Co-investment: The operational playbook for fund CFOs

Author: The Carta Team
Read time: 11 minutes
Published date: September 17, 2025

Co-investment is a minority investment alongside a private equity or venture capital fund, offering transparency, control and potential higher returns.

What is a co-investment?

A co-investment is a minority investment made directly into a portfolio company by a fund’s limited partners (LP), one of the key types of investors in the private markets. This investment happens alongside the main private equity or venture capital fund, but is separate from it. Think of it as an exclusive opportunity for select investors to increase their stake in a specific deal that the general partner (GP) has already sourced and vetted as part of their deal flow process.

For your finance team, each co-investment operates like one of many miniature private funds. It has its own group of investors, its own unique economics, and its own cycle of reporting and compliance obligations. This structure runs in parallel to the primary fund, creating a distinct set of operational tasks that require careful management.

Unlike investing in a traditional blind-pool fund, where LPs commit capital without knowing the specific future investments, a co-investment offers complete transparency. The co-investor knows exactly which company their money is going into from the very beginning. This level of specificity is a key part of its appeal.

GPs increasingly offer special incentives to their most strategic LPs to reward contributions that extend beyond a simple capital commitment. These arrangements are designed to attract anchor investors, secure access to valuable industry expertise, and strengthen key relationships for future fundraising.

Common incentives include:

• Co-investment rights: Allowing select LPs to invest directly into portfolio companies alongside the fund, often with reduced or no fees and carried interest.
• Fee reductions: Offering lower management fees or a more favorable carried interest structure.
• GP-stakes: Granting LPs a share of the GP's own economics. A growing trend is to award LPs a portion of the firm's carried interest, sometimes structured as profit interest units (PIUs), giving them a direct stake in the fund's success alongside the managers.

Ultimately, these arrangements are powerful tools for both capital formation and long-term investor relations, creating deeper alignment between a GP and its key partners.

How are co-investments structured?

To maintain clean books and records and to isolate risk, co-investment capital is never commingled with the main fund’s assets. This separation is a core principle of co-investing. This separation is achieved through the incorporation of a completely separate legal entity that is created for the sole purpose of making that single investment.

This legal separation is critical from both an accounting and a legal standpoint. It ensures that the liabilities of one investment cannot affect the assets of another. If the co-investment were to fail, it would not impact the financial health of the main fund or its other portfolio companies.

For your operations team, this structure has significant implications. Each co-investment adds another distinct entity to your administrative workload. This new entity will have its own bank account, sign its own legal contracts, and require its own tax filings, all dictated by its specific fund structures. If your firm executes five co-investments in a year, you are responsible for administering five new entities, each with its own lifecycle.

The role of the SPV

The most common legal structure used to facilitate a co-investment is an SPV. Many LPs and independent sponsors create bespoke pools of capital to invest alongside a private equity fund, using SPVs to gain more visibility and autonomy than they would in a traditional fund structure. An SPV is a legal entity, usually a limited liability company (LLC) or a limited partnership (LP), that acts as a container for the deal. It pools the capital from all participating co-investors and then makes a single, unified investment into the target company.

This structure is highly beneficial for the portfolio company receiving the investment. Instead of adding dozens of individual co-investors to their cap table, they add just one: the SPV. This simplifies their own administrative overhead, as they only need to communicate with and send reports to the SPV’s manager, who is the GP.

The process of forming an SPV can be handled in two very different ways.

• The traditional method: This involves engaging law firms to draft bespoke legal documents, coordinating paperwork with each investor, chasing down wet ink signatures, and manually setting up a new bank account. This process can be slow, expensive, and prone to administrative errors.
• A modern platform approach: This uses integrated software to streamline the entire workflow. It relies on standardized document templates, electronic closings for investors to sign, and integrated banking to manage the flow of funds. This approach reduces the time, cost, and risk associated with SPV formation and management. Explore the emerging managers guide to SPVs here.

Why GPs and LPs pursue co-investments

Co-investments create a symbiotic relationship that benefits both the fund manager and the investor. For the fund’s finance team, understanding the motivations of both sides is key to supporting the operational mechanics of the deal. The reasons are distinct but complementary.

For GPs, co-investments offer several strategic advantages.

