A guide to private markets co-investments: how they work, what they offer LPs and GPs, how the fees compare, and how co-investors select them.
Overview
A co-investment is a direct equity stake in a private asset, taken alongside the general partner (GP) leading the deal. The investor sees the asset, the price, and the capital structure before committing, and usually pays little or no management fee and carried interest on that position.
Access is the constraint. A GP offers a co-investment to a handful of partners it trusts to underwrite quickly and close on time, which is why the opportunity set an investor sees depends almost entirely on the relationships behind it. A broad network of GP relationships creates the volume of opportunities a co-investor needs to be selective. Without enough deal flow, selectivity is aspirational: the investor has fewer chances to compare opportunities, reject less attractive ones, and commit only to positions that fit the portfolio.
Key takeaways
- Co-investments let investors participate alongside the lead sponsor, often on preferential economic terms.
- Co-investing lets an investor aim exposure at specific sectors, regions, GPs, and vintages.
- Selectivity requires volume. A co-investor can only decline most of what it sees if the pipeline is large enough to make rejection affordable.
- Diligence compounds across strategies. Work done to underwrite a co-investment often resurfaces later, when the same asset or manager appears in a primary or secondary transaction.
- Each position is one asset, so diversification has to be built deliberately across deals, managers, and vintages.
How a co-investment works
A sponsor agrees to buy an asset and needs more equity than its fund should put into a single position. It offers the balance to select limited partners. Those investors take a passive minority stake on the same entry terms as the fund, and the GP retains governance and day-to-day ownership.
Timing separates co-investors into two groups:
- A post-signing offer arrives after the sponsor has committed to the deal, when price, capital structure, and governance are already settled, and the co-investor’s choice is limited to taking the position or passing on it.
- A pre-signing offer, by contrast, brings the co-investor in before the transaction is signed, to underwrite alongside the sponsor.
Arriving early is worth the extra work. A pre-signing co-investor watches the sponsor’s underwriting take shape and can test the assumptions while they are still open to argument, which reveals more about the GP’s investment acumen than a pitch deck ever could. Sponsors reserve those allocations for partners who can underwrite quickly and commit with certainty, so an invitation to co-underwrite is itself a signal.
Co-investment vs. fund investment
| Feature | Co-investment | Traditional fund investment |
|---|---|---|
| Fee structure | Reduced or no management fee and carried interest at the vehicle level, which removes the second fee layer. | Management fee on committed or invested capital, plus carried interest on fund profits. |
| Deal selection | The investor reviews each asset and decides whether to participate. | The GP selects investments within the fund’s mandate. LPs cannot opt in to or out of individual deals. |
| Portfolio control | Asset-level control over sector, region, GP, position size, and risk exposure. | The GP controls portfolio construction, bounded by the fund’s strategy and pace. |
| Diversification | One asset per position. A program builds diversification across deals, managers, strategies, and vintages. | One commitment buys a pool of assets, bounded by the fund’s mandate. |
| Liquidity | Illiquid until the asset is sold, recapitalized, or otherwise realized. Secondary liquidity may be limited. | Illiquid for the fund’s life, commonly 10 years or longer, with distributions controlled by the GP. |
| Commitment | Deal-specific, often on an accelerated timetable. Direct participation can require size, though a managed vehicle can aggregate investors. | Set at subscription, committed to a blind pool, and drawn over the investment period. |
| Transparency | Standardized, asset-level monitoring and exposure analysis. | Periodic GP reporting, which varies in format, timing, and asset-level detail. |
What co-investments offer limited partners
More of the gross return reaches the investor
Removing a fee layer does not improve an asset’s performance. It changes how much of that performance the investor keeps, and the effect compounds over a holding period. Blending co-investments into a private markets allocation lowers its overall fee burden.
