A co-investment fund, also known as a co-investment vehicle or CIV, refers to a partnership between limited partners (LPs) and general partners (GPs) in private equity deals. It provides a way for LPs to invest directly into companies alongside GPs without going through the traditional fund structure. Co-investment funds have become increasingly popular among institutional investors looking to enhance returns and reduce fees. In this article, we will explore what is a co-investment fund, its benefits and risks, and how it works.
Co-investment funds offer direct access to deals
Unlike regular private equity funds where LPs commit capital upfront into a blind pool, co-investment funds allow LPs to cherry-pick specific investments they find attractive. It gives LPs more control over their investments as they can evaluate deals individually before committing capital. Co-investments provide direct access to companies that LPs may not otherwise be able to invest in through a commingled fund due to diversification limits or fund constraints set by GPs.
Co-investment funds can improve returns for LPs
Co-investments generally do not charge management fees or carry to LPs, except for small deal origination fees in some cases. This can significantly improve net returns to LPs compared to traditional private equity funds that charge typical 2/20 fees. According to Preqin research, 80% of LPs reported co-investments outperformed their regular PE fund investments. The outperformance typically ranges from 2% to 5% higher returns.
Co-investment funds allow flexible capital deployment
Rather than committing to fixed capital calls like traditional funds, co-investment funds offer more flexible capital deployment for LPs. LPs can choose when and how much to invest based on the attractiveness of each deal. This allows them to better manage their overall exposure and liquidity needs. It also provides GPs with additional capital to fund large transactions without breaching fund limits.
Due diligence and quick decision making is critical
While co-investments can improve outcomes for LPs, they also come with risks. LPs take on more responsibility for conducting due diligence compared to relying on a GP’s capabilities. They also need to develop internal processes to evaluate deals quickly and make investment decisions within the GP’s timeline. Insufficient capabilities to properly analyse deals can expose LPs to adverse selection by GPs. Maintaining strong relationships with GPs and co-investing selectively in attractive deals can help LPs better manage the risks.
In summary, co-investment funds represent a form of partnership between LPs and GPs that provides investors access to direct PE deals. They can enhance returns through lower fees and greater control but require strong due diligence capabilities. When executed well, co-investments can be an effective way for LPs to complement their fund investments.