Coinvestment
Trevor L Taylor, a Miami private investor and the founder of Fortius Capital, has described the firm’s work as including select private equity investments. Coinvestment is one of the common ways private capital reaches such deals: a lead manager buys a company and invites one or more outside investors to put money into the same transaction directly, beside the manager’s own fund. In the classic version the outside investor is already a limited partner in that manager’s fund, and the extra stake comes with lower fees than the fund itself carries. One executive at the private markets firm Capital Dynamics explained to Institutional Investor that managers have little reason to offer poor deals because their limited partners pay the bills1.
How a deal beside the sponsor works
A coinvestment begins with a sponsor that has found a company to buy and needs more equity than its fund wants to commit. Funds usually cap how much they put into any single company, so a large purchase can leave a gap. Rather than borrow more or bring in a rival firm, the sponsor offers the remaining slice to investors it already knows. Those investors join the deal on similar terms, usually through a dedicated vehicle such as a special purpose vehicle, and the sponsor keeps running the company.
For the sponsor, the arrangement solves a sizing problem and strengthens relationships. PitchBook observed that the option to coinvest had been appearing more frequently as a way for managers to attract fund commitments2, often with fee discounts as part of the package. The same report described large pension investors building teams to do direct and side by side deals at scale, with the Canada Pension Plan Investment Board completing about 140 direct investments in less than a decade.
Family offices have become eager participants. CNBC reported on a Citi Private Bank survey in which seven out of ten family offices said they had made direct investments in private companies3, with nearly half increasing that exposure over the prior year even as they pulled back from early stage startups. An earlier CNBC report on a BNY Mellon Wealth Management survey noted that offices were also coinvesting alongside private equity firms, which can reduce fees and increase carried interest payments4, while warning that offices tend to succeed mainly in industries they already know.
Offices also partner with each other. Bloomberg reported that Mousse Partners, the office that manages the Wertheimer family fortune, bought into the wealth adviser Rockefeller Capital Management alongside two other family backed firms, Progeny 3 and Abrams Capital5. Such club deals let several families share one transaction without forming a fund. A related model has spread in venture capital, where TechCrunch profiled an investor who secured allocations in later stage companies and offered each deal to about 30 smaller institutions6 through single asset vehicles and nominee structures rather than a traditional fund.
Coinvestment can also arrive in the middle of a holding period. Institutional Investor described so called midlife coinvestments, in which a sponsor sells part of its stake in a portfolio company to a limited partner7 to raise cash when exits are slow. In that version the coinvestor is supplying liquidity to the manager as much as gaining access to a company, which changes the bargaining between them.
The structure sits on top of the limited partnership rather than replacing it. Most coinvestors still commit to the main fund, and the side deals are a privilege of that relationship. An investor with no fund commitment usually sees fewer and later invitations. Timing is a further constraint. Sponsors often give coinvestors only a few weeks to review a deal and commit, because the purchase agreement has its own deadline. Investors who cannot respond within that window simply miss the allocation, which is one reason larger pension plans and family offices keep standing teams ready to evaluate offers as they arrive.
Fees, returns and the selection problem
The main attraction is cost. A pooled private equity fund has traditionally collected around two percent of committed capital a year plus a fifth of profits. Coinvestments are often offered with no fee and no carried interest, or with much lighter terms. Capital Dynamics told Institutional Investor that a typical commingled coinvestment fund costs about 1 and 10, roughly half the standard rate, and found that for funds launched between 1998 and 2016, 60 percent of coinvestment funds delivered a higher net return than single sponsor funds. Lower fees did most of the work; the underlying deals performed much like the rest.
Demand keeps growing, and pricing is shifting with it. PitchBook reported that commingled coinvestment funds raised $47.3 billion in a single year, the highest annual total on record8, and that some managers now prefer partners who accept modest fees in exchange for more reliable allocations. The same article noted that a few large pension plans have saved substantial sums by combining coinvestments with internally managed assets, but that most managers still prioritize the investors who commit the most to their main funds.
The risks are less visible than the savings. The first is selection: an investor who sees only the deals a sponsor chooses to share cannot be sure it is seeing the best ones, so it must judge each company on its own merits, quickly, often within weeks. That requires staff who can read a deal memo, model the business and challenge the sponsor, which is expensive to build. The second is concentration. A fund commitment spreads money across a dozen or more companies; a coinvestment puts it into one. A family that does several coinvestments with the same sponsor can end up more exposed to that manager than it intended.
For these reasons the practice suits investors who already know a sponsor well and have the people to do their own investment due diligence. Done carefully, coinvestment lowers the cost of private equity and gives the investor more say over where its money goes. Done casually, it swaps a manager’s diversified selection for a series of single bets, and the fee savings matter only if those bets are chosen as carefully as the fund would choose them.
