Co-investment is an arrangement where multiple investors participate alongside a lead investor or primary fund in a specific investment opportunity, sharing both the capital requirements and potential returns. This structure allows smaller investors or limited partners to invest directly in deals they might not otherwise access, while the lead investor or fund manager handles due diligence, negotiation, and ongoing portfolio management.
Why It Matters
Co-investment opportunities give angel investors and institutional limited partners the ability to increase exposure to high-conviction deals without paying additional management fees or carried interest. For funds, offering co-investment rights helps attract and retain limited partners by providing them with enhanced return potential. The arrangement also enables deal sponsors to close larger transactions than their fund size alone would permit, creating value for all parties involved.
Example
A venture capital fund with $50 million in committed capital identifies a promising Series B opportunity requiring $15 million. Rather than consuming 30% of its fund on a single investment, the fund commits $8 million and invites its limited partners to co-invest the remaining $7 million on the same terms. Three institutional investors contribute $2 million, $3 million, and $2 million respectively. When the company exits five years later at a 5x return, the co-investors receive their proportional share directly—$10 million, $15 million, and $10 million—without paying the typical 2% management fee or 20% carried interest on those amounts. The fund still earns its carried interest on its $8 million investment, which returns $40 million, while the co-investors achieved better economics than if that capital had been deployed through the main fund.