A co-investment is always a second helping of a company the investor already owns through the fund, so a single-name limit tested on the cheque alone is tested on the wrong number.
Add the direct cheque to your pro rata share of what the fund holds in the same company. An LP with 10 per cent of a fund that puts 150 into Company X already owns 15 of it; a 40 co-investment then takes total exposure to 55, or 1.10 per cent of a 5,000 plan, against a 1 per cent single-company limit that the cheque alone, at 40, appears to pass. The look-through adds 37.5 per cent to the direct exposure, and the largest compliant cheque is 35, not 50.
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 →
Most co-investment mandates contain a single-name limit: no more than a stated share of plan assets, or of the private markets allocation, in any one company. The limit is usually written well. The test is often run badly, on the co-investment cheque alone, because that is the number on the approval memo. But a co-investment is by construction a company the investor already owns through the fund, so the exposure the limit is meant to cap is always larger than the cheque.
| Input | Value |
|---|---|
| Plan assets | 5,000 |
| Single-company limit | 1.0% of plan assets = 50 |
| LP commitment to Fund A | 100 |
| Fund A size | 1,000 |
| Fund A's equity cheque in Company X | 150 |
| Proposed co-investment, same price and terms | 40 |
| Fund A carried interest | 20% |
Look-through exposure = direct cheque + Σ (LP commitment ÷ fund size) × fund's holding in the company
LP share of Fund A: 100 ÷ 1,000 = 10%. Held through the fund: 10% × 150 = 15.0. Total: 40 + 15.0 = 55.0, which is 1.10 per cent of plan assets and 110 per cent of the limit.
Largest compliant cheque = limit − look-through = 50 − 15.0 = 35.0. In Excel: =Plan*Limit-SUMPRODUCT(Commitments/FundSizes,FundHoldings), one row per fund that holds the company.
Where funds report the investor's own share of each holding, use that figure rather than the commitment ratio: it already reflects excused investors, side-vehicle splits and any difference between the fund's commitments and its called capital.
| Test | Exposure | Share of plan | Against the limit | Largest cheque |
|---|---|---|---|---|
| Direct cheque only | 40.0 | 0.80% | 10.0 headroom | 50.0 |
| With look-through at cost | 55.0 | 1.10% | 5.0 over | 35.0 |
| Look-through net of carry | 52.0 | 1.04% | 2.0 over | 38.0 |
The direct test approves a deal that breaches the policy on day one. The look-through holding is 27.3 per cent of the true exposure, and it is invisible on the co-investment memo unless someone puts it there.
The third row is a refinement worth knowing about rather than a reason to relax the test. Once a fund is past its catch-up, the investor keeps only 80 per cent of each further gain on the fund's holding, so its economic sensitivity to Company X through the fund is 15.0 × 0.80 = 12.0. That is a measure of exposure to price movements, and only applies while the fund is in carry. A limit written to cap concentration of capital should be tested on the 55.0.
| Change in value of X | Direct | Through the fund | Total | Share of plan | Against the limit |
|---|---|---|---|---|---|
| −50% | 17.5 | 7.5 | 25.0 | 0.50% | −25.0 |
| 0% | 35.0 | 15.0 | 50.0 | 1.00% | 0.0 |
| +25% | 43.8 | 18.8 | 62.5 | 1.25% | +12.5 |
| +50% | 52.5 | 22.5 | 75.0 | 1.50% | +25.0 |
| +100% | 70.0 | 30.0 | 100.0 | 2.00% | +50.0 |
A position sized exactly to the limit at entry is in passive breach after its first write-up. That is the outcome everyone hopes for, so the mandate needs to say whether the limit applies at commitment only or at every valuation date, and what happens on a passive breach. Without that sentence, the best-performing deal in the programme becomes a compliance exception.
The second route. If the investor is also in Fund B, with 50 of a 500 fund, and Fund B holds 80 of the same company (a club deal, or a continuation vehicle), look-through rises by 8.0 to 23.0, and the largest compliant co-investment falls to 27.0. Run the sum across every fund the plan holds, not just the sponsor's.
Testing the limit on the cheque because the cheque is the decision. The decision is the cheque, but the risk is the company, and a co-investment is always a second helping of a company already in the portfolio. A limit grid that measures look-through for funds but direct-only for co-investments counts the same exposure in one place and misses it in the other. The deal-level economics that make a co-investment worth the concentration are set out in how much worse co-investment deals can be and still beat the fund, and how the deal count spreads that risk in how many co-investments an LP needs to diversify.
Exposure is the cheque plus the investor's share of every fund's holding in the same company: 40 plus 15.0 here, 55.0 against a limit of 50, so the largest compliant cheque is 35.0. Decide in the mandate whether the limit holds at entry or at every mark. The working documents for the book include the mandate with numbers in it and a limit grid measured on look-through, ready to fill in for your own programme.
Yes, or the limit measures the cheque rather than the company. In the illustrative case a 40 co-investment passes a 50 limit on its own, but the investor already holds 15.0 of the same company through its 10 per cent share of the fund, so total exposure is 55.0 and the policy is breached on day one.
A breach caused by a change in value rather than a new investment. A position sized exactly to an illustrative limit of 50 is at 62.5 after a 25 per cent write-up and at 75.0 after 50 per cent. The mandate should state whether the limit applies at commitment only or at every valuation date.
Only for a sensitivity measure, and only while the fund is in carry. Past the catch-up the investor keeps 80 per cent of each further gain, so 15.0 held through the fund moves like 12.0. A limit on concentration of capital should still be tested on the full 15.0, giving 55.0 rather than 52.0.
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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