How would you analyze a sponsor's co-investment proposal to an LP?
A co-investment = a direct LP stake in a portfolio deal, on top of the fund commitment. Typically without fee/carry ("no fee, no carry") — net +2–5% IRR vs. the fund.
- Economics: fee-free and carry-free should be the standard.
- Deal-level DD: independent assessment, not just trusting the GP.
- Timing: tight deadlines (2–4 weeks), accelerated IC process.
- Deal size: 10–30% of the equity ticket; concentration risk above 5–10% of the PE portfolio.
- Sector & geographic fit: does it fit the LP's asset allocation?
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- Pari passu with the fund: same terms, same rights.
- Tag-along on exits: the LP can sell alongside whenever the fund sells.
- Information rights: quarterly reporting like a fund LP.
- Voting rights: proportional to the stake.
The GP benefits from co-investments through (a) lower fund concentration, (b) a better LP relationship, (c) a track record on larger deals. The LP has to understand whether the co-investment offer is really a top-tier deal or whether the GP just wants to share the risk because it is skeptical itself.
Co-investments are statistically in the top-quartile range (Cambridge Associates: ~18–20% median net IRR vs. 15% for funds), but the variance is greater — no diversification effect as with fund investments.
In the interview, mention that co-investments are the primary way sovereign wealth funds and large pension plans invest in PE — and that GPs use co-investments as an important LP-relationship tool. This signals an understanding of LP-GP dynamics.