# Equity Co-Investment Explained: Advantages, Risks, and How It Works

## What Is an Equity Co-Investment?

An equity co-investment allows minority investors to join high stakes with [private equity](https://www.investopedia.com/articles/investing/093015/understanding-private-equity-funds-structure.asp) or [venture capital funds](https://www.investopedia.com/terms/v/vcfund.asp) without incurring the usual high fees. This article elucidates how institutional investors leverage their relationships with private equity firms to access profitable opportunities while sharing the risks involved.

### Key Takeaways

*   Equity co-investments allow investors to participate alongside private equity or venture capital firms without incurring high fees.
*   Typically, co-investors are institutional or high-net-worth individuals who contribute a minority stake and have no management role in the investment.
*   These investments provide access to new markets and potentially higher returns but come with risks such as a lack of transparency and limited control.
*   The interest in equity co-investments remains strong despite economic and geopolitical challenges affecting fundraising opportunities.
*   Co-investments have grown in significance within private equity since the 2007–2008 financial crisis, expanding beyond traditional fund investments.  
    

## How Equity Co-Investments Work

As noted above, a minority investment made by an investor into a company or venture is called an equity co-investment. Many of the investors that make these investments are [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp), such as [pension funds](https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp) and insurance companies. These deals may also attract certain [high-net-worth individuals (HNWIs)](https://www.investopedia.com/terms/h/hnwi.asp). The majority of the money poured into an equity co-investment (known simply as a co-investment) typically comes from a private equity or VC firm.

In a typical equity co-investment fund, the investor pays a fund sponsor or [general partner (GP)](https://www.investopedia.com/terms/g/generalpartner.asp) with whom the investor has a well-defined private equity partnership. The partnership agreement outlines how the GP allocates capital and diversifies assets. Co-investments avoid typical [limited partnerships (LPs)](https://www.investopedia.com/terms/l/limitedpartnership.asp) and general funds by investing directly in a company.

Because the co-investor has a [minority interest](https://www.investopedia.com/terms/m/minorityinterest.asp) in the fund, the sponsoring firm (the private equity or venture capital firm) retains control over how it is managed, including the holdings and [rebalancing](https://www.investopedia.com/terms/r/rebalancing.asp). As such, the co-investor cannot make any decisions about the fund.

Since the [2007-2008 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), equity co-investments have significantly boosted growth in private equity fundraising compared to traditional fund investments. While interest in co-investing is strong, fundraising is limited due to economic conditions, like interest rates and inflation, and geopolitical concerns.

> **Fast Fact**
>
> A Preqin study found that 80% of LPs reported better performance from equity co-investments than traditional fund structures.

## Pros and Cons of Equity Co-Investments

Equity co-investing in private equity deals has certain advantages. But, co-investors who participate in these deals should read the fine print before agreeing to them.

### Advantages

There are several key benefits to co-investments for both the investor and the private equity or venture capital firm that spearheads the fund. Among them, including:

*   Exposure to new markets. Co-investments open up [markets](https://www.investopedia.com/terms/m/market.asp) for eligible investors that the average investor cannot access. It also opens them up to alternative investment options. For instance, a private equity firm may open up access to mid-market companies or planning-based investment deals.
*   More [capital](https://www.investopedia.com/terms/c/capital.asp) and greater flexibility. By opening their funds up to co-investments, PE and VC firms can gain access to much-needed capital without sacrificing decision-making to further their investment goals. This frees up their own capital for other purposes, which gives them more flexibility.
*   The ability to share the [risk](https://www.investopedia.com/terms/r/risk.asp). Both co-investors and the offering firm can lower and share the amount of risk associated with the deal.  
    
*   Reduced fees. Many deals provide co-investors with a better [fee structure](https://www.investopedia.com/terms/f/fee-structure.asp) by reducing or eliminating fees.  
    

### Disadvantages

The most important aspect of co-investments is their complicated nature. These are risky ventures, which require a great deal of [transparency](https://www.investopedia.com/terms/t/transparency.asp) and disclosure. Since co-investors hold a minority stake, they must be well-informed about how the fund is managed.. They should also research the fund's management and the team's responsibilities.

