Private Equity Firms Tap Co-Investments for New Growth Opportunities

By David Goldstein

Co-investing has long been considered a niche strategy in private markets, but that perception is rapidly changing.

Historically, co-investments were reserved for an elite group of institutional investors with close ties to the largest private equity firms. Mega-funds granted these select LPs access to exclusive deal flow, often at more favorable terms than traditional fund commitments. These arrangements were highly relationship-driven, available primarily to investors with the capital, sophistication, and influence to negotiate direct stakes in deals. However, as the private equity landscape has evolved, access to co-investments has broadened. Today, even mid-sized institutional investors and family offices are gaining entry to these opportunities, democratizing what was once a privilege of the industry’s upper echelon.

Today, shifting market dynamics, rising valuations, and increasing investor demand are positioning co-investments as a core strategy for fund managers and LPs looking to deploy capital more effectively.

Take investor behavior, for example. As fundraising conditions tighten, LPs are becoming more selective, conducting deeper due diligence, and seeking greater control over where their capital is deployed. Many now expect co-investment rights as part of their fund commitments, preferring direct exposure to select deals rather than investing solely in blind pools. Some LPs won’t commit to a fund unless they receive co-investment opportunities, especially in volatile markets where they prioritize targeted investments over broader fund commitments.

At the same time, GPs increasingly rely on co-investments to secure funding for deals when traditional fundraising slows. These vehicles provide flexible capital solutions, allowing fund managers to navigate shifting market conditions while giving investors direct stakes in high-value opportunities. By offering a more precise and transparent investment structure, co-investments continue to gain traction as a preferred strategy for both LPs and GPs.

At the same time, private equity firms are deploying record levels of dry powder while balancing investor expectations for capital efficiency. Rather than raising larger blind-pool funds, GPs are increasingly turning to co-investments to secure additional capital on a deal-by-deal basis. This allows firms to maximize their purchasing power while avoiding excessive dilution across a fund.

As valuations continue to rise, deal sizes are growing, forcing firms to find ways to bridge capital gaps, particularly in high-growth sectors like AI and healthcare, where even well-capitalized firms struggle to execute new opportunities without additional funding. Many PE funds have investment limits preventing them from allocating more than a set percentage of total fund size to a single deal. For example, a firm targeting a $100 million investment may only be able to commit $70 million due to fund constraints. Co-investments provide a mechanism to close this gap, allowing GPs to secure the additional capital needed to pursue high-value deals while maintaining fund discipline.

Cost is another major driver. Co-investments generally offer lower fees than traditional private equity funds, making them an attractive alternative. Many GPs have adjusted their fee structures to remain competitive, reducing management fees and carried interest on co-investment vehicles. These favorable terms appeal to LPs while increasing pressure on GPs to manage these vehicles efficiently.

For middle-market private equity firms, offering co-investment opportunities has become a key differentiator in an increasingly competitive fundraising environment. Unlike large firms like KKR or Carlyle, which can raise commingled funds with relative ease, smaller fund managers must find creative ways to attract LPs. One approach is bundling co-investment opportunities with traditional fund commitments, giving investors immediate deployment options rather than waiting for capital calls. This not only strengthens LP relationships and increases capital commitments but also provides investors with faster exposure to deals without long-term lockups, making co-investments a compelling incentive for fund participation.

As more fund managers offer co-investments, LPs also find themselves competing for access to the best opportunities. Investors with the ability to move quickly and commit capital on shorter timelines often gain priority in these deals, reinforcing the need for a well-structured co-investment approach. While co-investments provide the flexibility for these managers to compete, they also introduce complex operational requirements that must be considered as part of the overall strategy. GPs must navigate separate accounting, compliance, and investor reporting needs for each co-investment vehicle.

Unlike commingled funds, which spread capital calls across multiple deals, co-investment vehicles operate on a deal-by-deal basis. This structure necessitates independent tracking, customized investor reporting, and precise liquidity management. Without a streamlined system, GPs risk delays in investor communications and inaccurate reporting.

Additionally, each co-investment vehicle must maintain separate bank accounts and meet distinct tax and compliance requirements. For firms managing multiple co-investments, investor overlap can complicate tracking commitments and distributions across vehicles. Managing this process efficiently is critical to maintaining strong investor relationships and avoiding reporting errors.

Fund administration has become a key factor in ensuring smooth execution. Unlike traditional funds, co-investments require rapid capital deployment and real-time reporting, often involving multiple investors with different structures. Firms that lack the infrastructure to efficiently track capital flows and investor commitments may face delays that erode LP confidence.

Another challenge is liquidity management. Since co-investments operate on a deal-by-deal basis, capital calls and distributions are often more irregular than traditional funds. For example, a GP may need to call $29 million from investors immediately while reserving $1 million for expenses, requiring precise liquidity planning. Without proper forecasting, firms may encounter cash flow mismatches that disrupt deal execution.

As the volume of co-investments grows, so does the need for scalable, accurate, and efficient solutions that allow fund managers to focus on what they do best: sourcing and executing high-quality deals.

Without the right infrastructure in place, GPs risk operational bottlenecks that could slow deal execution, frustrate LPs, and limit their ability to scale investment strategies. In an increasingly competitive fundraising environment, investors gravitate toward managers who demonstrate not only strong deal-sourcing capabilities but also the ability to execute co-investments efficiently.

As competition intensifies, fund managers who can scale co-investments efficiently will have a strategic advantage. Those who invest in the right infrastructure and operational expertise will not only attract more capital but also build stronger, long-term relationships with LPs. The firms that execute co-investments well will be the ones driving private market growth in the years ahead.

David Goldstein
Director, Product - Fund Services
STP Investment Services

STP Investment Services is an award-winning technology-enabled services company that provides middle, back-office, and compliance solutions to investment managers, hedge and private equity funds, family offices, wealth managers, and asset owners. STP’s end-to-end investment operations, Blueprint technology, and expertise provide a partnership to clients that enables them to grow revenue while optimizing processes and protect their business. STP provides a range of services with capabilities to process all asset classes and meet ever-evolving regulatory requirements.