Co-investments give institutional investors the opportunity to invest directly in private companies alongside private equity firms. Not only can they give investors more control over their portfolios, they allow private equity firms to access more capital, with both sides investing collaboratively and sharing in the potential profits.

While they have been around for decades, co-investments have proved an increasingly sophisticated tool for investors to manage their portfolios. In 2024, $33.2bn was raised through private equity co-investments, eclipsing a previous high of $25.3bn in 2021, according to data from Pitchbook. This data only captures publicly available deal flow and likely understates the true scale of co-investments. EQT alone agreed co-investment commitments in 2024 worth €12.5bn (US$13.9bn).

What’s in it for Limited Partners?

Among the many benefits of co-investing for investors, known in industry parlance as limited partners (LPs), is the control it gives them over their portfolios. Rather than only investing through a wider fund based on a predetermined investment strategy, institutional investors can invest directly in deals that match their specific risk-return profiles and interests.

Co-investments can allow LPs to increase their exposure to certain investment opportunities with strong growth prospects or favorable valuations.

LPs will also often pay reduced or no fees for co-investing, meaning investors can reduce the management and performance fees typically associated with private equity funds, potentially increasing net returns.

Also, co-investing allows LPs to leverage a private equity firm’s expertise, vast networks and deal-sourcing abilities, reaping the benefit of leveraging the private equity firm’s due diligence processes. Many large institutional investors will have internally managed teams to handle co-investments directly, giving them the skills and expertise needed to perform their own due diligence and build a more tailored portfolio.

What’s in it for General Partners?

Co-investments attract individual investors for their fee structures, increased transparency and portfolio diversification benefits – but what’s in it for private equity firms?

Co-investment can allow such firms – known as General Partners (GPs) – access to bigger-ticket deals without increasing their fund’s own exposure. This allows them to fill equity gaps without over-concentrating their portfolios on a certain company or sector. The way most co-investments are structured is that the LPs will be pooled together in a vehicle that the GP controls.

GPs can be incredibly selective about who they offer co-investment opportunities to, prioritising trusted LPs they have a history of working with. GPs have historically rewarded loyal or larger LPs with opportunities to co-invest, but this option is now available to a broader range of investors as the demand has evolved. This can be a particularly useful tool for GPs to incentivise involvement in funds.

Sharing more granular information with co-investors about certain deals allows LPs to understand better how GPs underwrite and diligence specific assets. Since LPs can often bring their own industry expertise and operational insights, this tighter relationship can be an excellent tool for knowledge transfer.

For example, in 2024, EQT partnered with Neuberger Berman Private Markets, the Canada Pension Plan Investment Board and a consortium of institutional investors to acquire Nord Anglia Education for $14.5bn.

The deal allowed co-investors to partner in the takeover of one of the world’s largest private school networks. It also significantly broadened and strengthened the company’s ownership structure, bringing together new strategic perspectives, resources and capital to drive its continued growth.

In addition, during 2023, EQT, together with ADIA and a number of co-investors, took Dechra Pharmaceuticals plc private in a £4.5bn deal.

Private equity market dynamics

Co-investing has already changed the LP-GP dynamic significantly, with LPs moving away from being largely passive capital providers to more collaborative and strategic partners in specific deals. With LPs more involved in deal-level discussions to evaluate their own opportunities and risks, both parties can be more aligned on shared interests and goals.