Late syndication at cost plus a carrying charge lowers the co-investor's multiple, yet often leaves its IRR above the fund's on the same deal.
When a sponsor closes a deal, holds the co-investment stake itself and sells it down months later at cost plus interest, the charge lowers the co-investor's multiple and IRR on the same deal. Bought six months after closing at cost plus 7 per cent a year, an illustrative 20.0 million stake costs 20.70 million, the multiple falls from 2.00x to 1.93x and the IRR from 16.65 to 15.76 per cent, a cost of 0.89 points. Against cash the co-investor could have held meanwhile at 4 per cent, the true economic cost is 0.30 million.
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Late syndication is common when a sponsor must sign before co-investors can finish their own work: the fund, or a warehouse facility, buys the whole equity cheque at closing and sells part of it down within a few months. The co-investors pay the original price plus a carrying charge, usually framed as compensation to the fund's investors for having funded the stake in the meantime. It is a different mechanism from equalisation interest, which a late-closing limited partner pays into a fund: here the co-investor buys a specific stake from the sponsor. The charge looks small. The question is what it does to the return, and how to read the return that results.
| Input | Value |
|---|---|
| Stake syndicated, at original cost | 20.0 |
| Months between closing and syndication | 6 |
| Carrying charge, simple, per year | 7% |
| Exit, years after closing | 5 |
| Gross multiple on original cost at exit | 2.00x |
| Proceeds to the stake at exit | 40.0 |
| Co-investor's yield on cash while waiting | 4% |
Syndication price = cost × (1 + rate × months ÷ 12)
Co-investor MOIC = exit proceeds ÷ syndication price; IRR = MOIC1 ÷ years held − 1
Economic cost = cost × (rate − cash yield) × months ÷ 12
In Excel: =Cost*(1+Rate*Months/12) for the price and =(Proceeds/Price)^(1/(Exit_Years-Months/12))-1 for the IRR, or =XIRR on the dated flows.
The price is 20.0 × (1 + 7% × 6 ÷ 12) = 20.70 million, of which 0.70 is interest. The co-investor holds for 4.5 years and receives 40.0, a multiple of 40.0 ÷ 20.70 = 1.93x. Over 4.5 years that is an IRR of 15.76 per cent. Had it bought at cost on the same date, 2.00x over 4.5 years would have been 16.65 per cent. The charge costs 0.89 points of IRR and 0.068x of multiple.
| Holder | Paid | Years held | Multiple | IRR |
|---|---|---|---|---|
| Fund, at closing, at cost | 20.0 | 5 | 2.00x | 14.87% |
| Co-investor, at six months, at cost | 20.0 | 4.5 | 2.00x | 16.65% |
| Co-investor, at six months, cost plus 7% | 20.70 | 4.5 | 1.93x | 15.76% |
The co-investor paid more than the fund for the same shares and still reports a higher IRR than the fund does on the deal, 15.76 against 14.87 per cent, because its clock started six months later. That gap is a timing artefact, not outperformance. The multiple is the honest comparison: 1.93x against 2.00x.
The economic cost is smaller than the 0.70 of interest suggests, because the co-investor's money was not idle. Set aside at closing and earning 4 per cent, 20.0 grows to 20.40 by syndication, so the top-up is 0.30 million: 20.0 × (7% − 4%) × 0.5. Measured from closing on everything it put up, the co-investor makes 1.970x against the fund's 2.00x.
| Months | Price | Multiple | IRR | IRR at cost | Cost, points |
|---|---|---|---|---|---|
| 3 | 20.35 | 1.97x | 15.29% | 15.71% | 0.42 |
| 6 | 20.70 | 1.93x | 15.76% | 16.65% | 0.89 |
| 9 | 21.05 | 1.90x | 16.31% | 17.71% | 1.41 |
| 12 | 21.40 | 1.87x | 16.93% | 18.92% | 1.99 |
The cost in IRR points more than doubles from six to twelve months, because the charge grows linearly while the hold over which it is spread shrinks. Holding the wait at six months and moving the rate instead gives a narrower range: 5 per cent costs 0.64 points, 7 per cent 0.89 and 9 per cent 1.14. Every extra quarter of warehousing also raises the reported IRR, to 16.93 per cent at twelve months, while the multiple falls to 1.87x. A co-investor who negotiates a shorter syndication window gets a better multiple and a lower IRR on the same deal.
The price is fixed; the value is not. Syndication at cost plus interest ignores what happened to the company in the meantime. If the sponsor's own mark has fallen 10 per cent to 18.0 by the syndication date, the co-investor pays 20.70 for it, 15.0 per cent above the mark. Ask for the latest valuation and any material change since closing before the price is set, and a right to step away if it has moved.
The common mistake is to compare a late co-investment's IRR with the fund's IRR on the same deal and conclude the co-investment did better. A later start date shortens the hold and lifts the IRR mechanically, which can hide the carrying charge entirely. Compare multiples, or compute both IRRs from the closing date with the co-investor's waiting period in cash. The second mistake is to treat the charge as negotiable only on the rate. The window matters more: halving it from twelve to six months saves 0.70 million on the price, cutting the rate from 9 to 5 per cent only 0.40.
Price the charge as cost times rate times time, then measure it on the multiple and against your own cash yield: here 0.068x, or 0.30 million net. Never read a late entrant's IRR against the fund's. The companion files for this book include the Appendix B timeline and decision memo, the natural place to fix the syndication window, and how MOIC converts to IRR by holding period shows why a shorter hold flatters the rate. For the cost-sharing side of syndication, see how broken deal expenses should be allocated to co-investors.
Because the fund, or a warehouse facility, has paid for the stake at closing and carried it until co-investors buy it, and the charge compensates whoever funded it. On an illustrative 20.0 million stake held for six months at 7 per cent simple, the charge is 0.70 million and the syndication price 20.70.
Because its holding period starts later. Paying 20.70 six months after the fund paid 20.0, and exiting at 40.0 five years after closing, the co-investor earns 15.76 per cent over 4.5 years while the fund earns 14.87 per cent over five. The multiple shows the truth: 1.93x against 2.00x.
Usually the window. At 7 per cent, cutting the wait from twelve months to six lowers the price from 21.40 to 20.70, a saving of 0.70 million on a 20.0 stake. At six months, cutting the rate from 9 to 5 per cent saves 0.40, from 20.90 to 20.50.
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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