• Co-investments provide access to a friendly and efficient source of capital to pursue larger deals, representing one of the key alternative sources of capital that have provided a multitrillion-dollar boost to global private equity AUM. For SPVs over $10 million, a common structure for co-investments, the median size reached nearly $22.6 million in 2023. This marks a continuous increase over four years from a median of $15.2 million in 2019, highlighting the expanding scale of this funding source. If a fund’s limited partnership agreement (LPA) has concentration limits that restrict how much it can invest in a single company, a co-investment allows the GP to complete the transaction without violating those terms.
• As a GP, you have a powerful tool for building deeper, more strategic relationships with key LPs. Offering access to your best deals is a way to reward your most important partners and encourage them to commit to future fund formations.
• Offering a co-investment opportunity also sends a strong signal of confidence to the market and to the LPs. It shows that the GP has an extremely high conviction that aligns with their investment thesis for the potential of the target company.

For LPs, the appeal of co-investing is just as strong.

• Amid investment holding periods reaching record lengths, co-investments give LPs the ability to gain targeted exposure to a specific company or industry they find attractive. This allows for more control over their capital deployment than a blind-pool fund offers.
• Co-investments often come with the potential for enhanced returns, which are tracked using various fund performance metrics.
• LPs also get a closer look at the GP’s investment process. They can review the detailed due diligence for a specific company, often summarized in an investment memo, which provides valuable insight into how the GP analyzes opportunities and makes decisions.

Managing co-investment economics and fees

One of the main attractions of a co-investment for an LP is its unique financial structure. These deals can be with significantly reduced fees, and some are even structured on a "no fee, no carry," basis. For instance, an analysis of SPVs, which are commonly used for co-investments, found that a majority operate without management fees. According to data from Carta, only about 44% of all SPVs charge any management fees at all.

Let’s break down what this means.

• Management fees: These are the annual fees LPs pay the GP to cover the fund’s operational costs. In a co-investment, this fee is often waived because the GP is already being compensated for managing the deal through the main fund.
• Carried interest: This is the GP’s share of the fund’s profits, typically taken after all LPs have received their initial capital back. Waiving carried interest on a co-investment means that a larger portion of the deal’s upside goes directly to the co-investors.

While this can be an attractive arrangement for LPs, this bespoke economics of co-investments can still create an operational challenge for a fund CFO. The co-investment vehicle requires its own parallel distribution waterfalls. A waterfall is the set of rules in the LPA that dictates how profits are distributed among all parties.

Because the SPV has different economic terms, its waterfall must be calculated and managed completely separately from the main fund’s waterfall. This isn’t a one-time calculation; it must be performed accurately for every distribution over the life of the investment. Relying on spreadsheets for these complex, parallel calculations introduces a high risk of error, which can lead to misallocating funds and damaging LP relationships.

How to manage conflicts of interest and allocation

Because co-investments involve preferential treatment for certain investors, they fall under strict venture capital regulations and are an area of focus for bodies like the U.S. Securities and Exchange Commission (SEC), which recently adopted a rule updating the dollar threshold for a fund to qualify as a “ qualifying venture capital fund.” Fund managers must be diligent in managing potential conflicts of interest to ensure all investors are treated fairly and that the GP is upholding its fiduciary duty.

A conflict of interest arises in any situation where the GP’s interests may not be perfectly aligned with the interests of all LPs. For co-investments, these situations often appear in a few key areas.

• Allocation: The process for deciding which LPs are offered the chance to co-invest must be fair, consistent, and defensible. You should have a clear, documented policy that governs how these opportunities are allocated, rather than picking favorites on a deal by deal basis.
• Expenses: If a deal falls through after the SPV has incurred legal and due diligence costs, who is responsible for those broken-deal expenses? This must be clearly defined in the co-investment documents before any money is spent.
• Exit: The terms of an exit need to be equitable. If the GP sells a portion of the main fund’s stake, co-investors should have a clear understanding of their rights to participate in that sale.

The best defense against regulatory scrutiny is meticulous documentation. Every decision related to the allocation, management, and exit of a co-investment should have a clear rationale that is recorded and stored in a centralized system.

Understanding key co-investor rights

When LPs agree to co-invest, they often negotiate for specific rights that are documented in the SPV’s legal agreements. For the fund’s finance and operations team, these are not just abstract legal terms. They are operational triggers that must be tracked and correctly executed during the life of the investment, particularly during a liquidity event.

Two of the most common rights are tag-along and drag-along rights.

• Tag-along rights: These rights protect a minority investor. They give the co-investor the right to "tag along" and participate in a sale of the company if a majority shareholder, like the GP, decides to sell its stake.
• Drag-along rights: These rights protect the majority shareholder. They give the GP the right to "drag" a minority investor along into a sale of the company. This prevents a small number of investors from blocking a sale that the majority has approved.

