Equity co-investment is a type of transaction in which investors—usually high-net-worth individuals or family offices—provide a portion of the capital needed to finance a purchase alongside the lead investor, typically a private equity fund. Co-investment is attractive to investors due to the potential for attractive returns and the greater control over the investments.

Advantages for Investors

For investors, co-investment presents an opportunity to manage risk and diversify their portfolio, potentially gaining a stronger return. The investors' capital serves as part of the funding for the deal, alongside the private equity fund, thereby reducing the fund’s investment risk. Because the investor is not reliant on the private equity fund to manage or make the investments, they can have a direct say in the decision-making process, which allows for greater control over the portfolios.

Co-investment also presents investors with the potential to gain higher returns than those available in public markets through the pricing agreement negotiated on the deal. Investors often receive a reduced investment fee, or no fee at all, which also reduces the total cost of the transaction.

Benefits for Funds

Equity co-investment has benefits for the private equity funds as well. The additional capital secured through the co-investment allows the private equity fund to increase their share of control and ownership in the portfolio company. With the co-investor’s increased capital, the private equity fund is able to stretch their investment further. Additionally, increased ownership allows the private equity fund to reduce their liquidity risk and potentially increase returns for investors.

Larger private equity firms also benefit from establishing relationships with the co-investors and receiving assistance with due diligence and deal analysis. Additionally, involving a co-investor enables the private equity fund to gauge investor sentiment, sentiment which can be beneficial in future fundraising endeavors.

Conclusion

Equity co-investment is an increasingly popular way for investors, especially high-net-worth individuals or family offices, to gain control, diversify their portfolio, and reduce their risk. It is also beneficial to the private equity funds as it provides them with a greater ownership stake, enhances due diligence, reduces liquidity risk, and can assist with fundraising. Thus, it is an increasingly attractive option for investors and private equity funds alike.