Key Takeaways
- • Co-investment funds delivered a median net IRR of 15.8% across 1998–2016 vintage years, outperforming single-sponsor primary PE funds at 13.5% net IRR—a 230 basis point advantage on a comparable basis.
- • For more recent vintages (2009–2016), the performance gap widened significantly, with co-investment funds achieving 18.9% median net IRR versus 14.6% for primary funds, with four out of five co-investment funds outperforming on a net IRR basis.
- • Fee structure is the primary driver of outperformance: co-investment funds typically charge 1% annual management fees and 10% carried interest, approximately half the cost of conventional buyout sponsors, reducing gross-to-net yield erosion by more than 7% on high-performing funds.
- • Lower fee drag on co-investments can improve net returns by reducing the performance multiple erosion by nearly 0.6x on invested capital, making them economically compelling for institutional investors seeking exposure to private equity deals.
Summary
Research by Capital Dynamics, utilizing Preqin performance data, demonstrates a compelling case for multi-manager co-investment funds over single-sponsor primary private equity funds. The analysis examined vintage years from 1998 to 2016 and found that the majority of co-investment funds materially outperformed traditional primary PE funds on both median net internal rate of return (IRR) and total value to paid-in (TVPI) metrics.
The performance differential is substantial. Co-investment funds generated a median net IRR of 15.8% across the full study period, compared to 13.5% for primary private equity funds—a 230 basis point spread. The advantage becomes even more pronounced when examining deals from 2009 onwards, when co-investment funds achieved a median net IRR of 18.9% versus 14.6% for primary funds. During this later period, four out of five co-investment funds outperformed their primary fund counterparts on a net IRR basis, indicating consistent and reliable alpha generation.
The research attributes this outperformance primarily to superior economics rather than deal selection or operational skill. Co-investment funds typically impose annual management fees of 1% on committed capital and carry interest of 10% on net gains—approximately half the fee burden of a conventional buyout sponsor. This fee advantage has significant implications for investor returns. The Capital Dynamics paper notes that private equity fees and carried interest can suppress gross returns by more than 7% and reduce the multiple on invested capital by nearly 0.6x for high-performing funds. Since co-investment structures typically halve these cost drains, they preserve substantially more of the underlying investment gains for limited partners.
This fee arbitrage translates into meaningful net return enhancement, particularly for investors in higher-performing funds where the absolute fee impact is largest. For institutional investors, family offices, and other sophisticated capital allocators evaluating private equity deployment, the data suggests that co-investment vehicles warrant serious consideration as a complement or alternative to traditional blind-pool commitments to single-sponsor primary funds.
The performance differential is substantial. Co-investment funds generated a median net IRR of 15.8% across the full study period, compared to 13.5% for primary private equity funds—a 230 basis point spread. The advantage becomes even more pronounced when examining deals from 2009 onwards, when co-investment funds achieved a median net IRR of 18.9% versus 14.6% for primary funds. During this later period, four out of five co-investment funds outperformed their primary fund counterparts on a net IRR basis, indicating consistent and reliable alpha generation.
The research attributes this outperformance primarily to superior economics rather than deal selection or operational skill. Co-investment funds typically impose annual management fees of 1% on committed capital and carry interest of 10% on net gains—approximately half the fee burden of a conventional buyout sponsor. This fee advantage has significant implications for investor returns. The Capital Dynamics paper notes that private equity fees and carried interest can suppress gross returns by more than 7% and reduce the multiple on invested capital by nearly 0.6x for high-performing funds. Since co-investment structures typically halve these cost drains, they preserve substantially more of the underlying investment gains for limited partners.
This fee arbitrage translates into meaningful net return enhancement, particularly for investors in higher-performing funds where the absolute fee impact is largest. For institutional investors, family offices, and other sophisticated capital allocators evaluating private equity deployment, the data suggests that co-investment vehicles warrant serious consideration as a complement or alternative to traditional blind-pool commitments to single-sponsor primary funds.
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