Other rights may also be negotiated, such as information rights that specify the level of reporting the co-investor will receive, or pre-emptive rights that allow them to participate in future funding rounds, including a potential down round.

The interplay with continuation funds

The use of continuation funds remains a significant—and increasingly complex—trend in private markets, especially as GPs navigate sluggish exit environments. Secondary transactions, which include continuation fund deals, saw explosive growth during the pandemic bull run, peaking at $7.4 billion transacted on the Carta platform in 2021. However, the latest data shows a marked contraction in activity. In 2023, secondary transaction value on Carta dropped to $4 billion, its lowest level in four years. While this reflects a cooling trend for direct startup liquidity events, the global secondaries market overall (spanning LP-led, GP-led, private equity, credit, and infrastructure) rebounded sharply—exceeding $100 billion in total transaction value in just the first half of 2025.

These figures underscore both the volatility and the growing strategic importance of secondaries for CFOs seeking liquidity options. As funds approach the end of their typical ten-year lifespans, GPs may launch continuation funds to purchase successful assets from aging portfolios. This process delivers liquidity to original LPs but also creates a critical juncture for co-investors: each must decide whether to cash out or roll over their investment into the new fund, often involving entirely new economic terms.

For CFOs, administering such transactions imposes significant operational demands: tracking individual investor elections, processing cash distributions, generating new legal documentation, and adapting to the new fund structure. The rising complexity and scale of these deals—reflected in today’s multi-billion-dollar secondary volumes—make efficient management and decision-making more important than ever.

The operational playbook for co-investments

Understanding the strategy behind co-investments is one thing; managing them effectively is another. This is the practical guide for fund finance teams, focused on the day-to-day realities of administering these parallel investment structures. The unique demands of co-investments require more than what disconnected spreadsheets and manual processes can offer.

A centralized system of venture capital tools is purpose-built to manage the entire co-investment lifecycle, from formation to exit. It connects all the disparate pieces of a co-investment into a single, cohesive system: the legal documents, the banking, the accounting, and the investor communications. This platform approach mitigates risk, creates efficiency, and provides the control needed to manage complexity at scale.

Delivering transparency to co-investors

Your co-investors have high expectations for the information they receive, and they often build these expectations directly into their deals. In fact, at private equity-backed LLCs, nearly 52% of performance-based equity grants for management are tied to a specific investor’s financial return, such as MOIC or IRR. They want timely, detailed, and accurate reporting on their investment’s performance, which you can provide through dedicated portfolio data collection and monitoring tools. Manually assembling and distributing these reports for each SPV is a significant administrative burden that can lead to delays and errors, reflecting poorly on your firm.

Maintaining audit readiness

Each co-investment SPV is its own legal entity and, as such, typically requires its own annual audit. If you're on a finance team that manages multiple SPVs, the annual audit season can quickly become a major bottleneck. The process of gathering documents and answering auditor questions for each entity can consume a tremendous amount of time and effort.

An integrated platform with an event-based general ledger and a dedicated auditor portal changes this process. It makes you "audit-ready," from day one because every transaction, capital call, distribution, and legal document is already captured and linked within the system. You can grant your auditors secure, permissioned access to this portal, allowing them to pull their own samples and trace transactions back to the source documents. This dramatically reduces the friction and time required to complete an audit.

Your partner in fund administration

Co-investments are a powerful strategic tool for building LP relationships and executing larger deals. Their operational demands, however, grow with every deal your firm completes. Attempting to manage this growing complexity with tools not designed for the task, like spreadsheets, introduces an unacceptable level of risk to your firm.

A unified platform of private equity software provides the operational backbone needed to execute a sophisticated investment strategy without letting the back office fall behind. It’s more than just software; it’s the infrastructure that enables your firm to scale its activities with confidence, control, and accuracy.

Frequently asked questions about co-investments

What is the difference between a direct investment and a co-investment?

A direct investment is when an investor sources, performs due diligence on, and executes an investment on their own, a process that requires founders to be skilled at finding investors.

What is the difference between a co-investor and an LP?

An LP invests in the main, blind-pool fund, committing capital before the specific investments are known. A co-investor is often an existing LP who chooses to make an additional, separate investment into a single, specific company alongside the fund.

Are co-investments only for private equity funds?

While co-investments are strongly associated with private equity, they're also a common practice in venture capital, often structured through SPVs. The use of these vehicles has expanded in lockstep with the VC industry, and the annual count of new SPVs has grown 116% over the past five years. They are a key consideration in portfolio management. The structure is also used in other private markets, such as real estate and private credit investing.