Co-investments have become an increasingly important part of compensation packages in private equity firms. As a supplement to base salaries and bonuses, co-investments allow employees to invest personal capital alongside the PE fund’s investments. This article will examine the mechanics of co-investments, their vesting schedules, and how they factor into the overall PE compensation structure. We will also look at differences based on seniority level and explore some example income scenarios. With investments becoming more accessible to retail investors, understanding PE co-investments can provide valuable insight into alternative compensation models.
Co-investments require no upfront capital from the PE firm
Unlike the core fund investments which require the PE firm to contribute substantial capital upfront, co-investments allow employees to invest their own money directly into deals the fund is pursuing. This means the firm takes on no additional capital risk, yet the employees participate upside if the investment performs well. Co-investments are generally available to Vice Presidents, Principals, and Partners, but sometimes to Associates as well.
Co-investments have longer vesting periods than carry
While carry may vest over 4-5 years, co-investments often have vesting periods of 6-8 years. This provides an incentive for employees to have a long-term view of the investment rather than aiming for a quick flip. The longer timeframe also ensures employees who leave early forfeit some of their co-investment potential.
Co-investments can significantly increase upside for individuals
In a simple example, if a Principal invests $500K of personal capital in a co-investment for a deal with 3x return potential, that $500K could become $1.5M over the vesting period. This supplements the income from base salary, bonus, and carry. Consequently, Principals and other senior team members may focus deals where they can deploy more co-investment capital.
Co-investments complicate estimates of total PE compensation
Unlike the base + bonus + carry model which has some stable components, the variability of co-investment returns makes total comp difficult to predict. An employee could have great cash comp but invest poorly and underperform an index fund. On the other hand, savvy co-investing could boost total compensation significantly beyond the averages.
Younger employees may not have capital to take full advantage
While co-investments offer significant upside potential, younger employees may not have enough capital to fully capitalize on the opportunities. For example, an Associate with $50K to invest will not gain nearly as much as a Principal who can invest $500K in the same deals. This contributes to the large compensation gap between junior and senior team members.
In summary, co-investments are an integral part of the overall private equity compensation model, especially for senior members of the team. They provide employees the opportunity to invest personal capital in the fund’s deals, with the upside going directly to the individual over an extended vesting period. However, theRETURN VARIABILITY and requirement for PERSONAL CAPITAL TO DEPLOY make co-investment income difficult to predict, contributing to the wide compensation bands in the private equity industry.