Behind The Co-Investment Curtain: Current 'Market' Terms Revealed

Author:Mr Mark Silveira
Profession:MJ Hudson

Co-investments are now an integral part of the private equity funds market, popular with GPs and LPs alike. In a classic co-investment, an investor is invited by a GP to make a separate, additional investment in a target company (the Target) alongside the main investment being made by the GP's fund (the Sponsor Fund). Co-investors may acquire the Target's shares directly, or their exposure to the Target may be indirect, through a co-investment vehicle (the CIV) run by the Sponsor Fund's GP. The CIV may be dedicated to just the one deal, or it may be a standing vehicle making multiple co-investments.

Although CIVs resemble mini-funds (indeed, they are often structured as limited partnerships, with the Sponsor Fund GP serving as general partner), they are heavily customised for the co-investors and investment(s) in question, and differ from conventional blind pool funds in several aspects:

Management fees

GPs use co-investment opportunities as a way to cement and grow the relationship with key LPs in their existing funds. That's one reason why management fees on co-investments are kept comparatively low - typically 0.5% to 1% of committed capital, invested capital or net invested capital, per year, as against the 1.5% to 2% seen in conventional blind pool funds. Some CIVs are fee-free, or only charge fees to co-investors who are not LPs in the Sponsor Fund.

Target fees

Even in a zero-fee vehicle, the GP may be able to take (without an accompanying offset obligation) one-off transaction and annual monitoring fees from the Target directly, which together comprise a de facto management fee. Co-investors (particularly if they are LPs in the Sponsor Fund, which can be expected to have its own complete or partial fee offset) typically negotiate to prohibit Target-level fees or, if they are commercially justified, to fix or cap them.


Like fees, CIV carried interest is invariably lower than in blind pool funds. We usually see co-investment carry in the 5% to 15% range. Ratcheted carry is increasingly popular: the carry rate moves up or down in line with total cash returns to co-investors. If the GP earns substantial fees from the CIV, then there may be zero carry. If co-investors pay carry, then they will benefit from a hurdle - generally, 6% to 8%.


Transaction-related expenses (with the possible exception of abort costs; see below) are apportioned between the Sponsor Fund and the co-investors in line with their investments in the...

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