Key Takeaways
- • Co-investment structures eliminate or substantially reduce management fees and carried interest, with over two-thirds of respondents to Private Fund CFO's 2024 Fees & Expenses Survey charging zero management fees on co-investments, compared to standard fund fee models.
- • Co-investments deliver fee savings of more than 50% relative to traditional fund structures, with typical co-investment terms featuring 0.75% management fees and 10% carried interest versus standard fund economics.
- • Co-investment arrangements offer LPs greater deal selectivity and the ability to cherry-pick opportunities, but require intensive due diligence and bind participants to passive investor status with limited control rights.
- • Co-investment has become a standardized fundraising tool in private credit, though implementation remains substantially more complex in private credit than in private equity or other alternative asset classes.
Summary
Co-investment structures have emerged as a material mechanism for institutional investors to enhance net returns through fee reduction, but the arrangement demands rigorous trade-offs between cost savings and operational complexity. Co-investments are increasingly offered to existing limited partners on a no management fee or no carried interest basis, fundamentally altering the economics relative to traditional fund vehicles. According to Private Fund CFO's Fees & Expenses Survey conducted in 2024, over two-thirds of respondents do not charge management fees on co-investments, while 42% eliminate carried interest entirely, creating a dual-fee environment within institutional portfolios.
The economic advantage is substantial. Co-investment fund structures demonstrate costs less than half those of comparable fund vehicles, with typical European co-investment terms pricing at 0.75% management fees and 10% carried interest. This fee compression directly flows to LP net returns, making co-investments particularly attractive for large institutional capital bases where fee-sensitive allocation decisions move capital between managers. The structure has become standardized within fundraising processes, particularly as GPs compete for LP commitments by offering co-investment rights as retention tools.
However, the operational reality presents significant friction. Co-investors must conduct demanding due diligence independently, as they assume responsibility for identifying and evaluating opportunities without the support infrastructure of a dedicated fund management team. Critically, co-investors remain passive investors throughout the investment lifecycle, surrendering control rights and governance participation despite their direct capital deployment. This structural passivity distinguishes co-investments from traditional fund vehicles and requires investors to place substantial trust in GP decision-making post-deployment.
Implementation complexity in private credit notably exceeds that of private equity and other alternative asset classes, creating barriers to scaled co-investment programs. Institutional investors pursuing co-investment strategies must balance the compelling economics against resource constraints in deal evaluation and post-investment monitoring, positioning co-investment as a selective tool for the right opportunities rather than a blanket strategy across all exposures.
The economic advantage is substantial. Co-investment fund structures demonstrate costs less than half those of comparable fund vehicles, with typical European co-investment terms pricing at 0.75% management fees and 10% carried interest. This fee compression directly flows to LP net returns, making co-investments particularly attractive for large institutional capital bases where fee-sensitive allocation decisions move capital between managers. The structure has become standardized within fundraising processes, particularly as GPs compete for LP commitments by offering co-investment rights as retention tools.
However, the operational reality presents significant friction. Co-investors must conduct demanding due diligence independently, as they assume responsibility for identifying and evaluating opportunities without the support infrastructure of a dedicated fund management team. Critically, co-investors remain passive investors throughout the investment lifecycle, surrendering control rights and governance participation despite their direct capital deployment. This structural passivity distinguishes co-investments from traditional fund vehicles and requires investors to place substantial trust in GP decision-making post-deployment.
Implementation complexity in private credit notably exceeds that of private equity and other alternative asset classes, creating barriers to scaled co-investment programs. Institutional investors pursuing co-investment strategies must balance the compelling economics against resource constraints in deal evaluation and post-investment monitoring, positioning co-investment as a selective tool for the right opportunities rather than a blanket strategy across all exposures.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.