A worked co-investment pacing model: deployment from a target NAV, the four-year ramp, and the cash the programme hands back once it is full.
Divide the target co-investment NAV by the sum of what one year's cheques are worth at each age they are held before exit. For an illustrative LP targeting 300 million of co-investment NAV, with five-year holds and a 2.0x gross multiple, each year's deployment is worth 5.725 times itself across the portfolio, so the programme must invest 52.4 million a year, not the 60.0 million that target divided by holding period gives. At 60.0 the programme overshoots by 14.5 per cent.
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 →
A fund commitment is drawn over several years and returned over several more, so fund pacing models overcommit and wait. A co-investment is funded in full at closing: 100 per cent of the cheque goes out the day the deal signs. There is no unfunded commitment to manage, so the call and distribution curves of fund commitment pacing drop out, and the pacing question becomes simpler and more exposed. Simpler, because the annual budget is cash. More exposed, because the only control is how much you deploy each year, and the NAV it produces depends on how fast each deal grows and how long it is held.
The usual shortcut is target divided by holding period: 300 over five years is 60 a year. It treats every deal as if it were carried at cost until it exits. It is not: a deal bought at 10 is carried at 17.4 in its fourth year, and the portfolio's NAV is the sum of cohorts that have all grown.
| Input | Value |
|---|---|
| Private equity NAV | 5,000 |
| Co-investment target, share of private equity NAV | 6% |
| Target co-investment NAV | 300 |
| Holding period, investment to exit | 5 years |
| Gross multiple per deal (no fee, no carry) | 2.00x |
| Implied annual growth in carrying value | 14.87% |
| Average cheque allocated / share of request allocated | 10.0 / 80% |
Cheques go out at the start of each year, carrying values compound at a steady rate to the exit multiple, and each cohort exits at the end of its fifth year. Real deals are lumpier; the method is the same with a schedule per deal.
Step 1: the growth rate. A 2.00x over five years is 2.001/5 − 1 = 14.87 per cent a year.
Step 2: what one year's deployment is worth across the portfolio. At any year end the programme holds four cohorts, aged one to four years. The fifth has just exited. Per unit deployed, they are carried at:
1.1487 + 1.3195 + 1.5157 + 1.7411 = 5.7250
Steady-state NAV = D × Σ Mk/H, for k = 1 to H − 1
D = 300 / 5.7250 = 52.40 a year
In Excel, with M in B1 and H in B2: =300/SUMPRODUCT(B1^(ROW(INDIRECT("1:"&B2-1))/B2))
Step 3: check the shortcut. 60.0 a year produces 60.0 × 5.7250 = 343.5 of NAV, 14.5 per cent over target. On a 5,000 private equity book, that is the difference between 6 and nearly 7 per cent.
Step 4: turn cash into deals. 52.40 at 10.0 a deal is 5.2 closed deals a year. With 80 per cent of each request allocated, the programme must ask for 65.5. How many offers that takes is worked in how much deal flow a co-investment programme needs.
| Year | Deployed | NAV at year end | Distributions | Net cash |
|---|---|---|---|---|
| 1 | 52.4 | 60.2 | 0.0 | −52.4 |
| 2 | 52.4 | 129.3 | 0.0 | −52.4 |
| 3 | 52.4 | 208.8 | 0.0 | −52.4 |
| 4 | 52.4 | 300.0 | 0.0 | −52.4 |
| 5 onwards | 52.4 | 300.0 | 104.8 | 52.4 |
The target is reached in year four, and from year five the programme is self-funding: each exiting cohort returns 104.8 against 52.4 going out. That is the other figure the investment committee needs. A steady co-investment programme at 2.00x hands back 52.4 a year of surplus cash, which has to be planned for in the wider portfolio rather than discovered.
| Holding period | 1.5x | 2.0x | 2.5x |
|---|---|---|---|
| 4 years | 81.4 | 70.0 | 62.2 |
| 5 years | 61.0 | 52.4 | 46.5 |
| 6 years | 48.8 | 41.9 | 37.1 |
Holding period moves the answer more than the multiple. A year shorter, at 2.0x, takes the need from 52.4 to 70.0; a year longer brings it to 41.9. When exits are slow, a programme on a fixed deployment budget drifts over target; when they speed up, it falls under. The multiple works the same way: deploy 52.4 a year and earn 1.5x instead of 2.0x, and NAV settles at 257.8, 14.1 per cent short.
The target also moves. If the private equity book grows 5 per cent a year, 6 per cent of it grows too, and deployment must grow with it. In a programme whose budget has grown at that rate, the cohorts already held were sized for a smaller target, so the current year's deployment has to be 59.61, not 52.40, a 13.8 per cent uplift.
Setting the budget once, as target over holding period, and leaving it. The shortcut is 14.5 per cent too high here, and the error compounds with the two things the LP does not control: exit timing and the multiple. Recompute deployment every year from the NAV actually held, the exits actually expected and the target as it now stands. The second mistake is to forget concentration: 5.2 deals a year is a thin portfolio, and the right number of names is worked in how many co-investments an LP needs to diversify.
Annual deployment = target NAV / Σ Mk/H over the ages held. Here 52.4 a year for 300, reached in year four and self-funding from year five. Pace in cash, re-pace every year, and plan for the surplus. The programme economics behind the multiple, including what follow-on reserves do to it, are in the free workbook for this case.
Because deals are carried at growing values, not at cost. With five-year holds at 2.0x, each year's cheque is worth 5.725 times itself across the four cohorts held, so 300 of NAV needs 52.4 a year. Dividing by the holding period gives 60.0, which builds 343.5 of NAV, 14.5 per cent over target.
Roughly one year less than the holding period if deployment is level from the start. In the illustrative case, deploying 52.4 a year with five-year holds takes NAV to 60.2, 129.3 and 208.8 in the first three years and to the 300 target in year four. Front-loading shortens the ramp but creates a vintage concentration.
When the first cohort exits. At 2.0x, a level programme deploying 52.4 a year receives 104.8 a year from year five, so it returns 52.4 a year net. A programme earning 1.5x on the same deployment settles at 257.8 of NAV and returns less, which is why pacing has to be recomputed each year.
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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