Equity Co-Investment

DEFINITION of 'Equity Co-Investment'

A minority investment made by investors in a company alongside a private equity fund manager or venture capital firm. Equity co-investment enables investors to get in on potentially very profitable investments without paying the usual fees charged by the private equity fund. Equity co-investment opportunities are generally restricted to large institutional investors who already have existing relationships with the private equity fund manager, and are typically not available to retail investors.

 

BREAKING DOWN 'Equity Co-Investment'

 

Why would a private equity fund manager give away a lucrative opportunity? Private equity is usually invested through a limited partnership (LP) vehicle in a portfolio of companies. In certain situations, the LP's funds may already be fully committed to  a number of companies, which means that if another prime opportunity turns up, the private equity fund manager may either have to pass up the opportunity or offer it to some investors as an equity co-investment.  

Most limited partners pay a 2% management fee and 20% carried interest to the fund manager who is the general partner. However, co-investors may benefit from lower fees or no fees in some cases, which would boost returns available to them.

A 2013 study showed that investor appetite for co-investment opportunities was at an all-time high. The survey of 140 limited partners showed that 73% had co-invested in at least one past portfolio company deal, while more than 75% reported they were looking for co-investment opportunities.