Co-investing in private equity offers you lower fees, direct access to high-quality deals, and targeted exposure—but requires operational capacity, strong GP relationships, and risk management discipline.
This article will help you evaluate whether private equity co-investing is the right move for your portfolio. You’ll see how it can enhance returns, where it creates risk, and what operational demands you need to be prepared for. Expect clear, actionable guidance shaped by proven institutional strategies.
What is private equity co-investing and how does it work?
Private equity co-investing occurs when you invest directly into a specific deal alongside a general partner’s fund, rather than through your standard fund allocation. You commit capital to a single transaction—usually when the GP requires additional funding for a larger acquisition—while the GP retains operational control.
The main attraction is structural efficiency. These investments are often made outside of the main fund structure, meaning you can avoid or significantly reduce management fees and carried interest. This improves your net returns and allows you to allocate capital toward deals you consider most attractive without committing more to the entire fund.
What benefits can you expect from co-investing?
One of the primary advantages is fee efficiency. Many co-investments waive management fees entirely and reduce carried interest to single-digit levels, giving you a cleaner return profile. For long-term investors, this cost reduction can materially increase net performance over multiple deals.
You also gain access to a GP’s highest-conviction investments—often in sectors or opportunities that would otherwise be closed to you. These deals have typically undergone the GP’s rigorous due diligence process, giving you a level of institutional vetting before you commit.
Flexibility is another advantage. You can target specific sectors, company stages, or geographies that align with your broader investment thesis, without waiting for the next fund cycle. And by deepening your collaboration with a GP, you strengthen relationships that can secure you priority access to future opportunities.
What risks and demands should you prepare for?
Co-investing isn’t passive. You need the capability to perform your own due diligence, negotiate terms, and monitor performance. Without a capable internal team, you risk relying entirely on the GP’s perspective, which may not always align with your interests.
Adverse selection risk is a critical concern. Some GPs use co-investments to offload less attractive deals, keeping their strongest opportunities fully within the fund. You must be selective and only commit when the deal meets your own performance criteria.
Finally, concentration risk can build quickly. Since co-investments are often larger single exposures than a typical LP fund allocation, one underperforming deal can significantly impact your returns.
How do you structure and negotiate co-investment terms?
Before committing, you should clarify your governance rights. Will you simply provide capital as a passive participant through a special purpose vehicle (SPV), or will you have any information or oversight privileges? This decision impacts your visibility into the investment’s performance.
Protective provisions matter. Tag-along and drag-along rights ensure your exit aligns with the GP’s, avoiding situations where you are forced to sell early or stay invested longer than planned. Confirm your rights to financial and operational reporting throughout the investment period.
Fee structure is another key element. In a competitive market, 60–70% of co-investments have no management fee, and many offer carried interest discounts. Your negotiation should benchmark against prevailing market terms to ensure fairness.
How is co-investing performing in the current market?
Institutional appetite is strong. Morgan Stanley recently raised $2.3 billion for a co-investment fund focused on the lower middle market, reporting early IRRs north of 30% on certain exits. Carlyle’s AlpInvest secured $4.1 billion for its ninth co-investment vehicle, targeting mid-market buyouts with attractive entry multiples.
However, scale matters. Large LPs like CalPERS have publicly stated that co-investments work best when you’re a preferred capital partner with the leverage to secure top-tier opportunities. Smaller LPs without scale may only see mid-tier deals.
What can you learn from leading institutional investors?
CalPERS has achieved higher returns on its co-investment portfolio—12.5% over three years—compared to 9.5% on its broader PE holdings. This reinforces the potential for outperformance when you are selective and aligned with the right GP.
Sovereign wealth funds like Norway’s NBIM and Dutch pension giant APG actively pursue co-investments to reduce costs and improve control over their exposure. Both stress the importance of dedicated internal teams to assess and execute deals quickly.
These examples demonstrate that infrastructure, relationships, and scale are often as critical as the deals themselves.
How do you decide if co-investing is the right fit for your strategy?
You should assess three main factors before moving forward:
- Operational readiness: Do you have the internal capability to analyze, negotiate, and oversee these investments?
- GP alignment: Are you a priority LP for the GPs whose deals you most want to access?
- Portfolio balance: Will these investments improve your exposure profile or increase concentration risk?
If you can confidently answer “yes” to these questions, co-investing could be a valuable addition to your portfolio strategy.
Key Considerations to Co-Investing in Private Equity
- Lower or no fees compared to fund investments
- Access to GP’s top deals
- Higher operational demands
- Risk of weaker deal allocation for smaller LPs
In Conclusion
Co-investing in private equity can significantly improve your portfolio’s performance profile through reduced costs, selective exposure, and stronger GP relationships. But these advantages come with operational demands and potential selection risks. If you have the scale, expertise, and discipline to manage them, co-investing can become a high-value complement to your broader PE commitments.
For more professional insights, visit my profile on Crunchbase
Thomas J. Powell is the Senior Advisor at Brehon Strategies, a seasoned entrepreneur and a private equity expert. With a career in banking and finance that began in 1988 in Silicon Valley, he boasts over three and a half decades of robust experience in the industry. Powell holds dual citizenship in the European Union and the United States, allowing him to navigate international business environments with ease. A Doctor of Law and Policy student at Northeastern University, he focuses on middle-income workforce housing shortages in rural resort communities. He blends his professional acumen with a strong commitment to community service, having been associated with the Boys and Girls Clubs of America for over 45 years. Follow Thomas J Powell on LinkedIn, Twitter,Crunchbase.