When investing in private debt, investors have three main avenues for capital deployment: primary, secondary and co-investments.
Historically, primary investments have been the predominant route for building exposure to private debt. At the same time, secondary transactions have provided attractive opportunities for capital deployment, often with the potential for enhanced returns. Co-investments, however, offer a compelling alternative, distinguished from the primary channel by unique characteristics.
Introduction
Co-investments are mutually beneficial for all participants. For GPs, they offer a way to maintain deal momentum and build or improve LPs and other investors’ relationships while managing exposure risk. In contrast, club deals—which can similarly help GPs facilitate larger transactions—often involve competitors, increasing governance risk and potential misalignment. On the LP side, co-investments complement primary investment channels by offering exposure to more transactions, greater collaboration with multiple GPs, lower fees, and capital deployment flexibility.
Why do GPs offer co-investments?
GPs typically bring in co-investors when the facility size exceeds their hold capacity—either to secure a deal or to provide additional capital as the borrower’s financing needs grow over time. As a result, co-investments help GPs reduce concentration risk in their single-loan positions, improve downside protection, and strengthen relationships with large LPs and other investors. This is particularly relevant for smaller-to-midsize GPs, who might face greater constraints in allocating capital due to fundraising being mostly concentrated in a couple of large GPs. By offering co-investments, those smaller GPs can attract investors to their funds while increasing their capabilities to close larger transactions. Additionally, LPs that commit substantial capital to a GP’s flagship fund often expect access to co-investment deals as part of their investment relationship. As private debt GPs continue to underwrite larger transactions, the availability of co-investment opportunities has grown, increasing deal flow for LPs. As a result, both GPs and LPs see co-investing as a flexible and mutually beneficial investment strategy.
Why are co-investments attractive for LPs?
Co-investments offer several advantages to LPs. Here are the main ones:
- Net returns, lower fees: Co-investments allow LPs to avoid the management and performance fees typically charged by GPs, enhancing net returns.
- Diversification: LPs can achieve broader diversification across GPs, private equity sponsors, borrowers, market segments, industries and regions. This diversification helps mitigate risk and provides downside protection—an important factor in private debt, where upside potential is limited.
- Selectivity: Co-investors can be more selective in the deals they want to participate in and thus pick the best opportunities according to their investment criteria.
- Deployment: Co-investments also help investors deploy capital more efficiently. For example, an investor exposed to only a few GP primary funds or separately managed accounts may face restricted deal flow. By co-investing with multiple GPs, they gain flexibility, mitigating dependence on any single GP’s pipeline.
- Relationships: Co-investments offer LPs deeper insights into their GPs’ investment strategies and underwriting processes.
However, co-investments are typically reserved for large investors and institutions with the resources to support them. These investors must have a substantial investment team capable of conducting due diligence on numerous transactions within tight time frames. GPs value speed and efficiency in deal processing and execution, meaning well-equipped investors are more likely to see co-investment deal flows.
Co-investments with evergreen funds
While co-investments have traditionally been limited to large institutional investors with significant financial capacity and human resources, private debt evergreen funds focusing
on co-investments present a promising avenue for broader participation. These funds also offer investor-friendly features like subscription-based access, liquidity options, lower fees
and lower minimum investment requirements, which are attractive to individual investors.
Conclusion
Co-investments provide an attractive opportunity for investors to diversify their capital deployment strategies within the private debt space. They offer key advantages, including greater diversification, deeper LP-GP relationships, enhanced capital deployment flexibility, increased deal selectivity and lower fees.
The emergence of co-investment-focused evergreen funds has broadened access, offering potentially lower fees and investor-friendly features such as liquidity options and subscription-based access. As a result, a broader range of investors can now participate in private debt co-investments, further expanding opportunities within the asset class.
