Unlocking Private Equity Co-Investment Opportunities

Private equity co-investment is a minority investment in a company made by investors alongside a private equity fund manager or venture capital firm. Co-investors are typically institutional or high-net-worth investors who make their investments alongside private equity or venture capital firms. Co-investments are particularly relevant during periods of macroeconomic volatility by providing flexibility to temper the pace of deployment in line with risk appetite. Co-investors are typically charged a reduced fee for the investment and receive ownership privileges equal to the percentage of their investment.

Co-investors typically have no voting power

In a typical equity co-investment fund, the investor pays a fund sponsor or general partner (GP) with whom they have a well-defined private equity partnership. This partnership agreement outlines how the GP allocates capital and diversifies assets. While co-investors may have input into the partnership agreement, ultimately, the GP has the final say.

The lack of voting power for co-investors is due to the structure of equity co-investments. These investments are made outside the existing fund of the lead financial sponsor, and co-investors rarely pay management fees or carried interest on individual investments. Instead, they receive ownership privileges equal to the percentage of their investment. This means that co-investors have a minority interest in the fund, which limits their decision-making power.

Despite having no voting power, co-investors can still benefit from equity co-investments. These investments offer reduced fees, exposure to new markets, and the potential for greater returns. Additionally, co-investors can gain more control over their private equity portfolios by choosing deals that align with their specific geographical or sector insights.

Co-investors are usually institutional or high-net-worth investors

Co-investors are typically charged a reduced fee for the investment and receive ownership privileges equal to the percentage of their investment. Co-investors can be institutional investors, such as pension funds, insurance companies, endowments, corporations, and sovereign wealth funds. They can also be high-net-worth individuals, including family offices. These investors provide a minority stake in an equity co-investment (less than 50%) but have no decision-making or voting power over how the investment or fund is managed.

Co-investments are often passive and non-controlling, as the private equity firm involved will exercise control and perform monitoring functions. Co-investors usually have a team with direct transaction experience who can sign equity commitment letters in pre-bid situations. They also need to have additional resources and experience to assess individual deals.

Co-investments offer several benefits to investors, including reduced fees, exposure to new markets, greater flexibility, and the ability to share risk. However, co-investments also come with certain risks, and investors stand to lose all capital invested. Co-investments should only comprise a small percentage of an investor's overall portfolio.

Co-investors are charged reduced fees

Co-investors are typically charged a reduced fee for their investment and receive ownership privileges equal to the percentage of their investment. This is because co-investments are made outside the existing fund, and so co-investors rarely pay management fees or carried interest on individual investments.

Co-investors are usually institutional or high-net-worth investors who make their investments alongside private equity or venture capital firms. They are often existing limited partners in an investment fund managed by the lead financial sponsor in a transaction.

Co-investments are typically passive, non-controlling investments, as the private equity firm or firms involved will exercise control and perform monitoring functions. Co-investors have no decision-making power and cannot make any decisions about the fund.

Co-investors benefit from reduced fees because of the lower economics paid to the general partner. This means that co-investments have the potential for more attractive returns. Providers charge lower management and performance fees, and also offer risk management benefits, such as additional due diligence, active portfolio construction, and broader diversification across assets.

Co-investors can also gain more control over their private equity portfolios. Investors with specific geographical or sector insight, for instance, can leverage their knowledge by choosing deals that map onto their areas of expertise.

Co-investments are particularly relevant during periods of macroeconomic volatility by providing flexibility to temper the pace of deployment in line with risk appetite.

Co-investors have limited control over their investment

Co-investments are typically passive, non-controlling investments, with the private equity firm exercising control and performing monitoring functions. However, there are also active co-investments where investors and the sponsor's primary fund invest alongside each other in the target or top holding company. In these cases, co-investors may be approached before the signing of an M&A transaction or asked to commit a large portion of the equity check.

Co-investors can gain more control over their private equity portfolios by leveraging their specific geographical or sector insight when choosing deals that map onto their expertise. They can also increase their exposure to top-tier managers by investing alongside them on individual deals. However, co-investors should be aware that they have limited influence on the transaction structure, pricing, and terms, as well as deeper insights into the transaction.

Overall, while co-investors have some ability to influence their investment choices, the majority of control lies with the sponsoring firm in a private equity co-investment.

Co-investments are typically passive

In passive co-investments, investors typically invest through a special purpose vehicle controlled by the sponsor, such as a limited partnership or an LLC. This vehicle pools the co-investors' capital and is a party to the main shareholders' agreement. As such, passive co-investors are often one step removed from the target company or the top holding company. They are not party to the main shareholders' agreement and have less influence over the transaction structure, pricing, and terms.

Passive co-investors usually bear expenses related to the formation and operation of the co-investment vehicle, as well as their pro-rata share of transaction expenses if the closing occurs. They may also be required to bear their pro-rata share of broken deal expenses if they commit equity before the closing of the underlying transaction.

Since passive co-investors have less direct involvement in the investment, they may face challenges in obtaining information, governance, and liquidity rights. They are reliant on the sponsor to enforce their contractual rights under the shareholders' agreement.

Despite the lack of control, passive co-investments offer several benefits. They provide access to attractive transactions and the potential for higher returns due to lower fees paid to the general partner. This type of co-investment also allows investors to build relationships with prospective or existing limited partners and increase their exposure to private equity on a selective basis.

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