A co-investment is a direct investment made by an LP into a specific portfolio company alongside the GP’s main fund. The GP identifies the deal, leads the transaction, and then offers select LPs the opportunity to invest additional capital directly into that company, typically on more favorable economic terms than the main fund. Most co-investments carry reduced or zero management fees and carried interest, making them one of the most cost-effective ways for LPs to increase their private markets exposure.
Co-investment has grown from a niche practice to a central feature of the GP-LP relationship. According to Bain & Company’s 2024 Global Private Equity Report, co-investment volume has grown significantly over the past decade, with co-investments representing an increasing share of total private equity deal value. The driver is straightforward economics: by investing directly alongside the fund at reduced or zero fees, LPs can materially improve their net returns. An LP that commits $20M to a fund paying 2% management fee and 20% carry, and then co-invests an additional $10M at 0/0 terms, blends down the effective fee load across their total exposure to that GP.
For GPs, offering co-investment serves multiple strategic purposes. The most practical is deal sizing. If a fund has $500M in committed capital with a 15% concentration limit, the maximum single investment is $75M. If the GP identifies a $120M opportunity, co-investment capital from LPs can fill the gap without the GP needing to bring in a syndication partner. Co-investment also strengthens LP relationships. Large institutional investors, particularly sovereign wealth funds, pension plans, and endowments, increasingly expect co-investment rights as a condition of committing to a fund. For emerging managers raising capital, the ability to offer co-investment opportunities can differentiate your fund and attract anchor investors who want direct deal exposure alongside their fund commitment.
The operational mechanics of co-investment require attention. When a deal comes together, the GP typically has a limited window to close. LPs who want to participate must conduct their own due diligence and make a commitment decision within two to four weeks, sometimes faster. This means co-investing LPs need internal investment processes that can move quickly, which is why co-investment programs are most common among larger, well-resourced institutional investors. Smaller LPs may have the interest but lack the internal capacity to evaluate deals on compressed timelines.
One risk that receives significant attention in the academic literature is adverse selection. The concern is that GPs may preferentially offer co-investments on their most expensive or highest-risk deals while keeping the most attractive opportunities for the fund alone. Empirical evidence on this is mixed. A widely cited 2018 study by Fang, Ivashina, and Lerner found that co-investments underperformed fund investments on average, though subsequent research has produced more nuanced results. The practical takeaway for LPs is that co-investment requires genuine underwriting capability, not just a willingness to follow the GP’s lead. For GPs, offering co-investment on your highest-conviction deals builds trust and supports long-term LP relationships.
Frequently Asked Questions
Why do GPs offer co-investment opportunities?
GPs offer co-investments for several reasons: to access additional capital for deals that exceed the fund's concentration limits, to build deeper relationships with key LPs, and to compete effectively for larger transactions without raising a bigger fund. Co-investment capacity has also become a fundraising tool, as many LPs now view co-investment rights as a prerequisite for committing to a fund.
What are the typical fee terms for co-investments?
Most co-investments are offered at zero management fee and zero carried interest (0/0), though some GPs charge reduced fees such as 1% management fee and 10% carry (1/10). According to a 2023 Preqin survey, approximately 70% of co-investments were offered on a no-fee, no-carry basis. The fee reduction is the primary economic benefit for LPs.
What are the risks of co-investing?
The main risks are adverse selection (GPs may offer co-investments on their riskiest or most overvalued deals), compressed diligence timelines (LPs often have two to four weeks to evaluate and commit), and portfolio concentration. LPs who co-invest heavily in a few deals lose the diversification benefit of the blind pool fund structure.
