Co-Invest Vehicles

Understanding Co-Investments: Key Legal Considerations

Co-investments is a popular strategy for investors looking to complement their investment portfolios. This post explores what co-investments are, the legal issues they present, and the unique value they offer to investors.

What is a Co-Investment?

A co-investment is a direct investment made alongside a private equity or other investment fund by an investor who is also participating in the fund. Typically, co-investments are offered on a deal-by-deal basis and allow investors to participate in specific transactions without the fees and carried interest typically associated with the main fund. Co-investors will typically invest through a co-investment vehicle that will invest on a side-by-side basis with the main fund.

For example, if a private equity fund is acquiring a company and requires additional capital beyond its fund resources or its investment limitations, it may offer co-investment opportunities to its limited partners (LPs). These opportunities are often exclusive to select investors and can provide exposure to a single asset.

Key Legal Issues to Address in Co-Investments

While co-investments can offer significant benefits, there are several legal issues that investors and fund managers should address to ensure a successful arrangement:

1. Investment Terms

   • The agreements for both the main fund and the co-investment vehicle should address whether the vehicles will acquire the same securities simultaneously, i.e., on a pari passu basis.

2. Allocation of Opportunities

   • How co-investment opportunities are allocated among investors should be transparent and fair.

   • The partnership agreement or side letters may govern these allocations.

3. Broken Deal Expenses

   • Managers should clearly disclose how broken deal expenses will be allocated among the main fund and co-investors.

   • Generally, broken deal expenses are borne by the main fund unless the co-investment vehicle becomes bound to the purchase. In such cases, co-investors may share the costs.

4. Expense Allocation

   • The co-investment agreement and main fund agreement should address how expenses between the main fund and co-investment vehicle are allocated with respect to the investment.

   • Investment expenses are typically allocated based on the investment amount of each vehicle unless the expense benefits solely one vehicle.

5. Liquidity and Exit Strategy

   • Co-investors should clearly understand the terms governing liquidity, including exit opportunities or any restructuring events related to the investment.

   • Fund documents typically require the co-investment vehicle to follow the main fund’s exit strategy.

Conclusion

Co-investments represent a compelling opportunity for investors seeking targeted exposure and cost efficiencies. However, navigating the complexities of co-investments requires careful consideration of alignment, legal issues, and governance. With the right approach, co-investments can create value for both investors and fund managers, fostering a mutually beneficial partnership.