Co-investments are minority investments by limited partners (LPs) in a specific company or transaction, made alongside investments by private equity firms or general partners (GPs).

They allow LPs to invest directly in certain deals rather than through a wider private equity fund investing in multiple companies, thereby increasing transparency and exposure to transactions that may offer different risk-return profiles compared to the overall fund.

Co-investments are often seen as a way for LPs to have greater control over their investment strategies and diversify their holdings, while increasing their exposure to news markets that private investors typically don’t have access to.

One of the major benefits of a co-investment is that they are typically charged reduced fees (or sometimes no additional fees) – since GPs will benefit from increased capital available – increasing the potential rate of return for LPs.

However, one obvious risk from an LP’s standpoint is that they are concentrating their investments into a single company or deal rather than spreading their risk out through a diversified private equity fund.

Co-investments are also not offered to every LP and are often restricted to larger players like institutional investors or high-net-worth individuals. Another downside is that the size of the co-investment required by GPs may be limited, thus limiting the potential capital gains for the co-investor.

For GPs, having co-investors can have key advantages, such as increasing the amount of capital available while retaining control of the investment, strengthening relationships with certain LPs, and reducing risk — since the firm is deploying less of its own capital.