Do you offer co-investment?

Ah yes, co-investment (“COI” for short). This can feel like Question Number 1 from prospective LPs.

In reality, LP opinion ranges from “I won’t commit to a new fund without COI,” to “We wish we could do COI but don’t have the resources,” to “We actively avoid funds with COI.”

Determining your approach to answering the question depends on which of the following categories best fits your fund:

Category 1: Most investments in your new fund are likely to have COI

• Trumpet COI availability, especially if you are seeking to add new investors to your LP base.
• Define a clear COI allocation policy early in the fundraise. As part of that, treat similar LPs similarly. For example, you could offer preferential allocation or terms to first- closers or to your largest LPs.
• Prepare to demonstrate how much COI you have offered historically, how much has been taken up by your LPs, and how deals with COI performed versus deals without.

Category 2: A few investments in your new fund are likely to offer COI

• Focus your COI conversations on potential anchor LPs, possibly offering them preferential COI terms.
• Signal to other potential LPs that COI may be available and prepare an analysis to show how much may be available.
• Don’t undersell the potential for COI. Many LPs are more interested in seeing opportunities than in executing on them.

Category 3: No investments in your new fund are likely to include COI

• Explain why your fund doesn’t include COI and why that benefits LPs, such as continuing focus on your optimum deal size or better alignment of interests.
• Focus marketing on investors that do not require COI; prequalify prospective LPs to confirm preferences.
• Be respectful of LPs that currently require COI. Their approach—or yours—may change in the future.

So long as investors are under pressure to reduce fees across their portfolios and until more investors have a better understanding of the performance contribution (or not) of COI, we anticipate continued interest. However, with a clear definition of your team’s strategy and value-add, your fund can be raised regardless of the COI volume.