Navigating the Growth and Complexity of Co-Investment Strategies

Co-investing has long been considered a niche strategy in private markets, but that perception is rapidly changing. Shifting market dynamics, rising valuations, and increasing investor demand are positioning co-investments as a key strategy for fund managers and LPs in 2025 and beyond.

Goldman Sachs’ 2024 Private Market Diagnostic Survey found that 50% of LPs now allocate to co-investments, up from previous years. Dechert’s Private Equity Outlook for 2025 reported that 60% of private equity firms globally and 73% of North American firms offer co-investment programs, underscoring its growing role in fund structures.

Driving forces

From our vantage point, we see three driving forces behind the rise of co-investments, ranging from investor demand to structural constraints within private equity funds.

• Fundraising challenges: With record amounts of dry powder, fundraising has become more challenging. LPs are more selective, conducting deeper due diligence, and seeking greater control over capital deployment. Many now require co-investment rights as a condition for fund commitments, preferring targeted opportunities over blind pools.
• Growing deal sizes: Growing deal sizes are forcing GPs to find ways to bridge capital gaps. For example, a fund targeting a $100 million investment but limited to $70 million due to fund restrictions may invite existing LPs to co-invest the remaining $30 million. This approach allows GPs to pursue larger deals while providing LPs flexible allocation options.
• Co-investing as a differentiator: For middle-market firms that face stiff fundraising competition, co-investing serves as a key differentiator. LPs are drawn to the chance to invest directly alongside PE firms at reduced fees, gaining exposure to high-quality assets while bypassing traditional fund economics.

Lovell Minnick Partners, a private equity firm based in Radnor, PA, with over $5 billion in capital commitments since inception, is seeing growing investor demand. ‘Many of LMP’s platform investments over the past two years have featured co-investment, and investor interest in access to co-investment continues to rise,' said Spencer Hoffman, Partner at Lovell Minnick Partners. 'Co-investment has been a valuable structure for LMP to increase access to capital for our portfolio companies.’ This underscores how co-investing is becoming increasingly integral to private equity strategies and the ways firms are adapting to market trends.

Operational implications

While co-investments offer flexibility, they also introduce operational complexities. GPs must manage separate accounting, compliance, and reporting for each co-investment vehicle. 

Following the previously mentioned scenario, a manager may request $29 million immediately, with $1 million set aside for expenses, requiring precise liquidity planning and cash flow management. Unlike commingled funds, co-investments operate on a deal-by-deal basis, requiring independent tracking and valuation.

Reporting also becomes more intricate. Customized reports detailing performance metrics, exit projections, and risk analyses are essential, and communications must be tailored to each investor. Without streamlined processes, delays in investor relations and compliance risks can arise.

Additionally, co-investments necessitate separate bank accounts and distinct tax compliance, increasing administrative demands. For firms managing multiple vehicles, complexities multiply, especially when overlapping LPs participate across different structures, requiring meticulous tracking to avoid reporting errors.

Distribution processes differ as well. Co-investments typically return capital in a single payout upon exit, which, while simplifying liquidity management, requires careful cash flow planning to meet investor expectations.

Structuring co-investment vehicles and scaling them across multiple deals requires careful planning to ensure that accounting, tax compliance, and investor reporting are all handled effectively. For GPs, the key question is whether they have the operational capacity to take on these additional responsibilities without detracting from their core focus. 

Fund administrators like STP provide the infrastructure for accounting, tax reporting, and investor communications, allowing private equity firms to scale their co-investment offerings without adding additional internal burdens. By outsourcing co-investment administration, private equity firms can seamlessly manage vehicles, reduce operational risk, and ensure compliance, while maintaining focus on sourcing and executing deals.