Another key drawback of these deals can be the absence of fee transparency. Private equity firms don't offer much detail about the fees they charge LPs. There may be [hidden costs](https://www.investopedia.com/investing/costs-investing/) in cases like co-investing, where they purportedly offer no-fee services to invest in large deals. For example, they may charge monitoring fees, which can amount to several million dollars. This may not be evident at first glance from LPs.

There is also the possibility that PE firms may receive payments from companies in their [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) to promote the deals. Such deals are also risky for co-investors because they have no say in selecting or structuring the deal. The success or failure of these deals depends on the skill of the private equity professionals in charge. In some cases, that may not always be optimal as the deal may sink.  

Pros

*   Exposure to new markets
    
*   Access to capital and greater flexibility
    
*   Sharing the risk
    
*   Better fee structure
    

Cons

*   Complicated  
    
*   Lack of fee transparency  
    
*   Co-investors have no say in the deal
    

## Example of an Equity Co-Investment

Here's a hypothetical example to show how equity co-investments work. Suppose a $500 million fund could select three enterprises valued at $300 million. The partnership agreement might limit fund investments to $100 million, which means the firms would be leveraged by $200 million for each company.

If a new opportunity merged with an enterprise value of $350, the GP would need to seek funding outside its fund structure because it can only invest $100 million directly. The GP could borrow $100 million for financing and offer co-investment opportunities to existing limited partnerships or outside parties.  

## What Role Does the Co-Investor Play in an Equity Co-Investment?

Equity co-investors are generally high-net-worth individuals and institutional investors, such as endowments, pension funds, and corporations. These investors provide a minority stake in an equity co-investment (less than 50%) but have no decision-making or voting power on how the investment or fund is operated. As such, investors should do their due diligence to ensure that their capital is protected. In exchange for their investment, co-investors get access to new markets, the potential for greater returns, and lower fees.

## How Much Money Have Co-Investors Put Into Deals?

According to S&P Global, sovereign wealth funds contributed the most to co-investment deals between 2018 and 2023. This amounted to $331.41 billion for 469 deals. Corporate investors made the most investments, providing financing to 3,182 deals for a total of $254.02 billion. Pension funds co-invested in 288 deals with $193.40 billion while family offices contributed $54.35 billion to 683 deals.  

## Do Equity Co-Investments Always Work?

Equity co-investments present a big opportunity for institutional and high-net-worth individuals, promising access to new and different markets and the potential for higher returns. But, they don't always work out.

One such example is the case of Brazilian data center company Aceco T1. Private equity firm KKR acquired the company in 2014 along with co-investors, Singaporean investment firm GIC, and the Teacher Retirement System of Texas. The company was found to have cooked its books since 2012 and KKR wrote down its investment in the company to zero in 2017.

## The Bottom Line

Equity co-investments present an opportunity for institutional and high-net-worth investors to engage in potentially lucrative markets without the high fees typically associated with private equity funds.

These investors benefit from lower costs and shared risks while gaining exposure to new markets. However, co-investments are complex and can be affected by macroeconomic conditions and geopolitical issues.

Despite their appeal, investors must exercise due diligence as they hold a minority stake and have no influence over the management decisions. This approach is not suitable for the average investor due to its complexity and risk.

> **Article Sources**
>
> 1.  Blackrock. "[The advantages of private equity co-investments](https://www.blackrock.com/institutions/en-us/insights/the-advantages-of-private-equity-co-investments)."
>     
> 2.  Prereqin. "[80% of Private Equity Investors See Their Co-Investments Outperform Commingled Funds](https://docs.preqin.com/press/PE-Co-Investments-Nov-15.pdf)."
>     
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>     
> 4.  Goldman Sachs. "[GOLDMAN SACHS SURVEY SHOWS LIMITED PARTNERS’ INTEREST IN PRIVATE MARKETS CONTINUES DESPITE FUNDRAISING SLOWDOWN](https://www.gsam.com/content/gsam/us/en/advisors/about-gsam/news-and-media/2023/goldman-sachs-survey-show-limited-partners-interest-in-private-markets-continues-despite-fundraising-slowdown.html)."
>     
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>     
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>     
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>     
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