Co-investment: The right deal for the right fee

Co-investment arrangements have emerged as a structurally advantageous alternative to traditional primary fund investments, particularly for institutional investors seeking improved fee economics and greater selectivity. The typical co-investment structure eliminates or substantially reduces management fees—commonly offered at zero fees plus carry participation or at 0.75% management fees with 10% performance carry—compared to traditional fund terms of 2% management fees with 20% carry and an 8% hurdle rate. This fee differential directly enhances net returns by allowing co-investors to capture economic value that would otherwise flow to general partners through fund-level fee structures.

Beyond fee benefits, co-investments grant limited partners the ability to exercise deal-by-deal selectivity rather than committing capital to blind pools or pre-determined fund structures. Investors can vary exposure by deal size, sector, and geography, creating flexibility unavailable in traditional fund commitments. However, this flexibility comes with corresponding operational costs. Co-investors must conduct independent, deal-level due diligence on each opportunity, evaluate sponsor fee-bearing arrangements, and monitor related-party transactions—responsibilities that demand substantial internal resources and analytical capability.

A critical structural limitation for co-investors is their passive investor status. While participating directly in portfolio company ownership, co-investors typically hold minority positions and exercise limited operational control. To protect against dilution in subsequent funding rounds, co-investors must proactively negotiate preemptive rights enabling them to maintain their ownership percentages. Similarly, co-investment agreements should mandate sponsor disclosure of all fee-bearing arrangements, imposing discipline on general partners and ensuring transparency across the deal structure.

General partners have increasingly embraced co-investment programs as strategic capital sourcing mechanisms. As institutional capital for new fundraisings has become scarcer, GPs recognize that expanding co-investment opportunities with existing and prospective limited partners deepens investor relationships and supports capital raise objectives. This dynamic suggests co-investment programs will remain a competitive necessity in private markets fundraising, with sponsors competing on fee terms and deal selection flexibility to attract sophisticated institutional capital.