Co-investment

A co-investment is a direct investment by an investor in a single deal, in addition to their stake in the fund. Instead of participating only through the fund, the investor puts additional money specifically into one transaction. This allows them to increase their exposure to a particularly attractive opportunity. The occasion usually arises from the fund structure itself: where a single equity requirement exceeds the diversification limit per investment set in the fund agreement, the manager must place the excess outside the fund and offers it to its investors.

For the investor the economic appeal lies in the terms, since co-investments are typically offered with no or substantially reduced management fee and carried interest, which noticeably lifts net returns compared with participating through the fund. It also allows the portfolio to be steered towards particular sectors or regions rather than simply following the manager's selection. Against this stand clear demands: the decision must be taken within weeks, separate diligence on the single company is needed, and risk is concentrated because the fund's diversification falls away. Selection deserves scrutiny: investors ask whether all excess amounts are offered systematically or only those transactions the manager itself considers less attractive. For the manager, co-investments are both a tool for investor relations and an argument in the next fundraise, because they provide additional equity firepower without increasing fund size.

The contractual design deserves attention, because co-investors are regularly admitted through a joint special purpose vehicle in which they often have limited control rights and little influence over exit timing. The agreement determines the precise arrangements. Information rights, the treatment of follow-on financing and what applies if the fund sells only part of its stake should therefore be settled. For the return calculation it should also be checked whether fees are genuinely absent or merely reduced.