capital. Track realized and unrealized results net of all expenses, including broken-deal and administrative costs. A mature program evaluates speed and selectivity together, since accepting every opportunity defeats the purpose while declining too often can weaken access.
Sources and further reading
- ILPA Principles 3.0Institutional Limited Partners Association
- Private Capital, Real Estate, Infrastructure, and Natural ResourcesCFA Institute