Fee savings arrive slowly and in small amounts; a write-off arrives at once. The ratio between them is a sizing rule.
Divide the loss by the fee saving per deal. If a standard co-investment saves 0.36× of its cheque against the fund route, one write-off of the same size erases the savings of 2.8 deals counted on capital, or 5.6 counted against the 2.00× it was expected to return. For one zero to erase a dozen deals, the cheque has to be 2.16 to 4.32 times the standard size, so the real lever is position sizing.
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 programmes are sold on fee savings, and the savings are real. They are also small per deal and earned slowly, while a write-off is large and arrives at once. The question an investment committee should ask is not whether a loss can happen but how many good deals' savings one loss consumes, and from that, how large any single cheque may be.
| Input | Value |
|---|---|
| Expected gross multiple per deal | 2.00× |
| Fund route: net multiple after fees and 20% carry | 1.64× |
| Co-investment: no fee, no carry, net multiple | 2.00× |
| Saving per unit of cheque | 0.36× |
| Standard cheque | 10.0m |
| Programme size | 20 deals |
| Exposure already held through the fund, per unit of cheque | 0.25 |
Deals erased = loss on the write-off ÷ saving per standard deal
In Excel: =B5*B6/(B2*B4) for deals erased, with the cheque size in B5, the loss
basis (1 for capital, 2.00 for expected value) in B6, the saving rate in B2 and the standard cheque
in B4.
Which basis is right? Both answer different questions. Capital tells you how many deals' savings the loss consumes in cash. Expected value tells you how far the programme falls behind the plan it was approved on. A committee should see both, because the gap between them is the cost of having been wrong about the deal rather than merely unlucky.
| Cheque, times standard | Cheque | Deals erased, capital | Deals erased, expected value | Capital, with look-through |
|---|---|---|---|---|
| 0.5× | 5.0m | 1.4 | 2.8 | 1.7 |
| 1.0× | 10.0m | 2.8 | 5.6 | 3.5 |
| 1.5× | 15.0m | 4.2 | 8.3 | 5.2 |
| 2.0× | 20.0m | 5.6 | 11.1 | 6.9 |
| 3.0× | 30.0m | 8.3 | 16.7 | 10.4 |
The last column is the one programmes forget. A co-investor in a company the fund also owns loses twice when it fails: the cheque, and its share of the fund's position. Here that turns a 2.8-deal loss into 3.5 at standard size.
The whole 20-deal programme saves 72.0m, or 7.2 standard cheques. One zero at three times standard size costs 3.0 cheques of capital and leaves 4.2. Concentration, not deal selection, decides whether the programme keeps its fee advantage.
Partial losses scale the same way. A cheque written down to half its cost loses 0.5 of the cheque on capital, so at standard size it erases 1.4 deals' savings, the same as a zero on a half-size cheque.
On reduced terms, 5 of fees per 100 and 10 per cent carry, the co-investment nets 1.81× and saves only 0.17× against the fund. The same standard zero now erases 5.9 deals on capital and 11.8 on expected value. Halving the saving doubles the damage a single loss does, so the cheaper the access, the more conservative sizing must be.
Set a loss budget in deals: one write-off may erase at most N deals' savings. The maximum cheque follows directly.
| Loss budget, deals | Max cheque, capital basis | In money | With look-through | In money |
|---|---|---|---|---|
| 1 | 0.36× | 3.6m | 0.29× | 2.9m |
| 2 | 0.72× | 7.2m | 0.58× | 5.8m |
| 3 | 1.08× | 10.8m | 0.86× | 8.6m |
| 5 | 1.80× | 18.0m | 1.44× | 14.4m |
A three-deal budget allows a 10.8m cheque on its own, but only 8.6m where the fund already holds the company. "Size to the downside" stops being a slogan and becomes a cap you can write into the programme's limits.
The common mistake is to size cheques by conviction and judge the programme by its average multiple. Averages hide the order of events: a programme that lost a triple-size cheque in year two will spend most of its life recovering savings it already spent. The second mistake is to count only the cheque and ignore the look-through, which systematically undersizes the loss on exactly the deals where the manager's own fund is most exposed.
The free workbook for this book at the companion page includes this case among its three, worked on the book's own figures. For where the 0.36× saving comes from and how adverse selection eats into it, see how much worse co-investment deals can be and still beat the fund.
Set a loss budget in deals: one write-off may erase at most N deals' fee savings. The maximum cheque is N times the saving rate, in standard cheques. At an illustrative 0.36x saving, a three-deal budget allows 1.08 times the standard cheque, or 10.8m on a 10.0m standard, and 8.6m where the fund already owns the company.
Because a co-investor in a company its fund also owns loses twice when the company fails: the cheque and its share of the fund's position. With exposure via the fund worth 0.25 of the cheque, a standard write-off erases 3.5 deals' savings instead of 2.8.
Yes, they magnify it. If reduced terms cut the saving from 0.36x to 0.17x of the cheque, one standard-size zero erases 5.9 deals' savings on capital and 11.8 on expected value, roughly twice as many, so cheques on reduced-fee co-investments should be sized more conservatively.
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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