A co-investment budget is a deal-flow target in disguise: the funnel from offers to closed deals, the GP relationships it takes to fill it, and the team needed to review it.
Divide the annual budget by the average cheque you will actually be allocated, then divide the number of deals by your offer-to-close rate. An illustrative programme deploying 120.0 a year, asking for 10.0 a deal and allocated 8.0, needs 15 closed deals; at a 20 per cent conversion that is 75 offers a year, from about 38 GP relationships sending two each. An LP with 25 relationships will deploy 80, a third short of plan.
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 budgets are set in money and missed in deal count. The budget is approved by an investment committee; the deals arrive at the sponsors' pace, are cut back at allocation, and most of them should be declined. Working the funnel backwards turns the budget into the thing the team actually has to produce: offers.
| Input | Value |
|---|---|
| Annual deployment target | 120.0 |
| Cheque requested per deal | 10.0 |
| Share of the request allocated, on average | 80% |
| Offers passing the first screen | 50% |
| Full reviews approved | 50% |
| Approved deals that close (timing, GP allocation) | 80% |
| Co-investment offers per GP relationship a year | 2.0 |
| Full reviews one professional can run a year | 12 |
All rates are illustrative. Replace them with your own history: the first screen and the approval rate are policy choices, the allocation rate and the offers per GP are what the sponsors give you.
Step 1: deals needed. Allocation cut-backs shrink every cheque, so divide by the cheque you get, not the one you ask for.
Average cheque = 10.0 × 80% = 8.0
Deals needed = 120.0 ÷ 8.0 = 15
Step 2: conversion from offer to closed deal. Multiply the stages: 50% × 50% × 80% = 20 per cent, or 0.20.
Step 3: the funnel.
Offers needed = 15 ÷ 0.20 = 75
Full reviews = 75 × 50% = 37.5, of which 18.8 approved and 15.0 closed
GP relationships = 75 ÷ 2.0 = 37.5
Team = 37.5 ÷ 12 = 3.1 professionals
In Excel: =Target/(Request*Alloc)/(Screen*Approve*Close) for the offers, then divide by offers per GP.
A naive plan, dividing 120.0 by 10.0, says 12 deals and treats every offer as a deal. The funnel says 75 offers and about 38 sponsors willing to show you two deals a year each. That is the real constraint on most programmes: an LP with commitments to 25 managers receives 50 offers, closes 10 deals and deploys 80, missing its budget by 40, or 33 per cent, without having done anything wrong at any single stage.
The temptation at that point is to lower the bar. Taking more of what is offered fills the budget, but it does so with exactly the deals a selective programme would have declined, and adverse selection is the main risk of co-investing, as shown in how many deals' fee savings one write-off erases.
| Conversion | Offers a year | GP relationships | Full reviews | Professionals |
|---|---|---|---|---|
| 10% | 150 | 75.0 | 75 | 6.2 |
| 15% | 100 | 50.0 | 50 | 4.2 |
| 20% | 75 | 37.5 | 38 | 3.1 |
| 25% | 60 | 30.0 | 30 | 2.5 |
| 30% | 50 | 25.0 | 25 | 2.1 |
Selectivity is paid for twice: in relationships, which take years to build, and in staff, because declined deals cost a review too. Halving the conversion rate from 20 to 10 per cent doubles both.
| Requested | Allocated | Deals | Offers | GP relationships |
|---|---|---|---|---|
| 5.0 | 4.0 | 30.0 | 150.0 | 75.0 |
| 10.0 | 8.0 | 15.0 | 75.0 | 37.5 |
| 20.0 | 16.0 | 7.5 | 37.5 | 18.8 |
Larger cheques cut the deal flow needed, but at 7.5 deals a year the portfolio is concentrated: one loss is a large share of the cohort. The trade-off between cheque size and diversification is worked in how many co-investments an LP needs to diversify.
Run the funnel in both directions. Backwards, it gives the relationships the budget requires; forwards, from the relationships you have, it gives the budget you can honestly deploy without lowering the bar.
Every rate in the funnel can be measured after a year or two, and each points to a different fix:
Setting the budget first and the selectivity afterwards. An approved budget of 120.0 with relationships that produce 50 offers can be met only by accepting 30 per cent of offers instead of 20. The decline rate then falls quietly to whatever fills the budget, and the programme becomes a buyer of the deals its sponsors find hardest to syndicate.
Offers needed = budget ÷ allocated cheque ÷ conversion: 120.0 ÷ 8.0 ÷ 0.20 = 75 a year, from about 38 sponsors and three reviewers. Size the budget from the deal flow you have, not the other way round. The cost of the follow-on decisions that come with each deal is priced in the free workbook for this book.
It depends on the LP's selectivity, which is a choice. The illustrative funnel accepts 20 per cent: half the offers pass the first screen, half of those are approved after full review, and 80 per cent of approvals close at the allocation expected. At 10 per cent the same 120.0 budget needs 150 offers a year instead of 75.
Offers needed divided by the offers each GP sends a year. With 75 offers needed and an illustrative two offers per GP, about 38 relationships. An LP with 25 GPs sees only 50 offers, closes 10 deals and deploys 80, a third short of its 120.0 budget.
Size it on full reviews, not on closed deals. The illustrative programme runs 38 full reviews a year to close 15 deals; at 12 reviews per professional per year it needs 3.1 people. Raise the selectivity to a 10 per cent conversion and it needs 6.2.
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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