Co-investments continue to remain a staple for both general partners (GPs) and limited partners (LPs) in a continuously complicated fundraising environment. According to a 2024 survey by Private Funds CFO, 82% of private equity firms now offer some form of co-investment (up from 75% in 2020)1. Access to co-investments is largely considered the "baseline" for large institutional investors, and we see a growing appetite for customized co-investment programs and separately managed accounts alongside the "traditional" passive sponsor-managed co-investment vehicles and co-underwritten transactions. Below, we discuss a few points that have received particular attention in co-investment dealmaking as of late.
Exit considerations: continuation vehicles
Continuation funds or vehicles (CVs) have become an established form of exit (representing 13% of all PE exits in 20242), allowing GPs to transfer assets from an existing fund into a new fund, often with new capital, different economics and a longer investment horizon. As we've previously noted, the "tied at the hip" provision—which provides for exit alongside the main fund on substantially the same terms and is fundamental in providing co-investors with GP alignment—also has the potential to cause unexpected results when applied in a CV exit. Complicating matters further, passive co-investment vehicles frequently exempt affiliate transfers from the "tied at the hip" clause, and also regularly permit the sponsor to enter into affiliate transactions (subject to certain parameters).
Many co-investors continue to seek to circumvent the resulting muddle by requesting express provisions that clearly delineate their rights in connection with a CV exit.
One approach sought by many sophisticated LPs is to negotiate for the same optionality for co-investors as is given to fund investors at the time of the CV exit (that is, giving co-investors the right to decide whether to monetize or to roll). While this approach will, at the time of the CV exit, present co-investors that previously benefited from an economics-free arrangement with an imperfect choice to either "cash out" at the price agreed by the sponsor or to roll into a new, typically fee-bearing and carry-charging vehicle, at least it gives co-investors optionality (and allows for alignment of a position held by the co-investor through the fund). Co-investors may also attempt to negotiate the economics of their participation in a CV in advance: for example, by insisting that the fee and carry structure applicable to the co-investment must be carried forward to the CV in the event they choose to roll.
Another more minimalist approach is to include provisions that safeguard co-investors from being dragged into a fee-bearing and carry-charging vehicle and that allows them to monetize the co-investment to the same extent that the fund investors (in aggregate) achieve liquidity.
Fee transparency and LP expectations
Many co-investment opportunities are marketed as "no fee, no carry"—but as sophisticated co-investors know, that does not mean that the sponsor cannot extract fees (such as monitoring and transactions fees) at the portfolio company level that disproportionately impact co-investors. There are many permutations of the various fees charged by sponsors. Transaction fees, where charged, are often set as a percentage of the purchase price for the underlying transaction (frequently between 1–3%). Monitoring fees, where charged, are often either expressed (i) as a percentage of EBITDA (e.g., 1–3.5%); or (ii) as a dollar amount (e.g., $1–10M/year).
GPs often take the position that the co-investment vehicle is a "sidecar" vehicle that should and will be treated the same as the main fund with respect to conflicts of interest. However, co-investors should bring particular focus to these (and other) fees (and their impact on net returns) given the lack of management fee offset in a co-investment transaction, which results in LPs (directly or indirectly) bearing fees economically. Where the interests of co-investors and main fund LPs are not aligned, co-investors continue to seek protection over affiliate transactions of this nature.
Warehousing costs and related considerations
Another cost item of significance that co-investors should be cognizant of are warehousing costs, where a GP or the main fund temporarily holds the portfolio investment before transferring it to the co-investment vehicle. In this scenario, LPs are typically asked to bear their pro rata cost of carry borne by the main fund (as well as interest).
GPs typically use the preferred return rate from the main fund, a percentage of the prime rate or the cost of borrowing on the main fund's credit or subscription line as the interest rate for warehousing or catch-up costs payable by co-investors. While the GP has an obligation to make main fund LPs "whole" where the fund has "warehoused" an investment, LPs expect GPs to be transparent with respect to how such fees are calculated and what exactly is being passed on to co-investors, especially as they usually are in addition to an LP's capital commitment (and are uncapped). Where possible, LPs often look to minimize the time these fees are incurred (given that costs accrue daily) including by trying to close as soon as possible (and sometimes in advance of other co-investors).
Footnotes
1. Private Equity International, Fee inconsistencies drive confusion in co-investing, March 3, 2025.
2. Jeffries, Private Capital Advisory: Global Secondary Market Review, January 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
