Co-Investment Operations: A Practical Guide for Fund CFOs

A co-investment is a minority equity or debt position that an investor takes directly in a portfolio company, alongside a sponsor's main fund, rather than through the fund. For LPs it offers more exposure to a deal they like at lower cost; for the GP it fills an equity cheque larger than the fund can or should write alone. For the fund CFO, it means a new vehicle, a new set of investors and a new set of fairness questions on every deal.

This guide covers the operating side of co-investment: how opportunities are allocated, how vehicles are structured, how expenses and closings are handled, and what the accounting and reporting look like once the deal is done.

Why co-investments exist#

A fund's governing documents usually cap how much of its commitments it can put into any one company, commonly expressed as a percentage of total commitments. When a deal needs more equity than that cap allows, the sponsor has three options: bring in another sponsor as a club partner, pass on the deal, or offer the excess to co-investors.

Co-investment is often the most attractive of the three. The GP keeps control of the deal, deepens relationships with its largest LPs, and avoids sharing governance with a competing sponsor. LPs, in turn, get concentrated exposure to a company they have underwritten themselves, and co-investments are frequently offered on a reduced-fee or no-fee, reduced-carry or no-carry basis. That fee advantage is one reason many institutional LPs ask for co-investment rights when they commit to a fund.

The trade-off is that co-investors must be able to move quickly, and the sponsor takes on real conflicts: deciding who gets an allocation, how much, and on what terms.

Common co-investment structures#

The sponsor-managed vehicle is effectively an SPV: one asset, a small number of investors, and a GP entity that votes the shares in line with the main fund. Most of the operational work in this guide applies to that structure.

Allocation: the policy comes first#

Allocation is where co-investment programmes get into trouble. Regulators have repeatedly focused on whether advisers disclosed how they allocate co-investment opportunities and whether they followed what they disclosed. The SEC's 2023 Private Fund Adviser Rules, which would have added specific preferential-treatment requirements, were vacated by the Fifth Circuit in June 2024, but the vacatur did not change the underlying obligations. Registered and exempt advisers remain subject to the Advisers Act anti-fraud provisions, and registered advisers still need written compliance policies reasonably designed to prevent violations. Undisclosed or inconsistently applied allocation practices remain an enforcement risk.

A workable allocation policy answers these questions in writing:

1. Who is eligible? LPs with contractual co-invest rights, LPs above a commitment threshold, strategic partners, the GP's own principals, or third parties.
2. How is priority set? Contractual rights first, then factors such as ability to execute on the deal timeline, sector expertise, and size of commitment.
3. How are cut-backs handled? Pro rata to requested amounts, pro rata to fund commitments, or discretionary with documented reasons.
4. What about the main fund? The fund should take its full intended allocation before any co-investment is offered, unless the documents say otherwise.
5. Who approves? A named committee or officer, with minutes kept for each allocation decision.

Then check that the LPA, the PPM and every side letter are consistent with the policy. A side letter that grants "first look" on co-investments to one LP can conflict with an allocation policy that promises pro rata treatment to another.

Expenses: decide before the deal, not after#

Co-investment expense allocation deserves specific attention because the sums can be material and the conflicts are obvious. Typical categories:

• Deal expenses on a closed transaction (legal, diligence, financing fees): normally shared pro rata between the fund and co-investors by amount invested.
• Broken-deal expenses: costs of deals that do not close. If co-investors were lined up, they arguably should share these, but they often have not signed anything binding yet. If the main fund bears 100% of broken-deal costs on deals that would have been part co-invested, the fund is subsidising the co-investors.
• Vehicle expenses: formation, administration, audit and tax prep for the co-invest vehicle itself, usually borne by that vehicle.
• Ongoing portfolio expenses: monitoring and holding-company costs, normally shared pro rata.

Worked example: sharing deal costs#

Assume a sponsor acquires a company with $200M of equity. The main fund invests $140M and a co-invest vehicle invests $60M. Total transaction expenses are $4M.

The formula is simply expense share = investor equity / total equity × total expense. The hard part is not the arithmetic; it is making sure the co-invest vehicle's documents actually require it to bear its $1.2M, and that the main fund's general ledger shows only $2.8M.

Closing mechanics#

Co-investors should generally invest at the same time, at the same price per share, and in the same security as the main fund. Where that isn't possible, document why. Common situations:

• Syndication after closing. The fund funds the full equity at closing (sometimes with a bridge) and sells down to co-investors within a short window. Agree in advance whether the sell-down is at cost, whether interest or a cost-of-carry charge applies, and who bears the transfer costs.
• Different securities. If co-investors hold a different class (for example, non-voting shares), confirm the economics are identical and record the voting arrangement.
• Funding. Co-invest vehicles usually call 100% of commitments up front to fund the purchase price. A brief, clear capital call notice with wiring instructions, due date and the exact per-investor amount avoids last-minute breaks on closing day.

Accounting and reporting#

Each co-invest vehicle needs the same back-office treatment as any other fund:

• Its own books. A separate double-entry ledger with capital accounts for each investor, not a sub-ledger buried in the main fund.
• Consistent valuations. The vehicle's stake should carry the same per-share value as the main fund's position at each quarter-end, applied under the same valuation policy. Different marks for the same security are a red flag for LPs and auditors.
• Waterfall. If the vehicle charges carry, model it in the vehicle's own waterfall. Many co-invest vehicles charge no carry, which makes distributions simple pro rata allocations.
• Audit and tax. Decide early whether the vehicle needs an annual audit (investor demands or custody rule considerations for registered advisers may drive this) and who prepares its partnership tax return and K-1s.
• Reporting. Co-investors typically want the same portfolio-company information as fund LPs for that asset, on the same cadence.

Watch the cross-entity flows#

Expense reimbursements, sell-down proceeds and shared invoices all create intercompany balances between the main fund, the co-invest vehicle and sometimes the management company. Reconcile these balances at every close. An unreconciled payable from the co-invest vehicle to the fund is exactly the kind of item that surfaces in an exam or an LP audit.

A co-investment checklist for the CFO#

1. Approved allocation policy, consistent with LPA, PPM and side letters.
2. Written expense-sharing terms covering completed and broken deals.
3. Co-invest vehicle formed, with governing documents, tax classification and bank account in place before signing.
4. KYC/AML completed on every co-investor before funds are accepted.
5. Funding notices issued and receipts matched to investors.
6. Closing price, security and date documented; any sell-down terms recorded.
7. Vehicle ledger opened; opening capital accounts tied to cash received.
8. Valuation tied to the main fund's mark each quarter.
9. Intercompany balances reconciled at every period close.
10. Tax and audit responsibilities assigned for the life of the vehicle.

How Privatis helps#

Privatis runs each co-invest vehicle as its own entity on a double-entry fund ledger with period close, so capital accounts, expense allocations and intercompany balances are tracked separately from the main fund. Capital calls and distributions, KYC/AML onboarding, side letter and MFN election tracking, and K-1 delivery work the same way for a co-invest vehicle as for a flagship fund, and every change is captured in the audit trail.