Co-Investment

Types of co-investment

Syndicated (post-closing). The sponsor's fund buys the whole equity cheque and sells part to co-investors after closing. Co-investors take little execution risk and less time pressure.

Co-underwriting (pre-closing). Co-investors commit before signing or closing, sharing deal risk and often joining diligence. Sponsors value this capacity because it lets them bid for larger deals.

Co-sponsor or club. Two or more sponsors share control and governance (club deal); this is closer to joint sponsorship than a passive co-investment.

LP-led direct. An LP sources a deal and invites a sponsor or invests alongside management, moving toward direct investment.

Vehicles

Co-investors usually invest through a sponsor-managed SPV per deal; sometimes directly into the acquisition holding company. LPs that want a stream of co-investments use a dedicated co-investment fund (offered by fund-of-funds managers and some sponsors), a fund of one or SMA with a co-investment mandate, or a sidecar fund committed to take overflow from the main fund.

Terms

Fees and carry on co-investments are negotiated and vary widely: many are offered with no management fee and no carry, others with reduced fee and carry, especially where the sponsor runs a dedicated co-investment vehicle or the co-investor is not an LP. Co-investors typically bear their pro rata share of deal expenses, and the allocation of broken-deal expenses between the fund and co-investors is a recurring point of negotiation and regulatory scrutiny. In June 2015 the US Securities and Exchange Commission (SEC) settled charges that Kohlberg Kravis Roberts & Co. (KKR) had allocated more than $17 million of broken-deal and diligence expenses to its flagship private equity funds and none to the co-investors in those deals, without disclosing the practice or having a written allocation policy; KKR paid nearly $30 million, including a $10 million civil penalty. Governance rights are usually limited to information rights and tag-along and drag-along provisions; co-investors follow the fund on exits.

Allocation and conflicts

The limited partnership agreement (LPA) and the sponsor's allocation policy decide how much of each deal the fund keeps and who is offered the excess. Principles 3.0 of the Institutional Limited Partners Association (ILPA) ask GPs to disclose in advance a framework for allocating co-investment opportunities, interests and expenses between the fund and co-investors, and to offer suitable opportunities to the fund first when they fit its strategy and it has commitments available. Points LPs check: whether the fund always takes its full target allocation before co-investment is offered; whether co-investors pay their share of fees and expenses; and whether some LPs receive preferential access.

Why LPs co-invest, and the selection question

LPs co-invest to lower average fees across their private equity programme, build exposure faster, and gain deal-level insight that also informs manager selection. The open question is selection: whether the deals offered for co-investment are as good as the fund's other deals, and whether LPs can evaluate them in the time given. LPs therefore treat each opportunity as a direct investment requiring its own underwriting rather than as fee-free fund exposure.

Co-investment platform

A co-investment platform is an organised programme for making co-investments. On the LP side it is the team, approval process and capital pool an investor dedicates to evaluating sponsor co-investment offers quickly, often with pre-agreed delegated authority. On the GP side it is a sponsor's standing arrangement, sometimes a dedicated vehicle, for offering co-investment to a defined group of LPs. Deal volume, fee terms and response times vary by programme and are not standardised.

Not the same as

• Direct Investment: A direct investment is made by an investor on its own account, often leading or controlling; a co-investment follows a sponsor that leads and controls the deal.
• Club Deal: A club deal is a transaction jointly sponsored by several firms sharing control; co-investors usually have no control rights.
• Cross-Fund Investment: Cross-fund investment is one of the sponsor's funds investing alongside another of its funds, raising conflicts; co-investment usually brings in outside capital.

How it is classified

• Co-investment: a non-controlling stake in one company alongside a lead sponsor's fund.
• Co-investment fund: a pooled vehicle that makes many such stakes; classify as a fund with a co-investment strategy.

Common mistakes

• Assuming co-investment is always fee-free. Terms range from none to fund-like fees and carry.
• Treating co-investment as diversified exposure; each is a single-company bet.
• Ignoring expense allocation, including broken-deal costs, when comparing co-investment and fund terms.

Edge cases

• A co-investor that commits before closing and then cannot fund can damage the sponsor's bid; sponsors therefore favour LPs with proven fast approval.
• Co-investments by a fund's own LPs can count toward a GP's allocation commitments in side letters, which in turn can create most favoured nation (MFN) issues.

Sources

1. ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). p. 26 — supports: Co-investment allocation framework disclosed in advance; suitable opportunities allocated to the fund first; expense allocation
2. SEC Charges KKR With Misallocating Broken Deal Expenses (SEC press release 2015-131; IA-4131). U.S. Securities and Exchange Commission, 2015-06-29. Status: settled administrative proceeding (checked 2026-10-01). Press release 2015-131 (2015-06-29) — supports: KKR settled charges of allocating more than $17 million of broken-deal expenses to its flagship funds without charging co-investors; nearly $30 million paid including a $10 million penalty
3. ILPA Model Limited Partnership Agreement (Whole of Fund and Deal-by-Deal versions). Institutional Limited Partners Association, ILPA, Whole of Fund first released October 2019, updated July 2020; Deal-by-Deal version and term sheet released 22 July 2020. Status: Current (checked 2026-10-01). WOF overview, 'Co-Investments' — supports: A co-investor should bear its pro rata share of fees, expenses and liabilities of a portfolio investment

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