In today’s competitive fundraising environment, co-investment rights have evolved from a niche offering into a strategic lever. While traditionally viewed as a way to align interests or reward anchor investors, co-investment rights are increasingly being used as a proactive fundraising tool, especially in private equity, private credit, and real assets.
This article explores how fund managers are structuring co-investment rights to differentiate their offerings, the operational implications of doing so, and how LPs are evaluating these opportunities.
What Are Co-Investment Rights?
Co-investment rights give select investors the option to invest directly in portfolio companies alongside the main fund, typically without paying management fees or carried interest. These rights are often negotiated during fundraising and documented in side letters or co-investment agreements.
While co-investments are not new, their strategic use in fundraising is.
Why Co-Investment Rights Matter in Fundraising
Fund managers are increasingly offering co-investment rights to:
Attract larger commitments: LPs may be willing to commit more capital to the main fund if they know they’ll have access to direct deals.
Differentiate from peers: In crowded fundraising cycles, co-investment rights can signal deal flow strength and LP-friendly economics.
Build deeper relationships: Co-investments often require more frequent communication and collaboration, fostering stronger GP-LP ties.
Appeal to sophisticated LPs: Institutional investors with internal deal teams often seek co-investments to boost returns and gain exposure to specific sectors.
Structuring Co-Investment Rights: Operational Considerations
Offering co-investment rights introduces complexity. Fund managers must consider:
Allocation mechanics: How will co-investment opportunities be allocated among LPs? Pro-rata? First-come, first-served? Strategic?
Timing and execution: Co-investments often move quickly. Managers must have processes in place to notify LPs, collect commitments, and close deals efficiently.
Compliance and transparency: Side letter terms must be tracked and honored. This requires robust compliance workflows and clear communication.
Technology and reporting: Systems must support tracking co-investment rights, allocations, and performance separately from the main fund.
LP Perspective: What Investors Look For
From the LP side, co-investment rights are attractive but not without scrutiny. Sophisticated investors evaluate:
Deal quality: Are co-investments truly high-conviction opportunities, or overflow deals?
Access and fairness: Will they realistically be offered meaningful allocations?
Operational burden: Do they have the bandwidth to evaluate and execute co-investments quickly?
Governance: Are rights clearly documented and enforceable?
Final Thoughts
Co-investment rights are no longer just a perk, they’re a strategic fundraising tool. When structured thoughtfully and supported operationally, they can help managers raise more capital, build stronger LP relationships, and stand out in a competitive market. But they’re not without complexity. Fund managers must balance investor expectations with operational realities, and LPs must assess whether the rights offered translate into real access. As co-investments continue to evolve, both GPs and LPs will benefit from clearer frameworks, better technology, and more transparent communication.