Co-investment: The operational playbook for fund CFOs

Author:

The Carta Team

Read time:

11 minutes

Published date:

17 September 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. 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.

Ultimately, these arrangements are powerful tools for both capital formation and long-term investor relations.

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 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, ensuring that the liabilities of one investment cannot affect the assets of another.

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.

This structure simplifies the administrative overhead for the portfolio company receiving the investment.

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

• The traditional method: Engaging law firms to draft bespoke legal documents and manually setting up a new bank account.
• A modern platform approach: Using integrated software to streamline the entire workflow.

Why GPs and LPs pursue co-investments

Co-investments create a symbiotic relationship that benefits both the fund manager and the investor. For GPs, co-investments offer several strategic advantages:

• Access to a friendly and efficient source of capital to pursue larger deals.
• A powerful tool for building deeper, more strategic relationships with key LPs.
• A strong signal of confidence to the market and to the LPs.

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

• Targeted exposure to a specific company or industry.
• The potential for enhanced returns.
• A closer look at the GP’s investment process.

Managing co-investment economics and fees

The unique financial structure of co-investments often features significantly reduced fees. For instance, many SPVs operate without management fees.

Key components include:

• Management fees: These are waived because the GP is already compensated through the main fund.
• Carried interest: Waiving this means more upside goes directly to the co-investors.

How to manage conflicts of interest and allocation

Co-investments can create potential conflicts of interest. Managers must be diligent in managing potential conflicts to ensure fairness among all investors. Important considerations include:

• The process for deciding which LPs are offered the chance to co-invest.
• Clarity around who is responsible for expenses if a deal falls through.
• Equitable terms of an exit.

Understanding key co-investor rights

Common rights negotiated by co-investors include tag-along and drag-along rights:

• Tag-along rights: Protect minority investors in a sale.
• Drag-along rights: Allow majority shareholders to proceed with a sale despite minority objections.

The interplay with continuation funds

Continuation funds have become increasingly complex as funds look for liquidity options. Administering these transactions imposes significant operational demands: tracking individual elections, processing distributions, and generating legal documentation.

The operational playbook for co-investments

Co-investments require a specialized approach. A centralized system of venture capital tools can manage the entire co-investment lifecycle efficiently.

Delivering transparency to co-investors

It is essential to provide detailed and accurate reporting to co-investors. Automated reporting can relieve administrative burdens.

Maintaining audit readiness

Every SPV typically requires its own annual audit. A centralized platform can make you "audit-ready" from day one, capturing every transaction and document.

Your partner in fund administration

Co-investments are a powerful tool for building LP relationships and executing larger deals. A unified platform of private equity software provides the operational backbone needed.