Definition
What is Co-Investment?
Direct investment by an LP alongside a fund into the fund's specific portfolio investment — typically fee-free or reduced-fee.
Co-investment is the practice where a Limited Partner (LP) invests directly into a specific portfolio company alongside the fund's standard investment. The LP commits an additional pool of capital that the GP draws upon for selected deals, typically at reduced or zero management and performance fees.
Mechanics: the GP identifies a portfolio investment that requires capital exceeding the fund's single-deal concentration limit, or where the GP wishes to share economics with anchor LPs. The GP offers co-investment slots to qualifying LPs — typically those who have committed sizeable primary fund commitments. The LPs decide individually whether to participate.
Why LPs want co-investment: - Fee economics — co-investment is typically structured fee-free or at materially reduced fees (e.g. 0.5% management + 10% carry vs the fund's 2/20). On a successful deal, this can boost net returns by 200-400 basis points per annum. - Concentration choice — LPs can opt in to the deals they like and skip those they don't, giving them more control than passive fund exposure. - Direct relationship — co-investing LPs typically receive direct reporting on the specific portfolio company, with deeper insight than the fund-level reports.
Why GPs offer co-investment: - Fund concentration limits — most LPAs limit any single investment to 10-15% of fund commitments. Co-investment lets the GP write larger cheques without breaching limits. - LP relationship — anchoring large LPs through co-investment access strengthens the relationship and the GP's prospects for future-fund commitments. - Deal selection signal — co-investment volume signals which deals the LP base believes in, useful intelligence for the GP.
NZ context: co-investment is more developed in larger US/EU funds than in NZ-domestic PE/VC. NZ funds typically have smaller fund sizes (NZ$50-300M) and less concentration risk, so co-investment is less needed mechanically. Where it does exist, it's often offered to family-office and institutional LPs.
Investor-side risks: - Adverse selection — GPs may offer co-investment on deals where they want to dilute their own concentration, which could be the riskier deals. LPs need to evaluate each co-investment on its own merits, not assume GP enthusiasm reflects quality. - Speed pressure — co-investment decisions typically have 2-6 week turnaround. LPs without dedicated investment teams may struggle with the diligence pace. - Concentration creates volatility — a co-investment-heavy LP portfolio takes the LP much closer to individual-deal risk than diversified fund exposure.
Related Terms
Private Equity (PE)
Investment in established private companies through buyouts, growth capital, or restructuring.
Venture Capital (VC)
Investment in early-stage, high-growth companies in exchange for equity, targeting significant returns.
GP / LP Structure
The General Partner / Limited Partner structure used in NZ Limited Partnerships, where the GP manages and bears unlimited liability while LPs are passive with capped liability.
Family Office
A private wealth management vehicle managing the financial affairs of a single ultra-high-net-worth family or a small group of families.
Educational Content Disclaimer
This glossary provides general educational information only and does not constitute financial, legal, or tax advice. Definitions and explanations are simplified for educational purposes and may not cover all aspects or nuances of each term.
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