The Rise of Co-Investment Opportunities
Private markets continue to evolve, and investors today act more targeted and value-driven than ever. One of the most significant shifts in recent years is the rise of co-investment opportunities. At Pinnacle Fund Services, we view this as a durable trend that actively reshapes how private capital is deployed and governed.
What Are Co-Investments?
Co-investment opportunities let limited partners (LPs) invest directly alongside general partners (GPs) in individual portfolio companies or assets—typically without additional management fees or carried interest. LPs gain concentrated exposure to a single high-conviction deal rather than a diversified blind pool.
Why Are Co-Investments Growing?
Several forces are driving their growth:
- Lower fees
- Greater transparency
- Closer GP–LP alignment
- Targeted exposure
- Potentially stronger returns
Benefits and Challenges of Co-Investments
Key Benefits:
- Stronger alignment
- Better investor economics
- Faster deployment
- Strategic deal targeting
- Reinforcement of GP sourcing strength
Key Challenges:
- Tight timelines
- Heavier operational needs
- Governance and allocation complexity
- Tax and regulatory considerations
- Elevated reporting expectations
Who Controls a Co-Investment Opportunity?
In most cases, the GP retains full control of the co-investment opportunity. Co-investors participate economically, but they do not drive strategy or influence day-to-day decisions.
LPs typically receive information rights, access to reporting, and standard investor protections, while the GP manages:
- Deal sourcing and negotiation
- Due diligence and structuring
- Portfolio management and value creation
- Exit strategy and timing
LPs play a financial—not operational—role. While rare exceptions exist, co-investments remain GP-led. This structure preserves consistent governance across the main fund and co-investors while maintaining alignment and reducing conflicts of interest.
How to Set Up a Co-Investment Structure
Co-investment structures vary widely based on deal type, tax considerations, investor location, and regulatory requirements. No two situations are identical, so legal counsel must guide the final structure.
However, most co-investment programs follow one of two common approaches:
1. Direct Co-Investment Into the Portfolio Company
LPs invest directly into the underlying company, purchasing the same class of shares or a parallel class.
Pros:
- Fewer entities to manage
- Clear alignment with the GP’s economics
- Faster execution
Cons:
- Complex cap table implications
- Direct legal relationships between investors and the portfolio company
- More sensitive governance considerations
2. A Dedicated Single-Investor or Multi-Investor SPV (Special Purpose Vehicle)
Often structured as a limited partnership, LLC, or corporate feeder entity.
Pros:
- Cleaner from a cap-table perspective
- Consolidated investor reporting
- Flexible economics and governance
- Can accommodate multiple LPs efficiently
Cons:
- Requires entity setup and administration
- Adds regulatory and tax considerations
- More documentation (LPA, subscription docs, side letters, etc.)
Key Questions When Determining Structure:
- Is the investor group a single institution or multiple LPs?
- Does the portfolio company prefer a single shareholder or multiple?
- Are there tax considerations requiring a blocker or feeder?
- Does the main fund’s LPA outline co-investment processes?
- How quickly must the structure be formed?
A well-designed structure makes execution smoother and protects both the GP and LPs.
What to Do When Co-Investors Also Participate in the Main Fund
In many deals, the co-investor is already an LP in the main fund. This creates additional considerations around allocation, fairness, and communication. Managers should address the following:
Ensure fair treatment: Economics, information rights, and processes must be consistent.
Monitor combined exposure: Avoid over-concentration for any single LP.
Communicate clearly: Explain allocation, timing, and terms early.
Coordinate reporting: Ensure deal-level reporting aligns with fund-level reporting without duplication.
Consolidated reporting: Ensure the LP can have visibility into both the main fund and co-invest performance on a consolidated basis.
Pinnacle often acts as the central hub to reconcile reporting and maintain consistency across both the fund and the co-investment vehicle.
Conclusion
Co-investments have become a core element of private markets. As investors seek lower fees and more targeted access, managers who offer co-investments—and support them with strong infrastructure—will differentiate themselves. At Pinnacle, we continue investing in the tools, people, and processes that help managers deliver a seamless, transparent co-investment experience.
Please reach out to Keith Donald at [email protected] or 1-604-559-8920 to find out whether co-invest opportunities are right for you.