Co-investing and club deals: the complete guide for billionaire families

Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

Family offices want more say over where their money goes, without taking on every deal alone. Co-investments and club deals sit between a passive fund commitment and a fully in-house direct deal. This guide brings together what I wrote in the book and how I explain these deals to families today, with links to deeper pages.

Two terms that get mixed up

Co-investment. An investor puts money into a company alongside a fund instead of only through it. If a private equity fund takes a large company private, it might carve out a slice for a family office to invest directly next to the fund. The family then holds two stakes in the same company: one through the fund and one direct.

Club deal. Several investors pool money to take on a deal too big for any one of them. The partners usually come in on the same terms, agreed in advance, and are often active and close to equal in size.

The practical difference is who drives the deal. A co-investment is usually offered by a fund or lead investor to more passive partners, with terms set case by case. A club deal is planned together from the start.

Direct and indirect co-investments

In a direct co-investment, the family puts money straight into the company and negotiates its own terms. It manages the position through to the exit.

In an indirect co-investment, the family invests through a vehicle, most often a special purpose vehicle run by the same manager as the fund. Some managers also pool several co-investments into one vehicle. The legal form depends on tax treatment, so experienced counsel matters here. Common choices include an SPV set up as an LLC or a limited partnership, often formed in Delaware, or in the Cayman Islands or Luxembourg for some foreign investors. I also apply my 40-hour diligence rule to every co-investment, and I like to see at least 2 or 3 references on each partner.

Why families want co-investments

The draw is clear. Co-investments often carry lower fees, sometimes with no performance fee, because the fund already did the work of sourcing and checking the deal. The family still gets the fund's team to source and monitor the company, and the fund supplies most of the capital.

If the family tried the same deal alone, it would have to find the company, raise the money, win over the owner, run diligence, manage the business, and plan the exit. That is a huge amount of work.

Families also use co-investments to gain control over where money goes and to train their own people. Over time, that experience can grow into an in-house direct investing program.

Deeper page: Co-investing vs fund commitments for billionaire families

Why managers resist

Fund managers have reasons to push back. Co-investments add work and cost. Managers give up fees. Once one investor gets co-invest rights, others ask. And every co-investment teaches investors to need the fund a little less.

Why co-investments grew

The financial crisis shifted power toward investors. Funds lost capital as investors fled to safer, cheaper, more liquid options, and performance was weak across many strategies. Managers who had brushed off requests for better terms in 2006 and 2007 had to listen. Co-investment rights became one of the main concessions used to win commitments.

How big buyouts use both

Some of the largest buyouts have combined both ideas. A founder or family office teams with a private equity firm in a club, and the fund then lets its own investors add money to the deal as co-investments.

Investors get more of a deal they like, and the fund keeps its own exposure at a size it is comfortable with.

How big these deals get

Co-investments range from small checks to very large ones. The largest families do the most of them, often in middle market companies. Most family offices prefer modest checks. Very few want enormous ones.

Higher risk, higher reward

A fund spreads money across many companies. A co-investment piles extra money into one. When it works, the family earns far more than it would through the fund. When it fails, the family is hurt more than other fund investors.

Treat each co-investment like its own direct deal.

Winning co-investment rights

Your odds depend on how much the fund needs you. Elite firms that raise money easily rarely grant co-investment rights except to win very large commitments from the largest families, sovereign funds, or big institutions. Newer firms, or those with weak track records, often use co-investment rights and fee breaks to attract capital, sometimes even from smaller investors.

Managers grant these rights to investors who bring a clear benefit, such as a large check, a strategic link, or a long relationship. Most co-investments happen between parties who already know each other.

The rights are written into the limited partnership agreement or a side letter. Some set aside a fixed share of the commitment for co-investment. Others leave nearly everything to the manager. A family can also hold a right and choose not to use it.

Terms worth pushing for include enough time to review each deal, access to the fund's diligence file, and clarity on your role. Fees are usually the biggest fight. Families often accept a management fee and push for a lower or zero performance fee.

