Co-Investments
Definition
A co-investment is a direct investment made by an LP (or third-party investor) into a specific portfolio company or asset alongside the main fund. The LP invests directly in the deal, in addition to (not instead of) their fund commitment. Co-investments are typically offered by the GP when a deal size exceeds what the fund alone can or wants to hold, or as a relationship benefit to key LPs.
Why LPs Use Co-Investments
Co-investments have become a significant part of the institutional LP toolkit for several interconnected reasons:
Fee economics: Co-investments often carry reduced or zero management fee and reduced or zero carry, compared with the full fee load of the underlying fund. An LP co-investing alongside a fund they are already paying fees into can significantly reduce the blended effective fee rate across their PE portfolio. The actual fee terms for each co-investment are negotiated with the GP and are not standardised.
Conviction-weighted exposure: Co-investments allow LPs to increase their exposure to specific deals they have high conviction in — beyond what the fund allocation alone provides. This is unavailable through a standard commingled fund structure.
J-curve mitigation: Co-investment capital is not subject to the same fee drag as committed fund capital. Capital deployed as a co-investment goes directly into an asset with no pre-deployment fee accrual, which reduces the J-curve depth for that tranche of capital.
Learning and transparency: Direct deal access improves the LP’s understanding of the GP’s investment process, deal structuring, and portfolio management — which benefits future manager due diligence.
Adverse Selection Risk
The most significant risk in co-investments is adverse selection: the risk that GPs offer co-investment opportunities on deals where the fund alone is insufficient or where the GP has less conviction, rather than on the strongest deals.
GPs face no obligation to offer their best deals as co-investments. In practice, the deals offered for co-investment tend to be larger transactions where the GP genuinely needs additional capital — but “larger” does not necessarily mean “better.” LPs should assess each co-investment on its own merits rather than assuming that GP co-investment invitation equals GP endorsement.
Some LPs report that over time their co-investment portfolio underperforms the main fund — partly because the best deals are not shared and partly because co-investors receive less ongoing information than the fund itself.
Concentration Risk
A fund portfolio provides diversification across 10–20+ positions. A co-investment adds a point exposure to a single asset. LPs with large co-investment programmes can inadvertently build significant concentration in individual companies or sectors — sometimes without realising it across a multi-GP portfolio. See Concentration Risk.
Faster Execution and Due Diligence Constraints
Co-investment opportunities typically come with a short decision window — often 1–2 weeks from the GP’s invitation to LP commitment. This timeline reflects the deal speed of the underlying transaction, not the LP’s preferred diligence schedule.
In practice, this means:
- LPs cannot conduct deep independent due diligence on each co-investment within the offered timeframe
- LPs rely significantly on the GP’s analysis, deal thesis, and structuring decisions
- LPs with limited internal investment teams or slow approval processes may find it difficult to execute co-investments consistently
LPs who wish to build a co-investment programme must ensure they have the internal resources — investment professionals, legal counsel, decision-making processes — to act within the available window.
Operational Tracking
Co-investments are tracked separately from the LP’s interest in the main fund:
- A separate investment agreement (not the LPA) governs each co-investment
- Capital calls and distributions for the co-investment are separate from fund drawdowns and distributions
- The co-investment appears as a separate line in the LP’s alternative investments portfolio, with its own capital account, valuation, and performance metrics
- The LP receives a separate co-investment reporting pack (varying in detail by GP)
- Operations teams must maintain distinct records for each co-investment alongside the fund interest
This operational complexity multiplies as the number of co-investments grows. LPs with large co-investment programmes need robust tracking systems to manage multiple simultaneous direct positions across different GPs.
Related Files
Manual Review Notes
- The claim that co-investment portfolios “sometimes underperform” the main fund is a documented concern in the literature but evidence is mixed and fund-specific. Present this as a risk to be aware of, not a demonstrated fact across all co-investments.
- Fee terms for co-investments vary significantly: some GPs charge no fee at all (pure alignment play); others charge a small management fee or a reduced carry. “Often reduced or zero” is a reasonable characterisation but should be verified for each deal.
- The “1–2 weeks” decision window is illustrative. Some GPs provide more time, particularly for relationships with established co-investors. Others may offer even shorter windows on fast-moving transactions.
- Co-investment governance (information rights, transfer restrictions, drag-along/tag-along provisions) is set in the co-investment side letter or agreement and varies by GP. Operations teams should ensure each co-investment’s specific terms are captured and tracked.