Co-investing vs fund commitments for billionaire families
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
Many wealthy families start in private equity the usual way. They commit money to a fund and let the manager pick the companies. Over time, a lot of them want more say over where the money goes. Co-investing is the middle path.
What co-investing means
Co-investing is when an investor puts money into a company alongside a fund, instead of only through it. Say a private equity fund is taking a large company private. It might carve out a slice so a family office can invest directly next to the fund.
The family then has two stakes in the same company. One comes through its fund commitment. The other is the direct co-investment.
Direct and indirect versions
In a direct co-investment, the family puts money straight into the company and negotiates its own terms. It manages the position from entry to exit.
An indirect co-investment usually runs through a special purpose vehicle, often called an SPV, that the fund manager sets up and runs. Some managers also pool several co-investments into one vehicle. The legal form can vary by tax treatment, so this is a place to lean on good counsel.
Why families want it
The main draw is fees. Co-investments often carry lower fees than the main fund, and in some cases no performance fee at all. The thinking is that the fund already did the sourcing and diligence work, so the co-investor should not pay full price for it again.
Families also want more control, and many see co-investing as a training ground. Each deal teaches the family team how a professional buyer sources and checks a company. Over several deals, that can grow into an in-house direct investing platform.
Most important, the family still gets the fund's people. If it tried the same deal alone, it would have to find the company, raise or borrow the capital, win over the owner, do all the diligence, and run the exit. That is a huge amount of work for a small family team.
Why managers push back
Fund managers often resist. Co-investments add work and cost. They give up fees they would have earned. Once one investor gets co-invest rights, others ask for them too. And each co-investment teaches the family to need the fund a little less.
A higher risk, higher reward position
Funds spread their money across many companies. A co-investment concentrates extra money in one. If that company does well, the family earns far more than it would through the fund alone. If it does poorly, the family is hurt more than other fund investors.
That is why I tell families to treat each co-investment as a direct deal in its own right. Read the diligence the fund relied on and ask hard questions. Do not assume the fund's approval is enough.
How both sides can win
In large buyouts, a fund often lets some of its own investors put extra money into a single deal as co-investments.
That helps both sides. Investors get more exposure to a deal they like, and the fund keeps its own check at a size it is comfortable with.
The size of these deals
Co-investments range from small checks to very large ones. In my experience, most family offices prefer modest checks in companies they can understand. Even the largest families rarely want huge single checks. They would sooner control a middle market company or ride along as a minority holder in a larger one.
What to take from this
- Use fund commitments to earn access to co-investment rights.
- Treat every co-investment like its own direct deal.
- Size each check so a single loss does not hurt the family badly.
- Use each deal to build your team's own skills.
This page is general information, not legal, tax, or investment advice. Speak with a qualified attorney and advisor before committing capital.
Questions and answers
What is a co-investment? An investment made directly in a company alongside a fund, in addition to or instead of investing through the fund.
Why do family offices like co-investing? Lower fees, more control, and access to the fund's sourcing and diligence.
Is co-investing riskier than a fund commitment? Yes, because the money is concentrated in one company.
What size co-investments do families usually make? Most prefer modest checks they could lose without real harm to the family.