Co-investments

Co-investment allows an investor to put additional capital into a specific transaction, usually at reduced or no fees.

Allocation. Who gets offered co-investment and in what order. Sponsors retain discretion in most funds, and investors negotiate priority rights in side letters. Allocation practices must be disclosed, and inconsistent practice is a recurring examination finding.

Structure. A parallel vehicle, a special purpose vehicle, or direct investment. The choice affects governance, transfer rights and exit mechanics.

Fees. Commonly no management fee and no carry, though sponsors increasingly charge on co-investment. Broken deal expenses — where a transaction does not close — must be allocated between the fund and prospective co-investors, and allocating them entirely to the fund has been the subject of enforcement.

Governance. Co-investors are typically passive, with the sponsor controlling voting and exit. Drag-along and tag-along provisions determine what happens on a sale.

Timing. Co-investment decisions run on the transaction’s timetable, which means diligence is compressed and reliance on the sponsor’s work is substantial.

Conflicts. Where the fund and co-investors hold different instruments, or exit at different times, the sponsor faces conflicts that should be disclosed and addressed by the advisory committee.