What Is an Equity Co-Investment?

What Is an Equity Co-Investment?

Let me tell you directly: an equity co-investment lets you, as a minority investor, jump into high-stakes deals with private equity or venture capital funds without paying those usual sky-high fees. I'm explaining here how institutional investors use their connections with private equity firms to grab profitable chances while splitting the risks involved.

Key Takeaways

You need to know that equity co-investments let you participate right alongside private equity or venture capital firms, skipping the high fees. Usually, you're an institutional or high-net-worth individual putting in a minority stake with no say in managing the investment. These setups give you entry to new markets and possibly bigger returns, but watch out for risks like poor transparency and zero control. Interest in them stays high even with economic and geopolitical hurdles messing with fundraising. Since the 2007-2008 financial crisis, co-investments have become a bigger deal in private equity, moving past just traditional fund investments.

How Equity Co-Investments Work

As I mentioned, an equity co-investment is your minority stake in a company or venture. Most investors doing this are institutions like pension funds or insurance companies, though some high-net-worth individuals get in too. The bulk of the cash comes from a private equity or VC firm.

In a standard setup, you pay a fund sponsor or general partner—someone you already have a solid private equity relationship with. The agreement spells out how they handle capital allocation and asset diversification. Unlike typical limited partnerships or general funds, co-investments go straight into the company.

Since you hold a minority interest, the sponsoring firm keeps full control over management, including what they hold and how they rebalance. That means you can't make any calls on the fund.

Post-2007-2008 crisis, these co-investments have driven a lot of growth in private equity fundraising over traditional methods. Interest is strong, but fundraising gets squeezed by things like interest rates, inflation, and geopolitical issues.

Equity Co-Investments Between 2018 and 2023

Looking at the data, sovereign wealth funds invested $331.41 billion across 469 deals. Corporate investors put in $254.02 billion for 3,182 deals. Pension funds contributed $193.40 billion in 288 deals, and family offices added $54.35 billion to 683 deals. This comes from S&P Global's report on global limited partner co-investments with private equity.

Fast Fact

A Preqin study shows 80% of limited partners reported better performance from equity co-investments than from traditional fund structures.

Pros and Cons of Equity Co-Investments

Equity co-investing in private equity has clear upsides, but if you're getting involved, read every detail before signing on.

On the advantages side, you get exposure to markets the average investor can't touch, plus alternative options like mid-market companies or specific deal types. Private equity and VC firms benefit too—they pull in more capital without giving up control, freeing their own money for other uses and adding flexibility. Everyone shares the risk, lowering it for all parties. And often, you see reduced or zero fees, improving the structure.

But disadvantages are real. These deals are complicated and risky, demanding full transparency and disclosure. As a minority holder, you need to be informed on fund management and the team's roles—do your research. Fee transparency can be lacking; private equity firms might not detail charges to limited partners, hiding costs like monitoring fees that run into millions, even in 'no-fee' setups. They might also get payments from portfolio companies to push deals. Plus, you have no input on selecting or structuring the deal, so success hinges on the private equity team's skills, which aren't always top-notch and can lead to failures.

Example of an Equity Co-Investment

Take this hypothetical: a $500 million fund picks three enterprises worth $300 million each. The agreement caps direct investments at $100 million, so they'd leverage $200 million per company.

If a $350 million opportunity pops up, the general partner can only put in $100 million directly. They'd borrow $100 million and offer co-investment slots to existing limited partners or outsiders.

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

You're typically a high-net-worth individual or institutional investor like an endowment, pension fund, or corporation. You provide a minority stake—under 50%—but get no decision-making or voting rights on operations. Do your due diligence to protect your capital. In return, you access new markets, potential higher returns, and lower fees.

How Much Money Have Co-Investors Put Into Deals?

Per S&P Global, sovereign wealth funds topped the list from 2018 to 2023 with $331.41 billion in 469 deals. Corporate investors did the most deals at 3,182 for $254.02 billion. Pension funds hit 288 deals with $193.40 billion, and family offices did 683 deals for $54.35 billion.

Do Equity Co-Investments Always Work?

They offer big chances for institutional and high-net-worth folks, with new markets and higher return potential. But they don't always pan out. Look at Brazilian data center Aceco T1: KKR bought it in 2014 with co-investors GIC and the Teacher Retirement System of Texas. The company had faked its books since 2012, leading KKR to write off the investment to zero in 2017.

The Bottom Line

Equity co-investments give institutional and high-net-worth investors a shot at lucrative markets without the steep fees of standard private equity funds. You get lower costs, shared risks, and new market exposure. But they're complex, hit by macro conditions and geopolitics. With a minority stake and no management say, due diligence is crucial. This isn't for average investors due to the complexity and risk.