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Co-investment Funds at a glance
Co-investment funds allow institutional investors to invest alongside private equity managers on a deal-by-deal basis. These funds typically offer lower fees and provide access to highly selective transactions. At the same time, partnering with co-investment funds allows GPs to access additional capital for larger deals, strengthen relationships with LPs, gain deal structuring flexibility, accelerate execution, share risk, showcase expertise, and enhance their track record while fostering long-term partnerships.
Access to Exclusive Deals: LPs gain exposure to hand-picked, high-quality deals curated by the GP, without having to source them independently.
Diversification: Co-investment funds typically invest across multiple deals, providing LPs with diversification within the fund structure.
Lower Fee Structure: Co-investment funds often offer more favorable fee arrangements compared to traditional private equity funds.
Efficient Capital Deployment: LPs can deploy capital into multiple co-investments through a single vehicle, streamlining the investment process.
Alignment with GP: The co-investment fund structure ensures close alignment with the GP's interests, as they invest alongside LPs in selected deals.
Concentration Risk: Co-investment funds may focus on fewer deals compared to traditional diversified funds, increasing exposure to individual investments and sectors.
• Deal Selection Bias: GPs may offer co-investment opportunities that don’t align with their core fund’s strategy, potentially pushing riskier or less desirable deals to co-investment vehicles.
• Limited Time for Due Diligence: Co-investments often require quick decision-making, which can limit the time available for thorough due diligence and increase the risk of poor investment choices.
• Illiquidity: Co-investment funds typically involve long-term capital commitments with limited liquidity, making it harder for LPs to exit positions before the fund’s term ends.
• Operational Complexity: Co-investing requires significant expertise and resources for evaluating deals, managing relationships, and navigating legal and financial complexities, which can be challenging for LPs without the necessary internal capabilities.
• Market Timing Risk: Since co-investments often happen during periods of market opportunity or specific deal flow, LPs may be exposed to higher risks if the timing of the investments aligns poorly with market cycles.
Industry/Sector: Co-investment funds typically focus on specific sectors or industries aligned with the GP’s expertise and strategy. While some co-investment funds are sector-agnostic, many target high-growth industries like technology, healthcare, industrials, or consumer goods, depending on the GP’s deal flow and investor preferences.
ESG: Environmental, Social, and Governance (ESG) considerations are increasingly important in co-investment funds. Many funds incorporate ESG criteria to ensure investments align with sustainable practices and responsible governance. Co-investments may focus on companies with strong ESG profiles or aim to improve ESG metrics as part of their value creation strategy.
Instruments: Co-investment funds primarily invest in equity instruments, typically in private companies alongside a lead GP. They may also use mezzanine financing or other hybrid instruments depending on the deal structure. These investments are usually direct equity stakes in the target companies, providing exposure to specific deals.
Target Company Size: Co-investment funds often focus on mid-market to large-cap companies. These companies tend to offer robust growth potential, established market positions, and the ability to absorb significant capital. However, some funds may target smaller companies if they present unique investment opportunities.
Geography: Co-investment funds typically follow a global or regional investment strategy, often focused on North America, Europe, and Asia. The geographical focus depends on the GP’s network, expertise, and deal-sourcing capabilities. Some funds might concentrate on emerging markets for higher growth prospects, while others focus on more stable, developed markets.
1. What do you see as the primary advantages of co-investment strategies for investors?
2. How do you approach deal selection for co-investment opportunities?
3. What are the key risks to consider when investing in co-investments?
4. What trends are shaping the co-investment landscape today?
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