Co-investment is sold on the fee saving. What a committee needs is its effect on the whole programme, weighted by the capital actually paid in.
Weight each sleeve by the capital actually paid in, not by commitment: blended net multiple = (fund net proceeds + co-investment proceeds) ÷ (fund paid-in + co-investment paid-in). On an illustrative $100m fund commitment returning 1.56x net and $50m of fee-free co-investment at 1.96x, the programme returns 1.70x, a gain of 0.14x and $20.4m of profit over putting the same $151m into the fund. The gain is real, but it is diluted by the fund capital it sits beside.
Worked in full in The Co-Investment Practitioner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Co-investment is sold on the fee saving. The number that matters to an investment committee is narrower: what does the sleeve do to the return on the whole private equity programme? That depends on three things only: how much of the programme is co-investment, how heavy the fund's fees and carry are at the gross return achieved, and whether the co-investments perform as well as the fund's other deals.
| Input | Fund | Co-investment |
|---|---|---|
| Capital committed | $100m | $50m |
| Management fee | 2% for 5 years, then 1% for 5 years | none |
| Carried interest | 20% over an 8% preferred return, full catch-up | none |
| Transaction and running costs borne by the LP | inside the fee | $1.0m |
| Gross multiple on deals | 2.00x | 2.00x |
| Average holding period, for the preferred return | 5 years | 5 years |
Fees over the life: $100m × (2% × 5 + 1% × 5) = $15.0m. Capital that reaches deals: $100m − $15.0m = $85.0m.
Gross proceeds: $85.0m × 2.00 = $170.0m. Profit over paid-in capital: $170.0m − $100m = $70.0m.
Preferred return hurdle: $100m × (1.085 − 1) = $46.9m. The full catch-up ends at $46.9m ÷ 0.8 = $58.7m of profit, so at $70.0m the GP takes a full 20 per cent: carry of $14.0m.
Net to the LP: $170.0m − $14.0m = $156.0m, so 1.56x on $100m paid in.
Gross-to-net, the fund gives up 0.44x of multiple: the $30.0m that the $15.0m of fees would have earned had it reached deals at 2.00x, plus $14.0m of carry, or $44.0m on $100m paid in.
Paid in: $50m into deals plus $1.0m of costs = $51.0m. Proceeds: $50m × 2.00 = $100.0m.
Net multiple: $100.0m ÷ $51.0m = 1.96x. The sleeve gives up 0.04x to costs.
Blended multiple = ($156.0m + $100.0m) ÷ ($100m + $51.0m) = $256.0m ÷ $151.0m = 1.70x.
In Excel, with net proceeds in B2:C2 and paid-in in B3:C3: =SUM(B2:C2)/SUM(B3:C3). Never =AVERAGE() of the two multiples.
| Sleeve | Paid in | Net proceeds | Net multiple | Share of capital |
|---|---|---|---|---|
| Fund | $100.0m | $156.0m | 1.56x | 66.2% |
| Co-investment | $51.0m | $100.0m | 1.96x | 33.8% |
| Programme | $151.0m | $256.0m | 1.70x | 100% |
Had the LP put the same $151.0m into the fund, it would have received $235.6m. The sleeve adds $20.4m of profit, and the programme's fee-and-carry load falls from 0.44x to 0.30x of multiple. It does not fall to zero, because two thirds of the capital still pays full freight.
The value of the sleeve moves with the gross return, because carry does. Below the hurdle there is no carry to save, only fees.
| Gross multiple | Fund carry | Fund net | Co-invest 25 | Co-invest 50 | Co-invest 100 | Co-invest alone |
|---|---|---|---|---|---|---|
| 1.50x | $0.0m | 1.28x | 1.31x | 1.34x | 1.37x | 1.47x |
| 2.00x | $14.0m | 1.56x | 1.64x | 1.70x | 1.76x | 1.96x |
| 2.50x | $22.5m | 1.90x | 2.01x | 2.09x | 2.18x | 2.45x |
Two readings. First, even a one-for-one sleeve leaves the programme well below the co-investment multiple: at 2.00x gross, 1.76x against 1.96x. Second, the uplift nearly triples between a weak and a strong vintage (0.10x at 1.50x gross with a 100 per cent sleeve, 0.28x at 2.50x), so a co-investment programme looks most valuable in exactly the years when the fund return already looks good.
The usual error is to assume the co-investments are as good as the fund's deals. The blend above only holds if they are. Co-investment allocations can be skewed towards larger, more levered or harder-to-syndicate deals. In this case the sleeve's gross multiple can fall to 1.59x before it returns no more than the fund's 1.56x net; below that, every co-investment dollar lowers the programme multiple. That break-even is worked in more detail, on slightly different illustrative terms, in how much worse co-investment deals can be and still beat the fund.
The second error is weighting by commitment rather than paid-in capital. Commitment is not capital paid in: in practice part of a fund commitment is never called, while the sleeve's own costs add to what is paid in ($51.0m here, not $50m). Weighting by commitment overstates the fund's share and understates the sleeve's effect.
One test for the committee paper: state the programme multiple at the gross return the fund is underwritten to, and again at the gross multiple at which the sleeve stops adding value. Here those are 1.70x and 1.59x gross.
A fee-free sleeve lifts the programme multiple in proportion to its share of paid-in capital, by an amount that depends on how much carry the fund would have charged. A $50m sleeve beside a $100m fund turns 1.56x into 1.70x at a 2.00x gross return. The book's companion file makes a related point about follow-on rounds: an apparently obvious decision on one deal can cost the whole programme, and only the programme number shows it. It is set out with the free workbook for this case; the J-curve side of the same decision is in how much co-investment reduces the J-curve.
Add the net proceeds of both sleeves and divide by the capital paid into both, including fees and costs. On $100m paid into a fund returning $156.0m and $51.0m paid into co-investments returning $100.0m, the programme multiple is $256.0m divided by $151.0m, or 1.70x. Averaging the two multiples would overweight the smaller sleeve.
Only if the co-investment deals perform close to the fund's deals. In the illustrative case the fund nets 1.56x at a 2.00x gross multiple, so a fee-free sleeve with small costs must earn at least 1.59x gross to add anything. Weaker selection on the co-investments can erase the whole fee saving.
The uplift grows with sleeve size but never reaches the co-investment multiple. At 2.00x gross, a sleeve of 25 per cent of the commitment lifts the programme from 1.56x to 1.64x, 50 per cent to 1.70x, and 100 per cent to 1.76x. Size is usually limited by deal flow and concentration, not by the arithmetic.
This article is one calculation from The Co-Investment Practitioner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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