The Co‑Investment Continuum: Structures That Give GPs More Control and Discretion (Part One of Two)

Prospective investors frequently demand access to co‑investments to average down their management fees and take greater control of their allocation pacing. GPs are often willing to meet that demand, but they occasionally become frustrated by ad hoc approaches that depend on LPs performing diligence on co‑investment opportunities and providing capital in tight time frames to close deals. GPs that want to meet investor demand while also mitigating those risks can structure their co‑investment programs in various ways that put them more firmly in the driver’s seat on deals. Although those approaches may not provide enough control for exceptionally proactive LPs, they can be a good solution for investors that want to increase their co‑investment allocations without needing high levels of involvement in each deal. This two-part series examines common co‑investment structures PE sponsors can pursue and notable factors to be weighed when selecting a path forward. This first article addresses key questions a fund sponsor must consider when structuring a co‑investment, as well as certain approaches that give GPs more control over the co‑investment process, such as syndicated co‑investments. The second article will outline structures that grant LPs more active roles in controlling and participating in co‑investment opportunities. See our two-part series on PE co‑investments: “Investment Vehicles, Investor Rights and Restrictive Covenants” (Jun. 18, 2019); and “Regulatory Risks and Important Tax Considerations” (Jun. 25, 2019).

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