Private Equity Co-investments Guide: Issues to Spot and Raise When Making a Direct Co-investment

Investors of many different stripes are eager to participate in private equity transactions as equity co-investors alongside private equity sponsors who source, lead, and execute on investment opportunities. These investors hail from portions of the financial landscape as diverse as hedge funds, strategic investors, high net worth individuals, and select limited partners in the sponsors’ funds. Some investment funds themselves are dedicated to making equity co-investments as their primary investment mandate. Direct co-investment opportunities are prized in these investor communities because they offer the potential for superior economic return. Direct co-investments reside outside of the lead sponsor’s fund. As a result, a co-investor’s economic return is not reduced by the carried interest paid by the fund to the sponsor. The trade-off, if there is one, is that investments made outside the fund may result in greater concentration of risk than an investment made in the fund itself, as co-investors will typically invest in only some (and perhaps only one) of the investments made by the fund. Co-investors can mitigate this risk by attempting to build their own portfolio of co-investments, similar to the way a lead sponsor builds a portfolio within each fund.

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