Co-investing alongside funds – smart move or hidden headache?
Joining a GP directly in a specific deal has become a common feature in private markets. Many LPs are doing it and some even build full strategies around it.
Why? Because co-investments offer:
Lower fees – often no management fee or carry
More control – choose specific deals, not just a blind pool
Faster capital deployment – no waiting for the fund to call capital
Closer GP relationships – get insight into how your managers really operate
Targeted exposure – tilt your portfolio to sectors, stages, or geos you believe in
But here’s the catch: co-investing is active. It demands speed, internal capacity, and clear decision-making. Without that, the risks outweigh the rewards.
Before diving in, ask yourself: Do I have the process, people, and purpose to do this well?
The strategic case for co-investments is stronger than ever
The co-investment universe is expanding. In 2022 alone total private equity co-investment activity hit approximately $50 billion according to Cambridge Associates. This growth is being driven by shifts in GP behavior, macro uncertainty and LP demand for more targeted exposure.
GPs are more motivated than ever. The post-2021 fundraising slowdown – down 21% in 2022 and 35% in 2023 has nudged many GPs to offer more co-investment opportunities as a goodwill gesture to LPs and a way to stretch their fund capital. In parallel deal pacing has slowed dramatically. Global private equity capital deployment was down 46% from its peak in 2021 and is tracking another approximate 43% decline in 2024.
In this environment co-investments serve as a way for GPs to maintain momentum and engage deeply with their LP base. For LPs this shift presents an opportunity to access more high-quality deals if they can move quickly and underwrite well.
The benefits: Why LPs want in
1. Lower fees
Most co-investments come with reduced or no fees – often no management fee, no carry –especially if you’re already an LP in the fund. That can significantly boost net returns.
That said, don’t let “free” be your filter. Some of the best deals still charge modest fees — and they’re worth it if the returns are there.
2. More control
Co-investing lets you pick the exact deals you want exposure to. It’s a way to express conviction in a sector, geography, or stage — and to correct imbalances in your portfolio without waiting for the next fund vintage.
It’s not just about diversification — it’s about precision.
3. Faster deployment
Blind pools can take years to deploy. With co-investments, you decide when to move. That’s helpful if you’re pacing capital over a specific horizon or trying to adjust exposure in real time.
Just remember: moving fast requires capacity. The deal won’t wait for your IC calendar.
4. Closer GP relationships
Co-investing gives you a front-row seat to how a GP thinks, diligences, and operates. It’s one of the best ways to test alignment and strengthen the relationship beyond quarterly updates.
LPs who co-invest — and handle it well — often become preferred partners on future opportunities.
What LPs often miss
1. Not all deals are good deals
Let’s say it plainly: sometimes co-investments are offered because the GP can’t fill the round — or doesn’t love the deal. That’s adverse selection.
If a GP already took the “hot” slots for themselves or their top LPs, what you’re getting might be leftovers. Before jumping in, ask:
Did the GP invest meaningful capital themselves?
Does this fit their core strategy?
Was it offered to others first?
Context matters more than the pitch.
2. Speed is everything
Many LPs are just too slow. Especially in venture or growth rounds, the window to commit can be days — not weeks.
If your internal process takes 6–8 weeks, you’ll miss the best deals. The LPs who get allocations are the ones who can say yes (or no) quickly — not the ones who ask for custom terms and long reviews.
3. It adds complexity
Every co-investment is extra admin: legal review, structuring, tax, reporting, and ongoing monitoring. GPs don’t want a herd of slow, high-maintenance co-investors.
Be honest: do you have the team to handle it? If not, you may need to work through a co-investment manager or fund — or stick to simpler structures.
Structural trends LPs should watch
1. LPs acting like GPs
More LPs — especially family offices and corporates — are bypassing funds and leading deals themselves. Some build internal teams. Others partner with ex-GPs or spin up single-LP funds.
The traditional LP-GP separation is breaking down. If you're still waiting passively for fund allocations, you may be a step behind.
2. The fund model is getting unbundled
Not every great deal flows through a classic 10-year blind pool. Today, GPs and ex-GPs are raising capital deal by deal, SPV by SPV, even via rolling funds or on-demand capital calls.
That means more flexibility — but also more noise. LPs need better filters, faster decision-making, and clearer mandates to navigate this new landscape.
3. The investment landscape keeps evolving
Five years ago, nobody expected $1B+ AI rounds — or that AI would be used to screen early-stage deals. Yet here we are.
Private markets are in constant flux. Sectors come and go, deal dynamics shift, and what feels standard today may be obsolete tomorrow. Co-investing is one strategy among others. It offers flexibility because you're not locked into a 10-year fund and can adapt your exposure as things change.
But that flexibility comes with a downside: Reducing your commitment to a fund might mean you loose access to high-quality deals or successor funds.
The takeaway: expect the market to change — and make sure your strategy can change with it.
Tactical guidance for LPs
1. Have a strategy – not just a reaction
Co-investing isn’t something you “try out” when a deal shows up. Define your objectives upfront: What role should co-investing play in your portfolio? What types of deals make sense for you? What’s your ideal pacing?
2. Speed is not optional
Winning allocations often comes down to responsiveness. If your process takes weeks, not days, focus on slower-moving opportunities — like lower mid-market or structured growth — where speed isn’t everything.
3. Be easy to work with
GPs favor LPs who are decisive, realistic, and low-friction. That means giving a quick no when appropriate, not asking for bespoke terms, and aligning on expectations from day one.
4. Treat co-investments like a portfolio
One-off deal tracking leads to messy reporting and bad decision-making. Group your co-investments. Track performance in aggregate. Monitor exposure by sector, stage, and geography.
Final thoughts
Co-investing isn’t a silver bullet – but it can be a powerful tool if used deliberately. It offers flexibility, alignment, and sharper exposure – but only if you have the structure and speed to act.
If you're looking to spot which funds are actively raising and where co-investment opportunities might emerge, check out WhoIsRaising.com. We track who's in market so you can focus on what matters: building relationships and finding the right deals.