The fee saving is real and small. The binding constraint is not the budget or the per-deal cap but the number of names the two together allow.
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.
Worked in full in The Private Markets Limited Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
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.
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% |
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.
| 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% |
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.
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% |
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.
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× |
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.
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% |
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.
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?
This article is one calculation from The Private Markets Limited Partner. 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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