What Is an Equity Co-Investment?

An equity co-investment is a minority investment in a company made by investors alongside a private equity fund manager or 澳洲幸运5官方开奖结果体彩网:venture capital (VC) firm. Equity co-investment enables other investors to participate in potentially highly profitable investments without paying the usual high fees charged by a private equity fund. Opportunities for equity co-investment are typically restricted to large institutional investors who have a relationship with the private equity fund manager and are often not available to smaller or 澳洲幸运5官方开奖结果体彩网:retail investors.

Understanding Equity Co-Investments

As noted above, a minority investment made by an investor into a company or venture is called an equity co-investment. Many of the investors that make these investments are 澳洲幸运5官方开奖结果体彩网:institutional investors, such as 澳洲幸运5官方开奖结果体彩网:pension funds and insurance companies. These deals may also attract certain 澳洲幸运5官方开奖结果体彩网:high-net-worth individuals (HNWIs). The majority of the money poured into an equity co-investment (known simply as a co-investment) typically comes from 𒆙a private equity or VC firꦉm.

In a typical equity co-investment fund, the investor pays a fund sponsor or 澳洲幸运5官方开奖结果体彩网:general partner (GP) with whom the investor has a well-defined private equity partnership. The partnership agreement outlines how the GP allocates capital and diversifies assets. Co-investments avoid typical 澳洲幸运5官方开奖结果体彩网:limited partnerships (LPs) and general funds by investing directly in a company.

Because the co-investor has a 澳洲幸运5官方开奖结果体彩网:minority interest in the fund, the sponsoring firm (the private equity or venture capital firm) retains control over how it is managed, including the holdings and 澳洲幸运5官方开奖结果体彩网:rebalancing. As such, the co-investor cannot make any decisions abo⛦ut the fund.

Equity co-investment accounted for significant growth in private equity fundraising since the 澳洲幸运5官方开奖结果体彩网:2007-2008 financial crisis compared to traditional fund investments. Although interest in co-investing remains high, fundraising is limited. This is largely due to economic conditions (澳洲幸运5官方开奖结果体彩网:interest rates, inflation, and recessionary fears) and geopolitical concerns.

^{Source: S&P Global. "."}

Advantages and D🐼isadvantages of Equity Co-Invꦰestments

Equity co-investing in private equity deals has certain advantages. But, co-investors who participate in these deals should read the fine pri⛦nt before agreeing🌌 to them.

Advantages

There are several key benefits to co-investments for both the investor and the private equity or venture capital firm that spearheads the fund. ♋Among them, including:

• Exposure to new markets. Co-investments open up markets for eligible investors that the average investor cannot access. It also opens them up to alternative investment options. For instance, a private equity firm may open up access to mid-market companies or planning-based investment deals.
• More capital and greater flexibility. By opening their funds up to co-investments, PE and VC firms can gain access to much-needed capital without sacrificing decision-making to further their investment goals. This frees up their own capital for other purposes, which gives them more flexibility.
• The ability to share the risk. Both co-investors and the offering firm can lower and share the amount of risk associated with the deal.
  
• Reduced fees. Many deals offer co-investors a better 澳洲幸运5官方开奖结果体彩网:fee structure by reducing their fees or eliminating them.
  

Disadvantages

The most important aspect of co-investments is their complicated nature. These are risky ventures, which require a great deal of 澳洲幸运5官方开奖结果体彩网:transparency and disclosure. Since co-investors take a minority stake in a co-investment, they should be sure that they are well-apprised of how the fund is run and executed. They should༒ also research the fund's management and the team's responsibilities.

Another key drawback of these deals can be the absence of fee transparency. Private equity firms don't offer much detail about the fees they charge LPs. There may be 澳洲幸运5官方开奖结果体彩网:hidden costs in cases like co-investing, where they purportedly offer no-fee services to invest in large d🧸eals. For example, they may charge monitoring fees, which 🥀can amount to several million dollars. This may not be evident at first glance from LPs.

There is also the possibility that PE firms may receive payments from companies in their 澳洲幸运5官方开奖结果体彩网:portfolio to promote the deals. Such deals are also risky for co-investors because they have no say in selecting or structuring the deal. The success (or failure) of the deals rests on the acumen of the private equity professionals in charge. In some cases, that may not always be optimal as the deal may sink.

Example of an Equity Co-Investment

Here's a hypothetical example to show how equity co-investments work. Suppose a $500 million fund could select three enterprises valued at $300 million. The partnership agreement might limit fund investments to $100 million, which means the firms would be leveraged by $200 million for each company.

If a new opportunity merged with an enterprise value of $350, the GP would need to seek funding outside its fund structure because it can only invest $100 million directly. The GP could borrow $100 million for financing and offer co-investment opportunities to existing limited partnerships or outside parties.

The Bottom Line

Equity co-investments allow investors with a large capital pool to access new markets, so it's not an investment option for the average investor. Institutional and high-net-worth investors can access attractive investment opportunities with the potential for high returns. Although interest continues to remain strong, equity co-investments are impacted greatly by macroeconomic factors, such as interest rates, and geopolitical concerns.