Resources / Glossary / Co-investment

Co-investment.

Aka. Co-invest · Co-investment right
All terms

What is a co-investment?

A co-investment is a direct equity stake a limited partner takes in a specific portfolio company alongside the fund, separate from and additional to its commitment to the fund itself. When a deal is larger than the GP wants to fund alone, the GP offers the excess to select LPs, who invest directly into that single company on their own ticket.

The defining attraction is economics. Co-investments are typically offered at reduced or zero management fees and carried interest — far cheaper than the blended cost of the fund. For an LP, layering fee-light co-investments on top of a fund commitment lowers the all-in cost of its private-markets exposure and concentrates capital in deals it likes.

For the GP, co-investment is a relationship tool and a capacity tool at once. It lets the manager pursue deals bigger than the fund alone could support, avoid over-concentrating the fund in a single name, and reward its most valued LPs with access they prize.

How co-investment works in practice

The process runs alongside the GP's own underwriting of the deal.

  1. The GP identifies an over-allocation. A deal exceeds the fund's concentration limit or appetite, leaving equity to place.
  2. The GP offers the co-invest. Selected LPs — often those with co-investment rights in a side letter — are shown the opportunity, usually under tight timelines.
  3. The LP diligences fast. Co-invest windows are short; the LP must underwrite the single deal quickly, frequently leaning on the GP's diligence.
  4. Capital goes in directly. The LP invests into the company (often via a co-invest vehicle) on fee-light terms, alongside the fund's stake.
  5. Outcomes track the deal. The co-investor's return follows that one company's exit, independent of the rest of the fund.

The catch is speed and concentration: co-investment trades diversification for cost and control. An LP that cannot move quickly, or that lacks the staff to underwrite a single name, is poorly placed to use it.

Why GPs and LPs both want it

Co-investment has grown because the incentives align on both sides. LPs get cheaper exposure and the ability to overweight their best ideas. GPs get the capacity to do larger deals, a way to manage fund-level concentration, and a powerful lever for deepening relationships with the LPs they most want to re-up in the next fund. Co-investment rights are therefore among the most negotiated items in a side letter, and the ability to deliver attractive co-invest flow is now part of how large LPs choose managers.

Frequently asked.

5 questions
01 Why are co-investments offered with reduced fees?

Because they are a benefit the GP extends to valued LPs and a means to fund deals larger than the fund alone can support. Charging little or no fee and carry on co-invest makes the offer attractive and rewards the relationship, while still getting the deal done at the size the GP wants.

02 How is a co-investment different from a fund commitment?

A fund commitment buys diversified exposure across the whole portfolio at the fund's blended fees. A co-investment is a direct stake in one specific company, on its own ticket, usually at much lower fees — so its return tracks that single deal rather than the fund as a whole.

03 What is the main risk of co-investing?

Concentration and speed. Because a co-investment is exposure to a single company, a bad outcome hits hard with no portfolio to cushion it. And co-invest windows are short, so an LP must be able to underwrite the deal quickly — often relying heavily on the GP's own diligence under time pressure.

04 Who gets offered co-investments?

Typically the GP's larger and more strategic LPs, especially those with co-investment rights written into a side letter, and those who can diligence and commit on a short timeline. The ability to move fast is as important as the relationship in determining who actually sees and wins co-invest allocations.

05 How do LPs diligence a co-investment so quickly?

By leaning on the GP's underwriting and the deal's data room, then layering their own checks on the points that matter most to them. The faster an LP can access and query that deal record, the more credibly it can underwrite a single name inside a tight co-invest window — which is exactly where keeping the deal artifact live and queryable pays off.

Related terms

Pfund economics

Preferred return

The return LPs are entitled to receive first — conventionally about 8% compounding — before the GP earns any carried interest on the fund's <em>profits</em>.

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Dfund economics

Dry powder

The committed capital a fund has raised but not yet invested — the <em>uncalled</em> commitments it can deploy when the right opportunity appears.

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Cfund economics

Crossover fund

A fund that invests across private and public markets — backing a company in its late <em>private</em> rounds and holding it through and after the IPO.

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Dfund economics

Distribution waterfall

The contractual order in which a fund splits cash from exits between LPs and the GP — return of capital, preferred return, catch-up, then the <em>carry</em> split.

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Mfund economics

Management fee

The recurring fee — conventionally about 2% a year — that funds the GP's operating costs, paid regardless of whether the fund's <em>investments</em> succeed.

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Dfund economics

Deal-by-deal carry

A structure where the GP earns carried interest on each profitable exit, rather than waiting until the whole fund returns capital. The <em>American waterfall</em>.

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