Co-investment, also known as co-investing, refers to the practice where two or more parties jointly invest in a company, project or asset. Co-investing has become increasingly popular in private equity, venture capital and real estate investment. The key parties involved in co-investing are typically the general partners (GPs) who manage investment funds and the limited partners (LPs) who contribute capital to these funds. There are several benefits for both GPs and LPs to participate in co-investments. For LPs, co-investing allows them to deploy more capital, gain greater control and potentially earn higher returns compared to just investing in funds run by GPs. For GPs, co-investing provides a way to establish closer relationships with LPs and put more capital to work without fundraising constraints. Overall, co-investing enables LPs and GPs to customize their investment strategies and maximize outcomes through synergistic partnerships.
co-investing provides benefits including higher returns and lower fees for LPs
For limited partners (LPs), the key benefits of co-investing alongside general partners (GPs) include:
– Higher returns: By co-investing, LPs can earn higher returns compared to solely investing in a GP’s fund. This is because co-investments typically don’t charge management fees or carried interest.
– Lower fees: Co-investments allow LPs to avoid paying the typical 2% management fee and 20% carried interest charged by GPs on their fund investments. This reduces overall investment costs.
– Greater control: LPs have more control over specific co-investments compared to giving full discretion to GPs in a commingled fund structure. LPs can customize their co-investment strategy.
– Strategy diversification: Co-investing provides LPs an additional way to deploy capital beyond fund investments for strategy diversification.
co-investing enables GPs to build LP relationships and deploy more capital
For general partners (GPs), some key upsides of co-investing with limited partners (LPs) are:
– Strengthen LP relationships: Offering co-investment opportunities helps GPs deepen relationships with LPs and stand out from competitors during fundraising.
– No fundraising constraints: Co-investments are not subject to the capital limits faced by funds, so GPs can put more money to work on deals.
– Limited partner capital: GPs can leverage LP co-investment capital to make larger investments without relying solely on their fund capital.
– Economics: While GPs typically forego management fees and carry on co-investments, they benefit from putting more capital to work and earning returns on a larger investment amount.
– Portfolio diversification: Co-investing enables GPs to broaden their portfolios beyond what their fund size constraints would otherwise allow.
typical co-investment structures include direct co-investing and GP side vehicles
There are two primary structures for how LPs and GPs execute co-investments:
Direct Co-Investments: The LP invests directly in the target asset alongside the GP’s fund investment in that asset. The LP participates as an additional investor in the capital structure of the asset.
GP Side Vehicles: The LP invests in a separate investment vehicle managed by the GP that only invests in that specific co-investment asset. The side vehicle parallels the GP’s fund investment in the asset.
Direct co-investments allow LPs to customize deal-specific terms and maintain full economics. GP side vehicles provide more discretion to GPs over the co-investment while still allowing LPs to participate under preferential economics.
key steps in the co-investment process include deal screening, due diligence and post-investment governance
The process of executing co-investments between LPs and GPs generally follows these key steps:
– Deal screening: GPs source potential co-investment opportunities and screen for LPs based on investment preferences, capabilities and partnership dynamic.
– Due diligence: LPs conduct due diligence on proposed co-investments, assessing the investment thesis, risks, and value creation plan.
– Deal terms: Investment terms, information rights, and governance mechanics are negotiated between the GP and LP.
– Post-investment governance: LPs and GPs collaborate during ownership through board roles, monitoring, reporting, and strategic planning.
In summary, co-investing is an increasingly popular practice where LPs and GPs partner to make direct investments in assets and companies. Key benefits include higher returns, lower fees, greater control and strengthened partnerships between LPs and GPs. Co-investments typically follow a screening, due diligence and governance process to identify and manage investment opportunities. When executed strategically, co-investing enables LPs and GPs to maximize outcomes through collaborative investing.