A co-investment programme is sold on a single sentence: no management fee, no carried
interest, so the blended cost of the portfolio falls. It does fall. On a 10,000 plan with a 15%
allocation, running 15% of commitments through co-investment moves the cost line from 2.54% of net
asset value to 2.17% — 37 basis points, about 4.38 million a year.
That is real money and it is a ninth of the cost line. It is also bought with a new decision
process, dedicated staff, a five-business-day response standard and fewer than three executions a
year — and it comes with a risk term that is almost never stated: the whole advantage is
consumed by a 22.8% total-loss rate on co-invested capital.
The step almost nobody does first
Before any of the cost arithmetic works, a co-investment has to be measured in the same unit
as a primary. Pacing models run on NAV-years — how much net asset value a dollar of
commitment carries, and for how long. A primary commitment is usually taken at about 6.30 NAV-years.
A co-investment is a different instrument and the multiplier has to be re-derived.
NAV-years per unit committed
A primary fund commitment
6.30
A co-investment, drawn in full and held 5 years
7.725
More net asset value per dollar committed
22.6%
A fund draws over five years and distributes before it finishes drawing. A co-investment draws once and returns nothing until exit.
22.6% more net asset value per dollar committed, for the ordinary reason that a co-investment
is drawn in full on the day it closes and returns nothing until exit. Skip this step and the cost
ratio is computed on the wrong denominator, which flatters the programme.
The saving, at six programme sizes
Co-invest share of commitments
Deals a year
Net asset value
Annual cost
Cost / NAV
0%
0.00
1,500.0
38.1
2.540%
10%
1.79
1,533.9
35.3
2.304%
15%
2.68
1,550.9
33.7
2.174%
25%
4.46
1,584.8
30.5
1.922%
30%
5.36
1,601.8
28.8
1.800%
50%
8.93
1,669.6
22.3
1.337%
A 10,000 plan, 15% to private markets, on a 238.1 commitment budget.
Two things in that table are worth more than the headline. First, the shape at the top: at
10% of commitments the fixed overhead — a process, a named decision-maker, standing counsel,
screening capacity — is spread over 1.79 executions a year, and most of the saving goes to
pay for it. There is a minimum viable scale, and “a programme of any size helps” is
the wrong instinct at the small end.
Second, the shape at the bottom. Halving the cost line takes roughly half of all commitments
in co-investment and more than half of net asset value sitting in single assets, which violates
every concentration discipline the same policy documents impose four paragraphs earlier. The
saving does not scale gracefully in either direction.
What the fee advantage is actually worth, priced as risk
Here is the calculation the cost case usually stops short of. A dollar through the fund
returns 1.544 times net. The same dollar into a fee-free co-investment at the same gross performance
returns 2.00 times. So the advantage is 45.6 per 100 — and the question is how much has to go
wrong before it disappears.
Per 100 committed
Value
Primary route, gross
200
Primary route, net of fees and carry
154.4
A fee-free co-investment at the same gross
200
The fee advantage
45.6
Break-even gross multiple on the co-investment
1.544×
as an annual rate, against the fund’s 14.87%
9.08%
Break-even total-loss rate
22.8%
The share of co-invested capital that can go to zero before the fund route wins.
22.8%. That is the whole fee advantage, expressed as the share of
co-invested capital that can be written off before the investor would have been better off taking
the same exposure through the fund and paying for it. It is not a tail assumption. Single assets
do not diversify, and syndicated deals carry a well-known adverse-selection question.
And the constraint that actually binds is neither the budget nor the cap
If the break-even loss rate is about one in four, the programme needs enough names that one
failure is less than one in four of the cohort. That is a deal-count constraint, and it is set by
the budget and the per-deal cap together — two parameters usually chosen independently, by
different people, for different reasons.
Value
Co-investment budget, a year
35.7
Per-deal cap — one third of a 40 fund commitment
13.33
Deals a year the two allow
2.68
One total loss, as a share of the annual cohort
37.3%
Break-even total-loss rate, from above
22.8%
Deals a year needed to survive one total loss
4.39
which means a per-deal cap of
8.14
The usual cap is too large by
1.64×
Not the budget, and not the cap. The number of names the two together allow.
This is the finding. At a per-deal cap of one third of a fund commitment, a 15% budget
buys 2.68 deals a year, so a single total loss is 37.3% of the annual cohort —
comfortably above the 22.8% break-even. The programme is set up so that one failure puts the sleeve
under water against simply having bought the fund. Cutting the cap from a third of a fund
commitment to about a fifth fixes it: same budget, same staff, more names.
One collision worth checking in your own pacing model
If a co-investment carries 7.725 NAV-years and a primary carries 6.30, then adopting a 15%
co-investment policy while keeping a commitment budget solved on the primary multiplier produces
more net asset value than the target, without a single new decision being taken.
Co-investment hold, years
NAV-years
Blended
Against the primary assumption
3
3.98
5.953
-5.5%
4
5.73
6.214
-1.4%
5
7.73
6.514
3.4%
6
10.02
6.858
8.9%
7
12.66
7.254
15.1%
The investor does not choose the hold period. The sponsor does.
At a five-year hold the portfolio runs 3.4% over target; at seven it runs 15% over; at three it
runs under. An investor cannot choose the hold period of a co-investment, so this is not a dial,
it is an exposure. The honest treatment is to re-solve the commitment budget on the blended
multiplier, and to re-solve it again when the realised hold turns out to differ from the
assumption.
How to put the decision to a committee
Not as a cost-reduction exercise with a risk footnote. As a bet that selection on single
assets stays under a loss rate of about one in four, in exchange for 37 basis points — and
a bet whose survivability depends on a per-deal cap that is usually set by convention.
Stated that way, the two questions to ask the manager fall out on their own. What is your
realised record on syndicated deals against the ones you retained? And how many names will this
budget actually buy at the cap you are proposing?
The workbook behind this article
Every figure above is a live formula in the companion file for
The Private Markets Limited Partner, which also holds the NAV-years derivation, the blended cost at six programme sizes, the deal-count constraint and the pacing collision. It is free, and it needs no account and
no email address.
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How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
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The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
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Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
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