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In private equity, the smartest general partners (GPs) are realizing that co-investments aren't just a fundraising sweetener; they're a strategic lever. Done right, they strengthen the portfolio, deepen LP relationships and reduce overall risk exposure. Yet many GPs still treat co-investing as an afterthought rather than a core element of fund strategy.

In today's climate, where LPs are more selective, underwriting standards are higher and trust is harder to earn, co-investments can be the edge that separates high-performing GPs from the pack. Here's how the most sophisticated firms are using co-investing not just to raise capital, but to build resilient portfolios and tighter LP alignment.

Why co-investments matter more than ever

The co-investment market has matured rapidly over the past decade. According to Preqin's Global Private Equity Report, nearly 70% of LPs now expect co-investment opportunities from their fund managers. This demand is no longer limited to mega-institutional family offices. Sovereign wealth funds and even smaller foundations are seeking ways to increase exposure to direct deals while lowering blended fee structures.

Meanwhile, a 2023 report from PitchBook emphasized that co-investment volume is rising even in volatile markets, fueled by LPs looking for more control, lower fees and deeper access to quality deals.

For GPs, this presents both a challenge and an opportunity. The challenge: Co-investments can strain internal resources and slow deal execution if not managed well. The opportunity: When built into the fund's operations and strategy from day one, co-investments enhance portfolio flexibility, attract strategic LPs and reduce concentration risk, all without diluting fund governance.

Co-investing as a tool for portfolio construction

Smart GPs treat co-investment capacity as part of their capital stack, not a separate, ad hoc offering. This mindset allows them to:

• Pursue larger deals than the fund alone could support, without increasing fund-level concentration.
• Add diversification by allocating fund capital to core positions and inviting co-investors into adjacent or higher-risk assets.
• Act quickly on opportunistic deals by pre-qualifying LPs who can co-invest with short notice.

Let's say your $100M fund is targeting 10 core platform deals of $10M each. You come across a $25M acquisition that fits the thesis but exceeds your single-asset exposure cap. With co-investment capital lined up, you can still lead the deal, funding $10M from the fund and $15M from co-investors. This approach maintains portfolio balance while giving LPs direct access to a larger asset.

More importantly, it builds your reputation as a GP who brings access, not just capital.

Reducing risk while increasing ownership

One underappreciated benefit of co-investing is how it allows GPs to retain control of high-conviction assets without overexposing the core fund. In many cases, the most attractive deals are also the most capital-intensive. Without co-investment partners, a GP must choose between taking a smaller slice or over-allocating from the fund.

By bringing in co-investors, GPs can secure majority or lead positions while staying within prudent limits. This improves control over governance, exit timing and value creation plans, all critical levers in reducing downside risk.

Additionally, co-investing can be a powerful tool in navigating market cycles. During downturns, GPs can selectively syndicate capital-heavy deals to preserve dry powder, while still deploying into discounted opportunities.

The operational backbone of a co-investment strategy

Of course, offering co-investments isn't just about having the deal flow. The GPs who excel at this have built internal systems to handle:

• Legal structuring: Quick SPV setups, allocation mechanics and clear governance roles.
• LP segmentation: Understanding which investors have the appetite, capacity and decision-making speed to co-invest.
• Data sharing: Secure, real-time access to diligence materials and post-investment reporting.
• Compliance and fairness: Ensuring transparent allocation that doesn't disadvantage the core fund.

This operational backbone is often the difference between firms that “can” offer co-investments and those that do so consistently, cleanly and at scale. Platforms like Carta, Juniper Square, Passthrough, or Anduin are often used by advanced GPs to streamline these workflows.

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Co-investment fosters lasting trust

From an LP point of view, co-investing is a way to display confidence and alignment. It gives them more say, more return and often a larger role at the table. When done fairly, it turns your investors into full partners. In a world that is becoming more relationship-based in terms of fundraising, GPs who put in consistent, thoughtful co-investments are at an advantage to:

• Retain top LPs in future funds.
• Convert one-time investors into anchor commitments.
• Win allocations in competitive fundraising cycles.

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A word of caution: Don't over-promise

With all its advantages, co-investing is not a silver bullet. When used excessively or poorly, it may bring execution risk, create inefficiencies and bring LPs into conflict. The most common shortcomings are:

• Providing too much in co-investments, devaluing their quality.
• Granting favors with allocations.
• Procrastinating closings from side deal logistics.
• Failing to coordinate internal bandwidth to handle the complexity.

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