Co-Investment
A co-investment is a direct investment by a limited partner alongside a private equity or venture capital fund in a specific deal, made outside the fund vehicle and typically at reduced or zero fees.
Co-investment opportunities arise when a general partner identifies a deal that is larger than the fund's single-investment concentration limits, or when the GP wants to reward key LP relationships by offering them privileged access to its best transactions. The LP invests directly in the target company at the same price and terms as the fund, bypassing the fund's fee layer for that portion of capital.
The fee benefit is significant. Capital deployed via co-investment typically incurs no management fee and no performance fee, or reduced versions of each — sometimes described as zero-and-zero or one-and-ten structures. For an institutional investor committing hundreds of millions of dollars, the fee savings on co-investments can materially improve blended portfolio economics across its entire PE program.
However, co-investments concentrate risk rather than diversifying it. An LP participating in a co-invest is adding to an already-existing GP bet, doubling down on a single company at a single point in its lifecycle. If the deal underperforms, the LP absorbs the loss both through its fund exposure and its direct co-invest position. GPs have also been observed to offer co-investments in their less attractive deals — where they need additional capital to close — while reserving the best transactions exclusively for the fund. Sophisticated LPs conduct independent due diligence on each co-investment rather than deferring entirely to the GP's analysis.
Co-investments have grown significantly as large pension funds and sovereign wealth funds seek to build internal investment capabilities and reduce fee drag. Some large institutions have built dedicated co-investment teams that evaluate dozens of opportunities annually.