Co-Investment

Mechanism

The Institutional Limited Partners Association (ILPA) defines co-investment in its glossary as the syndication of a private equity financing round, or an investment by individuals, usually general partners, made alongside a private equity fund during a financing round, with "two or more investors in a given transaction" (ILPA Principles 3.0). The SEC's examination staff uses the term "coinvestment vehicles" for private funds that invest alongside an adviser's flagship funds in the same investments (SEC Office of Compliance Inspections and Examinations Risk Alert, June 23, 2020).

Three questions govern every co-investment: how much goes to the fund, who is offered the remainder, and who bears the fees and expenses. Each is a conflict for the adviser.

Allocation

Section 206 of the Investment Advisers Act of 1940 makes it unlawful for an adviser to engage in any transaction, practice, or course of business that operates as a fraud or deceit on any client (15 U.S.C. § 80b-6(2)). The Commission's 2019 interpretation states that an adviser facing conflicts when it allocates investment opportunities among clients "must eliminate or at least expose through full and fair disclosure the conflicts associated with its allocation policies, including how the adviser will allocate investment opportunities, such that a client can provide informed consent." It adds that an adviser "need not have pro rata allocation policies, or any particular method of allocation" (Release No. IA-5248, 84 FR 33669, July 12, 2019).

ILPA recommends that a manager disclose in advance, in the placement memorandum, the partnership agreement and regulatory filings, how co-investment opportunities and expenses will be allocated, and that every suitable opportunity go first to the fund when it fits the strategy and the fund has remaining commitments (ILPA Principles 3.0).

Fees and Expenses

ILPA states that, unless the partnership agreement prohibits it, a manager may charge management and other fees on co-investments, and that fees payable to the co-investment vehicle should accrue to the fund and be offset against the management fee (ILPA Principles 3.0).

Status of the 2023 Private Fund Adviser Rules

The SEC's private fund adviser rules (Release No. IA-6383, 88 FR 63206, September 14, 2023) reached co-investment in two places. Rule 211(h)(2)-1(a)(4) barred a non-pro rata allocation of fees and expenses related to a portfolio investment shared by multiple private funds and other clients, unless the allocation was fair and equitable and each investor received prior written notice.

The adopting release also stated that co-investment terms generally will be material to an investor's bargaining position. On June 5, 2024, the Fifth Circuit vacated the rules in National Association of Private Fund Managers v. SEC, No. 23-60471 (SEC announcement, October 31, 2024). The Electronic Code of Federal Regulations returns no text for 17 CFR § 275.211(h)(2)-1 as of October 1, 2026. Section 206 and the 2019 interpretation were not vacated.

Worked Example

Assume a hypothetical $100 million fund whose partnership agreement limits any one investment to 15 percent of commitments, a limit assumed for this example. A company seeks $40 million in a financing round. The fund may invest $15 million (0.15 × $100 million), which leaves $25 million ($40 million − $15 million) for co-investors. The co-investors then hold 62.5 percent of the round ($25 million ÷ $40 million) and the fund holds 37.5 percent ($15 million ÷ $40 million).

Now assume the round fails to close after $400,000 of third-party expenses. Allocated in proportion to the planned positions, the fund bears $150,000 and the co-investors $250,000; if the co-investors bear none, the fund bears all $400,000. ILPA states that limited partners should be made aware of any co-investment vehicles that are not allocated a pro rata share of broken-deal expenses (ILPA Principles 3.0).

What It Means for a Limited Partner

A limited partner reads co-investment first as an allocation question. ILPA asks for a written policy "sufficiently clear as to be verifiable ex post," so the first test is whether actual allocations reconcile to the policy disclosed (ILPA Principles 3.0). Examiners found advisers that disclosed an allocation process but failed to follow it, and advisers that promised certain investors such opportunities without adequate disclosure to the others (OCIE Risk Alert, June 23, 2020).

The second test is economics: fees, offsets and broken-deal expenses. The third is the adviser's own disclosure. Item 6 of Form ADV Part 2A requires an adviser that manages accounts with performance-based fees alongside accounts with other fee types to explain the incentive to favor the first group. Item 11.B requires an adviser to describe its practice, and the conflicts it presents, when it or a related person has a material financial interest in securities it buys for clients.

In Life Sciences and Healthcare

Clinical investigation of a previously untested drug is generally divided into three phases (21 CFR § 312.21). The National Venture Capital Association's model legal documents, updated in October 2025, incorporate mechanics for tranched financings, in which funding is released on a time or milestone basis (NVCA Model Legal Documents). Where a biopharmaceutical round is tranched, its milestones can be tied to those phases, and a co-investor may be asked to fund the later closings. ILPA recommends that a manager disclose the allocation of any follow-on investments related to co-investments (ILPA Principles 3.0), so a framework for a life sciences company should state how each later tranche is divided between the fund and co-investors.

Governing Authority and Sources

• Advisers Act Section 206: 15 U.S.C. § 80b-6.
• SEC fiduciary interpretation: Release No. IA-5248; 84 FR 33669 (July 12, 2019).
• Form ADV: Part 2 instructions and Part 2A items, Items 6 and 11.
• ILPA: ILPA Principles 3.0 (June 2019), co-investment allocations, fee offsets, broken-deal expenses and glossary; ILPA Principles page.
• SEC examination staff: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).
• Private fund adviser rules: 88 FR 63206 (Sept. 14, 2023); SEC announcement of the vacatur (Oct. 31, 2024); eCFR version history for 17 CFR § 275.211(h)(2)-1.
• Clinical phases: 21 CFR § 312.21.
• Tranched financings: National Venture Capital Association, Model Legal Documents (financing documents updated October 2025).

Frequently Asked Questions

What is co-investment in private equity?

Co-investment is an investment made in a financing round alongside a private equity fund, in addition to the fund's own investment. ILPA's glossary describes it as the syndication of a financing round, or an investment by individuals, usually general partners, alongside a fund, with two or more investors in the transaction. The 2019 SEC interpretation requires an adviser to eliminate or disclose allocation conflicts.

What is a co-invest fund?

Co-invest funds are vehicles that invest alongside a manager's main fund. The SEC's June 23, 2020 Risk Alert calls these "coinvestment vehicles" and describes them as private funds that invest alongside flagship funds in the same investments. Examiners found advisers that disclosed a process for allocating opportunities between such vehicles and flagship funds but did not follow it.

What are co-investment rights?

Co-investment rights are rights to evaluate or participate pro rata in co-investment opportunities, and they may be granted in a side letter. ILPA recommends that a manager disclose the existence of such arrangements to all limited partners, along with any differentiated economics offered to co-investors. The SEC's 2020 Risk Alert faulted advisers that gave certain investors such opportunities without adequate disclosure to other investors.

Related Reference

Pillar: Growth Equity. See also Special Purpose Vehicle (SPV), Private Equity Secondaries, and Family Offices in Private Equity.