Co-investments are where the return premium lives — and where adverse selection hides. The pitch is compelling: direct exposure to a single deal, fee relief (often zero management fee, reduced carry), and a seat at the table alongside a GP you've already underwritten. Done well, co-investments can meaningfully improve net portfolio returns. Done poorly, they are a way to absorb the deals a GP couldn't fill elsewhere. The central problem is information asymmetry. By the time a co-investment lands in your inbox, the GP has had weeks or months with the asset. You have days. The deals that come with urgency — and most do — are the ones that require the most discipline. This week: the framework for separating the genuine opportunities from the overflow.
The Baseline Question
Why is this deal available to me?
This is the first question and the most important. GPs allocate co-investment to LPs strategically. The best deals go to the LPs they most want to retain, reward, or deepen. The deals that are broadly marketed, sent to fifty LPs at once, or offered with a 72-hour deadline are almost never the best deals.
Legitimate answers: you've been a strong LP, the GP values the relationship, the deal is simply larger than the fund's concentration limits allow. Concerning answers: the anchor LP pulled out, the financing package changed at the last minute, or the rationale pivots when you ask the question twice.
The Checklist
Eight questions before you wire a dollar
One: What is the GP's co-investment track record, net to co-investors? Not fund-level — co-investment specific. Two: What is the GP's ownership stake in the deal? Significant GP commitment is a meaningful alignment signal.
Three: What is the path to exit, and is it realistic given current market conditions? Four: What are the covenants or governance protections for minority co-investors? Five: What does the cap table look like and who else is co-investing alongside you?
Six: What is the downside case, modelled conservatively — not the base case repackaged as a bear case. Seven: What is the holding period assumption and what happens to your liquidity if it extends by three years? Eight: What fee concessions are you actually receiving, documented in the side letter?
The Adverse Selection Problem
The deals most likely to be offered are the deals most likely to disappoint
Academic research on co-investment returns is mixed, and the gap between top-quartile and median co-investment outcomes is wide. The primary driver of dispersion is adverse selection — LPs who take every deal offered perform meaningfully worse than LPs who decline most deals and wait for the right ones.
The right ones share characteristics: the GP has relevant sector expertise with a verifiable track record in the specific sub-sector, the deal didn't require urgency, and the GP has meaningful skin in the game beyond the carry. When all three are true simultaneously, the historical hit rate improves substantially. Read more →
What We're Watching
The rise of co-investment clubs: what the structure actually buys you
Several multi-family offices and advisory networks have formalised co-investment clubs — pooled vehicles that aggregate LP capital to access deals that would otherwise require a $25M+ minimum. The appeal is obvious: diversification across deals, shared diligence costs, and access to deal flow that single-family offices below a certain AUM threshold couldn't otherwise see.
The risks are less discussed: the club structure adds a layer of intermediary between you and the deal, the lead underwriter's incentives may not be identical to yours, and the pooled structure can create pressure to deploy rather than pass. The best clubs have a documented pass rate above 70% — they say no more than they say yes. That's the number to ask for.
— Cecile
Editor, The Family Office Allocator