How family offices win co-investment rights from top funds

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

One of the most common questions I hear from families is how to get co-investment rights. The honest answer is that it depends on how much the fund needs you.

Know the fund's position

Elite private equity firms often raise their funds easily and turn investors away. They have little reason to hand out co-investment rights. When they do, it is usually to close a very large commitment from a very large family, a sovereign wealth fund, or a big institution.

Newer managers are in a different spot, and so are firms with weak past returns. Their investor relations teams often use co-investment rights, fee breaks, and other terms to attract capital. They may even offer these to smaller investors who could never get them at a top firm.

So before you ask, think about your bargaining position. How hard is this raise? How much does your check help them close?

Offer something in return

Managers do not give co-investment rights to every investor. It adds too much work. They give them to investors who bring a clear benefit. That might be a large commitment, a strategic link, or a long relationship.

For a small or struggling fund, the benefit may simply be choosing them over a better-known peer. Know what you bring before you ask.

Relationships come first

Most co-investments happen between parties that already know each other. Often the family has backed the firm's earlier fund. That history tells the manager what the family likes and what it would want to co-invest in.

More families now share their preferences openly, by sector and deal size. That draws calls from people looking for partners. I know several energy families who have told me exactly what they want to see. When I need equity partners on an energy deal, I call them first.

Read the agreement closely

Co-investment rights show up in the limited partnership agreement or a side letter. I have seen many versions. Some set aside a fixed share of the commitment for co-investment with lower fees and more control. Others leave nearly everything to the manager, who decides which companies are offered and in what size.

Sometimes a family has a right to put in a large amount but chooses not to. It may lack confidence in the deal, or prefer to keep its exposure to the fund commitment alone. Having the right is not the same as using it.

The fund manager has usually negotiated these terms many times. You may have done it once. Watch for small clauses with big effects.

Terms worth pushing for

Enough time to review the deal before you have to decide.
Access to the same diligence materials the fund relied on.
Clear limits on your role and on what the manager expects from you.
A structure, SPV or otherwise, that works for your tax position.

Expect the fund to push back on some of this. Many agreements say the co-investor takes responsibility for its own decision, barring fraud or similar failures.

Fees are the hardest part

Fees are usually the biggest fight. Families often accept a management fee but want a lower or zero performance fee. Managers try to keep terms close to their normal pay.

The right answer depends on how much work the manager does on the co-investment, how involved the family wants to be, and how much each side wants the relationship.

What to take from this

Size up how much the fund needs your money before you ask.
Lead with what you bring, not what you want.
Build relationships across more than one fund cycle.
Have experienced counsel read every co-investment clause.

This page is general information, not legal, tax, or investment advice. Speak with a qualified attorney about any fund agreement or side letter.

Questions and answers

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

Where are co-investment rights written down? Usually in the limited partnership agreement or a side letter.

What fees do co-investors pay? It varies. Many families accept a management fee and push for a lower or zero performance fee.

Do I have to use a co-investment right? No. Many families pass on deals they do not like.