Key Takeaways
- • Family offices are increasingly structuring co-investment arrangements with private equity funds to access direct deal flow while reducing operational burden and maintaining reduced fee structures on co-invested capital.
- • These partnerships allow ultra-high-net-worth family offices to bypass traditional PE fund fee structures by committing large capital to PE funds in exchange for rights to invest additional capital directly alongside portfolio companies, typically at reduced management or performance fees.
- • Co-investing has gained significant traction over the past decade, driven by family offices' desire for greater control and direct investment exposure combined with PE firms' capital-raising challenges in a competitive fundraising environment.
- • The arrangement distributes deal sourcing, due diligence, execution, and ongoing management responsibilities to PE fund partners, enabling family offices to gain direct investment experience without building full in-house investment infrastructure.
- • Scott Beach, chair of Day Pitney's family office practice, characterizes these structures as allowing families to "share the burden, share the costs" while relying on PE firms' operational expertise and deal sourcing capabilities.
Summary
Family offices managing assets for ultra-wealthy families are increasingly adopting co-investment structures with private equity firms to access proprietary deal flow at lower costs and with greater control than traditional limited partner commitments. Rather than investing exclusively through PE funds as passive LPs, family offices are negotiating arrangements that grant them the right to deploy additional capital directly into individual portfolio companies alongside their PE partners.
The mechanics of these partnerships typically involve family offices making substantial capital commitments to PE funds in exchange for enhanced access to deal opportunities and reduced fee arrangements on co-invested capital. Unlike standard fund investments, which carry full management fees and carried interest, co-invested capital often qualifies for reduced or waived management fees, with families paying only on actual portfolio company performance. This structure effectively allows family offices to achieve direct investment exposure while leveraging the PE firm's sourcing and operational capabilities.
The growth of co-investment partnerships reflects dual market pressures. Family offices increasingly seek direct stakes in private companies to maximize returns and exercise greater governance influence—objectives difficult to achieve through traditional limited partner roles. Simultaneously, PE firms face capital-raising headwinds and view co-investment arrangements as mechanisms to attract large commitments from institutional-quality investors while demonstrating confidence in their deal sourcing and management capabilities. According to attorneys and fund managers interviewed, these arrangements have become substantially more common over the past decade.
The appeal of co-investment structures centers on cost and capability arbitrage. Family offices avoid the expense of building fully independent investment teams capable of sourcing, underwriting, and managing direct investments. The PE firm assumes operational risk and due diligence burden while maintaining the relationship with portfolio company management. Family offices gain exposure to curated deal flow, professional investment management, and reduced fee drag—effectively "having their cake and eating it too," as one legal advisor noted. These arrangements typically include protections preserving family office ownership stakes and enhanced access to financial and operational information on underlying investments.
The mechanics of these partnerships typically involve family offices making substantial capital commitments to PE funds in exchange for enhanced access to deal opportunities and reduced fee arrangements on co-invested capital. Unlike standard fund investments, which carry full management fees and carried interest, co-invested capital often qualifies for reduced or waived management fees, with families paying only on actual portfolio company performance. This structure effectively allows family offices to achieve direct investment exposure while leveraging the PE firm's sourcing and operational capabilities.
The growth of co-investment partnerships reflects dual market pressures. Family offices increasingly seek direct stakes in private companies to maximize returns and exercise greater governance influence—objectives difficult to achieve through traditional limited partner roles. Simultaneously, PE firms face capital-raising headwinds and view co-investment arrangements as mechanisms to attract large commitments from institutional-quality investors while demonstrating confidence in their deal sourcing and management capabilities. According to attorneys and fund managers interviewed, these arrangements have become substantially more common over the past decade.
The appeal of co-investment structures centers on cost and capability arbitrage. Family offices avoid the expense of building fully independent investment teams capable of sourcing, underwriting, and managing direct investments. The PE firm assumes operational risk and due diligence burden while maintaining the relationship with portfolio company management. Family offices gain exposure to curated deal flow, professional investment management, and reduced fee drag—effectively "having their cake and eating it too," as one legal advisor noted. These arrangements typically include protections preserving family office ownership stakes and enhanced access to financial and operational information on underlying investments.
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