The portfolio can be aimed
A fund commitment buys whatever the GP selects. A co-investment program, on the other hand, allows greater precision. An allocation heavy in North American tech can be balanced with European industrials. A vintage gap can be filled in the year it appears. StepStone measures each proposed deal against the client’s wider allocation before recommending it, weighing what the position would do to sector concentration, geographic mix, and pacing.
Capital goes to work sooner
A fund draws capital over several years and charges fees while early investments mature, which produces the J-curve familiar to any private markets investor. A co-investment deploys into an identified asset at close. That can shorten the path to positive cumulative net cash flow and gives an investor a way to adjust deployment pace without waiting for the next fundraise.
The investor learns how the GP actually works
Fund diligence shows an investor a track record and a pitch. Co-underwriting a live transaction shows how the deal team reasons under time pressure, how it adjusts its models, and how it handles an asset after close. That view is difficult to obtain any other way. It sharpens later fund commitments, and it works in both directions, since a partner who reviews deals promptly and closes on schedule earns a place on the GP’s short list for future investment opportunities.
The diligence carries over into primaries and secondaries
Work done on a co-investment does not expire when the deal closes. Primary or secondary opportunities regularly involve an asset or a manager the investor has already underwritten, and it is not uncommon to price a secondary position in an asset reviewed years earlier as a co-investor. That history is a real advantage. The investor begins diligence with a view of the asset, its management, and the value creation plan the sponsor set out, rather than starting from a data room under a compressed deadline. It can also judge what has actually happened against what was projected at entry.
The benefit works the other way as well. Assets and sponsors studied through secondary processes inform how a co-investment is read when one is offered. An investor active in both builds a single body of knowledge, which is difficult to replicate from either strategy alone.
What co-investments offer general partners
Equity for deals a fund cannot carry alone
Concentration limits prevent a GP from putting too much of one fund into a single asset. A co-investor supplies the difference, which lets the sponsor pursue a transaction above its normal size without breaching those limits or over-weighting the fund. Sponsors consistently name execution skill, flexibility, scale, and strategic partnership as the qualities they look for in a co-investor.
Certainty on a deadline
Sponsors say speed matters more than almost anything else. Many LPs lack the investment, legal, and tax resources to move that fast on a single position. A GP working with a partner who has closed with it before knows what to expect on confidentiality, diligence coordination, and timing, and that reliability is what earns repeat invitations.
Alignment of interest
The fund and the co-investors own the same asset on the same entry terms, so both want the same outcome from the same operating plan. In fact, StepStone’s own research suggests that GPs have greater conviction in the deals they offer to co-investors as evidenced by the fact that it is not uncommon for a co-investment to outperform its parent fund.
How StepStone evaluates co-investment opportunities
Three things determine whether a co-investment program works: the range of opportunities it sees, the speed and depth with which it can assess them, and the discipline to decline most of what it reviews.
A network broad enough to be selective
An investor cannot decline most of what it sees without seeing a great deal to begin with. That flow comes from being a large primary allocator. An LP who backs a GP’s funds, buys its secondaries, and sits on its advisory boards is on the short list for co-investors. Breadth matters for a second reason as well: a wide opportunity set is what makes it possible to fill a particular gap in a client’s portfolio rather than take whatever happens to be available that quarter.
A team that can answer at deal speed
Dedicated co-investment teams underwrite each asset directly, with legal, tax, and operational specialists in house, so the decision does not wait on outside advisors. Proprietary performance data across the private markets lets those teams test a growth assumption or an exit multiple against what comparable assets actually delivered, rather than accepting the sponsor’s model. Depth and speed are usually presented as a trade-off; resourcing is what removes it.
Discipline about what belongs in the portfolio
A good asset can still be the wrong position. We judge every opportunity in the mandate or portfolio it would enter, weighing sector, region, GP, and vintage exposure against pacing, liquidity needs, and the effect on total risk. The complete case then goes to an Investment Committee, and an investment proceeds only after the required approvals are in hand and the legal, compliance, and operational requirements are met. Most opportunities never get that far, which a feature of the process, not a bug.