Deeper page: How family offices win co-investment rights from top funds

Forming a club deal

A club deal often starts when a family finds a company it likes that is too big to buy alone. I once saw a brand-name consumer company that a private equity firm had held for years without profits. The fund's investors wanted out. One family believed its operating skill could turn the company around in a few years, but did not want to carry the whole check alone. It led a club of other families and a few institutions, who joined as passive partners.

In a perfect world, the lead family would have taken the whole deal and all of the profit. The club let it take on a deal it could not otherwise swallow.

Every club needs a clear lead. That person usually found the deal or knows the industry best, runs diligence, talks to the seller, and keeps partners moving.

Deeper page: Club deals: how billionaire families team up on big deals

The terms that keep clubs together

In the book I shared a detailed set of club deal guidelines from a family office executive. The core points:

Start with a letter agreement before closing.
Choose members who add value and share your style and time frame.
Keep the club small. More members tend to mean more risk of failure.
Name a leader. Each member names one person to speak for it.
Agree on the plan if things go wrong, before closing.
Use one shared set of advisors and cap their fees.
Never front expenses without a written promise of repayment.
Settle fees, governance, board seats, and information rights.
Agree on share transfers, exits, conflicts, non-competes, and confidentiality.
Choose a vehicle that does not hurt any member's tax position, and include binding arbitration.

Deeper page: Club deal terms to agree on before closing

Sharing diligence well

Shared diligence is a real advantage. In a co-investment, the fund has done much of the work. In a club, members can split the work by strength.

The danger is that everyone assumes someone else checked. Many co-investment agreements also put the decision squarely on the co-investor. Build a shared table with an owner and a deadline for each area, ask for the fund's diligence file, and add a few independent calls of your own.

Check partners as hard as you check the company. One executive I interviewed keeps calling references until his team is fully comfortable, reaching lenders and vendors well beyond the list a partner offers.

Before deep diligence, use a short screen of must-haves. One is full commitment from the CEO. The hen contributes to breakfast, but the pig is committed.

Deeper page: Sharing due diligence in co-investments and club deals

Industry syndicates

Some families build standing groups around one industry. An energy family I know formed a cleantech investment club, voting members in and out. It also priced capital to match risk, lending at higher rates in the riskiest early phase of a project and lower rates as other investors joined.

Deeper page: Family office syndicates by industry

Lessons from experienced deal makers

The family office leaders I interviewed shared a few common lessons:

There is no single right way to do a deal. Structure it around your family's goals and time frame.
Be ready for the long haul. Some stretches feel like chewing glass.
Avoid deals that depend on government subsidies or pending approvals where you can.
Be careful moving from equity into debt. Have someone on the team who knows that market.
Specialize in an industry and hire people who know it.
Build real businesses instead of assets meant to flip quickly.

Questions to ask before saying yes

Before a family commits to any co-investment or club deal, I suggest working through a short set of questions.

Would we do this deal if no one else were in it? If not, why are we comfortable now?
Do we understand this industry well enough to know why the deal could fail?
How much of our net worth sits in this one company once the check clears?
What happens if the company needs more money in year two? Are we ready to put it in?
Who decides on the exit, and does their time frame match ours?
Have we checked our partners as closely as the company itself?

If the answers are vague, slow down. A good deal will usually still be there after another week of work. A bad deal looks the same on day one as a good one, and the questions are how you tell them apart.

Where this is heading

Families keep getting more sophisticated, and some now have internal teams that rival large institutions. I expect co-investments, club deals, and direct deals to keep growing as families look to cut fees and manage more money themselves.

This guide is general information, not legal, tax, or investment advice. Speak with a qualified attorney and advisor before any co-investment or club deal.

Questions and answers

What is the difference between a co-investment and a club deal? A co-investment is usually offered by a fund or lead investor to passive partners. A club deal pools near-equal partners on shared terms.

Why do family offices co-invest? Lower fees, more control, and access to a professional team's sourcing and diligence.

Can smaller family offices get co-investment rights? Sometimes, especially from newer funds or those having a hard raise.

How many partners should a club deal have? As few as the deal allows.

Can a co-investor rely on the fund's diligence? It can use it, but should add its own checks.