Co-Investment Illusions: More Risk, Same Drama

If you spend any time on a private-investment platform, you’ve probably seen the siren song of “co-investments” scroll across your screen. Slick pitch decks, bullet-pointed fee breaks, and the promise of cherry-picking a manager’s best ideas—what’s not to like? Plenty, as it turns out. Co-investing can be a powerful tool, but it is also riddled with half-truths that make seasoned allocators wince.

Below are five of the most common co-investment illusions making the rounds online and at conferences. Peel them back now, and you’ll make far better decisions when the next “can’t-miss” deal link lands in your inbox.

The Fees Are Practically Zero, So the Math Automatically Works

Reduced or waived management fees are the headline perk dangled in front of every prospective co-investor. The sales logic is simple: if the fee drag shrinks, the hurdle to outperform widens. What the slide deck rarely highlights is the hidden cost of your time, your internal resources, and—most important—your opportunity cost.

• You still need to underwrite the deal yourself. That means legal review, additional diligence, and often outside consultants. Those invoices might not show up in the fund-level fee schedule, but they land on your desk just the same.
• Speed kills. Co-investments usually come with a two- to three-week window to wire capital. Rushed underwriting often leads to confirmation bias—seeing what you hope to see instead of what’s actually there.
• Finally, co-investments don’t replace the management fee you pay on the rest of your portfolio. They sit on top of it. So unless you’re trimming existing exposures, your aggregate fee bill may actually rise.

Fee breaks are nice. They aren’t a substitute for risk-adjusted return. Don’t let a line item lull you into thinking the economics are automatically tilted in your favor.

No Blind Pool Means No Nasty Surprises

Traditional funds ask you to back a manager first and hope the underlying deals pan out later. Co-investments flip the script: here’s the deal, do you want in? Investors often assume that this extra visibility eliminates risk. If only.

• You see one transaction—maybe two. What you don’t see is how that position interacts with the rest of your holdings. A trophy software roll-up can feel fresh and exciting until you realize you already own the same customer base through three different managers.
• You also miss the deals the GP passed on. Why this one and not the others? Sometimes it’s because the GP loves the upside. Sometimes it’s because the GP wants outside capital to soften a thorny execution risk.
• And remember, you’re joining the cap table late. Terms can be set, competitive dynamics locked, and most negotiating leverage gone. Visibility is comforting, but it is not the same as control.

Co-Investing Diversifies My Portfolio Overnight

Diversification is the evergreen excuse for stretching a mandate, and co-investments make the temptation worse because each opportunity arrives individually wrapped. “It’s just one deal,” we tell ourselves. “How much harm can it do?”

• The real diversification benefit comes from uncorrelated cash flows. Single deals deliver binary outcomes—home run or strikeout—and those outcomes usually rhyme with the business cycle.
• Platform algorithms reinforce the bias. After you click on one renewable-energy transaction, you’ll be fed five more. Suddenly you’ve constructed a theme fund without noticing.
• Last, concentration risk rarely stays put. Co-invest deals are often structured with debt-like seniority or preferred equity twists. If the company stumbles, you can end up both overexposed and illiquid—exactly where diversification was supposed to keep you out of trouble.

If you truly want diversification, tighten your portfolio guidelines before the email blast arrives, not after.

I’ll Have Enough Time to Do Real Diligence

Every co-investment deck features a tidy timeline suggesting ample runway: “soft indication by Friday, close in three weeks.” In practice, that period evaporates in record time.

• Data rooms populate in phases, not all at once. You think you’re 80 percent done, then a new tranche of customer contracts drops two days before your IC meeting.
• Third-party experts, especially the good ones, are almost always double-booked. Try squeezing a two-hour call with a former CFO into a holiday week and see how patient your own committee feels.
• The more compressed the timeline, the more you rely on the GP’s analysis—precisely what co-investing was supposed to help you supplement.

If you can’t do 90 percent of your diligence in half the stated window, pass. There will be another deal next quarter.

Exit Optionality Looks Just Like Public Stock

Ask any platform what happens if the deal underperforms and you’ll hear cheerful phrases like “multiple strategic buyers” or “robust secondary markets.” Translation: we hope someone else wants to own this later.

• In reality, secondary buyers gravitate to the same bright-shiny winners you do. Underperformers languish.
• Your contractual rights—tag-along, drag-along, registration—may look airtight until you test them. Enforcement is expensive, time-consuming, and relationship-sapping.
• Even if an eventual IPO or sale materializes, you’re often bound by lockups. Public-like liquidity can be years away.

Co-investing isn’t day-trading. Treat the capital as tied up for the full projected hold period, plus a buffer. If that makes you nervous, reduce the check size or walk away.

Pulling the Lens Back

None of this is to say co-investments are toxic. Many allocators use them to enhance returns, deepen manager relationships, and dial in sector tilts very effectively. The key is understanding what co-investments are—and what they are not.

They are:

• High-octane, single-asset bets layered on top of a broader private-equity or venture program.
• A way to lower headline fees if you already trust the GP and have the bandwidth to underwrite quickly.
• A tool for tilting exposures toward themes you believe in, so long as you measure overlap rigorously.

They are not:

• A magic wand for diversification.
• A no-brainer fee arbitrage.
• A replacement for disciplined portfolio construction.

Practical Guardrails Before You Click “Interested”

• Set a Pre-Commit Checklist: Define, in writing, the minimum docs you need—full cap table, customer cohort data, audited financials—before even scheduling an IC call.
• Cap Exposure: Limit any single co-investment to, say, 1-2 percent of NAV. Concentration creep is real, and it shows up fastest in single-deal bets.
• Keep a “Parking-Lot” List: Every time you pass on a co-investment, jot down why. Review the list quarterly. Patterns emerge, biases get exposed, and future decisions improve.
• Charge Yourself a Shadow Fee: Estimate internal hours and external bills, convert them to basis points, and tack that onto the pro-forma model. If the deal still sings, great. If not, you’ve just saved yourself a headache.

Final Thought

Private-investment platforms have democratized access to an asset class once limited to a clubby circle of family offices and mega-fund LPs. That’s undeniably positive. But the accessibility can blur the line between thoughtful allocation and hop-on-the-bandwagon speculation.

Co-investments will continue to flash across your dashboard with slick narratives and eye-popping IRR projections. Before you reach for the wire instructions, remember: fewer fees don’t erase fundamental risk, deal-level visibility isn’t the same as control, and liquidity remains a polite illusion until the exit documents are signed.

Approach each opportunity with the same skepticism you’d apply to a blind-pool fund—or maybe a touch more. After all, when the drama hits, you’re standing on the stage, not safely seated in the audience. More risk, same drama. Act accordingly.

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