Key Takeaways
- • Continuation vehicles (CVs) accounted for 13% of all private equity exits in 2024, according to Torys LLP, making them an established exit route that raises co-investor alignment questions.
- • Co-investors are seeking express "tied at the hip" provisions and optionality to monetize or roll their positions when a sponsor executes a CV exit, rather than being dragged into a new fee-bearing, carry-charging vehicle.
- • Deals marketed as "no fee, no carry" can still carry portfolio-company-level transaction fees (typically 1-3% of purchase price) and monitoring fees (1-3.5% of EBITDA or $1-10M per year) that fall disproportionately on co-investors.
- • Warehousing costs, which LPs bear as pro rata carry plus interest, are typically uncapped and accrue daily, prompting LPs to push for transparency and early closings.
- • Per a 2024 Private Funds CFO survey cited by Torys, 82% of private equity firms now offer some form of co-investment, up from 75% in 2020, and co-investment access is considered baseline for large institutional investors.
Summary
Co-investments remain a staple for general partners (GPs) and limited partners (LPs) in a complicated fundraising environment, according to a Torys LLP analysis. Citing a 2024 survey by Private Funds CFO, Torys reports that 82% of private equity firms now offer some form of co-investment, up from 75% in 2020. Access to co-investments is largely viewed as the baseline for large institutional investors, which are showing growing appetite for customized co-investment programs and separately managed accounts alongside traditional sponsor-managed passive vehicles and co-underwritten transactions.
Continuation vehicles have become an established exit route, representing 13% of all PE exits in 2024 per Torys. CVs allow GPs to move assets from an existing fund into a new fund, often with new capital, different economics and a longer horizon. Torys notes that the "tied at the hip" provision, which requires exit alongside the main fund on substantially the same terms and underpins GP alignment for co-investors, can produce unexpected results in a CV exit. Passive co-investment vehicles frequently exempt affiliate transfers from this clause and permit sponsors to enter affiliate transactions subject to certain parameters. Sophisticated LPs are negotiating for co-investors to receive the same monetize-or-roll optionality given to fund investors, or for protections that prevent co-investors from being dragged into a fee-bearing, carry-charging vehicle and allow them to exit to the same extent as fund investors in aggregate.
Fee transparency is another focus. Although many co-investment opportunities are marketed as "no fee, no carry," Torys cautions that sponsors can still extract monitoring and transaction fees at the portfolio company level, disproportionately affecting co-investors. Transaction fees are often 1-3% of the purchase price, while monitoring fees are typically either 1-3.5% of EBITDA or $1-10 million per year. GPs often characterize co-investment vehicles as sidecars that should be treated like the main fund for conflicts purposes, but Torys advises co-investors to scrutinize these fees given the absence of a management fee offset.
Warehousing costs, where a GP or main fund temporarily holds an investment before transfer to the co-investment vehicle, are another material expense. LPs are typically asked to bear their pro rata carry borne by the main fund plus interest, generally benchmarked to the main fund's preferred return, a percentage of the prime rate, or the cost of borrowing on the main fund's credit or subscription line. These charges are usually additional to the LP's capital commitment and uncapped. Torys reports that LPs expect GPs to clearly explain how these fees are calculated and to minimize their duration by closing as early as possible, sometimes ahead of other co-investors.
Continuation vehicles have become an established exit route, representing 13% of all PE exits in 2024 per Torys. CVs allow GPs to move assets from an existing fund into a new fund, often with new capital, different economics and a longer horizon. Torys notes that the "tied at the hip" provision, which requires exit alongside the main fund on substantially the same terms and underpins GP alignment for co-investors, can produce unexpected results in a CV exit. Passive co-investment vehicles frequently exempt affiliate transfers from this clause and permit sponsors to enter affiliate transactions subject to certain parameters. Sophisticated LPs are negotiating for co-investors to receive the same monetize-or-roll optionality given to fund investors, or for protections that prevent co-investors from being dragged into a fee-bearing, carry-charging vehicle and allow them to exit to the same extent as fund investors in aggregate.
Fee transparency is another focus. Although many co-investment opportunities are marketed as "no fee, no carry," Torys cautions that sponsors can still extract monitoring and transaction fees at the portfolio company level, disproportionately affecting co-investors. Transaction fees are often 1-3% of the purchase price, while monitoring fees are typically either 1-3.5% of EBITDA or $1-10 million per year. GPs often characterize co-investment vehicles as sidecars that should be treated like the main fund for conflicts purposes, but Torys advises co-investors to scrutinize these fees given the absence of a management fee offset.
Warehousing costs, where a GP or main fund temporarily holds an investment before transfer to the co-investment vehicle, are another material expense. LPs are typically asked to bear their pro rata carry borne by the main fund plus interest, generally benchmarked to the main fund's preferred return, a percentage of the prime rate, or the cost of borrowing on the main fund's credit or subscription line. These charges are usually additional to the LP's capital commitment and uncapped. Torys reports that LPs expect GPs to clearly explain how these fees are calculated and to minimize their duration by closing as early as possible, sometimes ahead of other co-investors.
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