Private Equity Co-Investments

Key Features and Structural Benefits¹

What Are Co-Investments?

A private equity co-investment is a minority equity investment directly into a privately owned company alongside a private equity firm, also known as a general partner (GP) .

Co-investors are typically passive investors who generally have limited influence over day-to-day management of company operations but have strong legal/structural protections associated with their investment.

Why Do Co-Investments Exist?

Lead private equity firms typically invest from a single pool of capital, referred to as a private equity fund, that has a target portfolio construction consisting of factors including number of companies, size of investments, industry exposure, etc.

Co-investment opportunities arise when the equity needed to complete a transaction is more than the private equity firm can invest on its own. The equity shortfall is usually the result of a private equity firm actively managing the portfolio construction of the fund it invests from. Co-investors account for the shortfall, allowing the private equity firm to complete the transaction.

potential advantages of a co-investment allocation

Michael Taylor, Partner, Co-Investments, shares insights on the potential advantages and benefits of a co-investment allocation.

Private Equity Fund Overview²

Co-Investment Transaction Overview²

Advantages of Co-Investments¹

Provides for Structurally Lower Cost Access

Lead private equity firms generally, though not exclusively, look to syndicate co-investment capacity to limited partners in the fund. Where a pre-existing relationship exists, direct co-investors typically pay no or reduced economics (management fee, carried interest) to the lead private equity firm on capital committed to a co-investment transaction. Funds that invest solely in co-investment opportunities typically charge lower economics to investors. As a result, co-investment can be a fee-efficient way for investors to access private markets.

Differentiated Access

Institutional co-investors have typically established strong relationships with a large number of private equity firms over a long period of time. These relationships often form the foundation of access to co-investment opportunities, and are hard to replicate without significant resources and focus on private markets investing. Partnering with an institutional co-investor can unlock access to more restricted segments of the market.

Diversification

Co-investors rely on the lead private equity firm partner to manage the day-to-day operations of the underlying portfolio company . As a result, co-investors can manage a much larger portfolio of companies with resources similar to a lead private equity firm, allowing for improved diversification across a wide range of company attributes such as geography, sector, business model and size. Importantly, day-to-day company management is not compromised in this context, as quality co-investors will ensure the lead private equity firm they partner with in a transaction has the knowledge base and experience to effectively manage the underlying company.

Merits and Considerations of Co-Investments¹

Potential Allocation Benefits¹

As part of a broader portfolio, a dedicated co-investment fund can provide many distinct advantages regardless of whether that represents a first commitment to private markets or an addition to an established alternatives Historically, an allocation to a dedicated co-investment fund has demonstrated an ability to provide high quality, fee efficient, well-diversified private equity exposure.

EXPOSURE TO SOME OF GPS’ HIGH CONVICTION INVESTMENTS

Co-investment opportunities arise when there is a shortfall of equity capital, which typically happens when the general partner is making a large investment from the private equity fund they manage.

Fee Efficiency

Co-investment fund economics are often significantly lower than a typical private equity fund. As a result, investors are able to access similar exposures as the lead private equity fund, but at a substantially lower cost, making dedicated co-investment funds a fee-efficient access point for private markets.

More Stable Risk-Return Profile

The combination of greater portfolio-level diversification, lower fee burden, and consistency of day-to-day company management has historically translated to a more stable risk/return profile for co-investment funds as compared to other private equity offerings.³

While certain investors attempt to execute co-investments directly, the relationships, diligence requirements, and execution capabilities required often present considerable challenges. Dedicated co-investment funds can deliver the core advantages of co-investment opportunities in an investor-friendly, lower cost format.

Key Terms

Alternative Investments
Investment opportunities beyond traditional stocks, bonds, ETF, mutual funds and cash, including hedge funds, private equity, private credit, real estate, commodities, art, and other assets. Alternative investments typically have lower correlation with public equity and bond markets and offer diversification and the potential for higher returns. Alternative investments may have structures that are more complex, and there is less regulatory oversight and lower liquidity versus publicly traded investments. Past performance is not a guarantee of future results; investments are subject to loss, including a complete loss, of capital.

Diversification
Spreading investments across asset classes, vintage years, geographies, sectors, investment managers, company size, or other factors. Diversification typically helps to manage risk in a portfolio and provide downside protection. Past performance is not a guarantee of future results; investments are subject to loss, including a complete loss, of capital.

GP | General Partner
Typically, a private markets firm responsible for the day-to-day operations of the partnership, including making investment decisions related to any assets held by the partnership. GPs aim to generate returns for LPs (investors) by investing partnership assets in a portfolio of private equity, private credit or other private market investment opportunities.

Portfolio Company
A business in which an investment fund holds debt or equity.

Private Equity/Private Equity Fund
Equity investments made directly into privately held companies, ranging from start-ups to mature businesses with proven profitability. A private equity fund pools capital from multiple investors to deploy in private companies. These funds aim to generate returns by acquiring equity stakes in various opportunities. Managers of private equity funds seek to add value to portfolio companies through active management and strategic guidance to achieve profits upon exit.

To see a comprehensive list of terms with definitions, visit the Advisor Academy Glossary >

Notes & Disclosures

1. For illustrative purposes only. There can be no guarantee that a private equity investment will exhibit all of the attributes or merits described herein or that even if it does, that such private equity investment be successful as past performance is not a guarantee of future results.
2. For illustrative purposes only; the structures do not necessarily represent the structure or fund terms of any Adams Street investment vehicle; the structure and fund terms of any Adams Street investment vehicle are subject to, and qualified in their entirety by, the final governing documents of such offering.
3. Source: Goldman Sachs Asset Management, Preqin, Cambridge Associates, as of Q1 2023, Page 6 The Case for Co-Investments Q4 2023

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