structuring-co-investment-allocations

# Structuring Co Investment Allocations

Designs co-invest offerings with allocation methodology, LP terms, and fee/carry structure for direct investment opportunities.

## When To Use

- Structuring a co-investment vehicle alongside a main fund deal
- Allocating excess deal capacity beyond fund concentration limits or GP appetite
- Designing LP co-invest programs with standing or deal-by-deal terms
- Setting fee and carry arrangements for co-invest participants
- Determining allocation priority among LPs with co-invest rights or side letter commitments
- Evaluating whether to offer co-invest on a no-fee/no-carry, reduced-fee, or full-economics basis

## Inputs To Gather

- **Deal parameters**: Total enterprise value, equity check size, fund commitment amount, and excess capacity available for co-invest
- **Fund documents**: LPA provisions on co-invest rights, concentration limits, and GP discretion language
- **Side letter commitments**: LP-specific co-invest rights (pro-rata, priority, minimum allocation thresholds)
- **LP profile data**: Commitment size to main fund, historical co-invest participation rate, response time track record, and LP type (pension, sovereign wealth, endowment, family office, etc.)
- **Target economics**: Proposed management fee (if any), carried interest, preferred return, and waterfall structure for the co-invest vehicle
- **Tax and structuring constraints**: Blocker entity needs, UBTI sensitivity, ERISA plan status, and non-US LP withholding considerations
- **Timeline**: Expected signing-to-close window and LP response deadline

## Workflow

1. **Size the co-invest pool** — Calculate excess equity beyond the main fund's allocation. Factor in concentration limits (typically 10-20% of fund NAV per deal), GP co-invest, and any follow-on reserve needs. Determine total co-invest capacity available.

2. **Map LP eligibility and priority** — Review side letters and LPA for contractual co-invest rights. Rank LPs into tiers:
   - **Tier 1**: Contractual pro-rata or priority rights (must be offered first)
   - **Tier 2**: Discretionary allocation based on relationship, fund commitment size, and strategic value
   - **Tier 3**: New or smaller LPs offered remaining capacity
   - Flag any most-favored-nation (MFN) provisions that could cascade co-invest rights [VERIFY]

3. **Design the allocation methodology** — Select and document the approach:
   - *Pro-rata by commitment*: Each LP offered co-invest proportional to main fund commitment
   - *Rotational/sequential*: LPs offered deals in rotation to spread access over fund life
   - *Discretionary*: GP allocates based on strategic criteria (speed of execution, sector expertise, relationship depth)
   - *Hybrid*: Contractual rights satisfied first, remaining capacity allocated discretionally

4. **Set fee and carry structure** — Determine the economic terms for the co-invest vehicle:
   - **No fee / no carry**: Most common for large LPs; GP incentivized by management fee on main fund and relationship maintenance
   - **Reduced fee / reduced carry**: Typical range of 0-1% management fee and 0-10% carry
   - **Full economics**: Rare; used when co-invest is structured as a parallel fund or when deal sourcing justifies it
   - Confirm whether economics differ by LP tier or allocation size [VERIFY against side letter MFN provisions]

5. **Select vehicle structure** — Determine the legal wrapper:
   - SPV (most common for single-deal co-invest)
   - Sidecar fund (for programmatic co-invest across multiple deals)
   - Direct LP investment into deal entity (rare; simplifies structure but limits GP control)
   - Address blocker entities for tax-exempt and non-US investors as needed

6. **Draft allocation memo and LP communication** — Prepare:
   - Internal allocation memo documenting methodology, LP rankings, and rationale
   - LP offering materials with deal summary, co-invest terms, timeline, and subscription documents
   - Response deadline (typically 5-10 business days given deal timing)

7. **Finalize and close** — Collect LP commitments, handle oversubscription or shortfalls (scale back pro-rata or offer to next tier), and coordinate with deal counsel on subscription agreements and closing mechanics.

## Output

- **Co-invest allocation memo**: Documents total capacity, LP priority ranking, allocation methodology, and final allocations with supporting rationale
- **Term summary**: Fee/carry structure, preferred return, waterfall mechanics, and any clawback provisions
- **LP communication package**: Deal overview, co-invest terms, response timeline, and subscription instructions
- **Vehicle structure diagram**: Entity chart showing main fund, co-invest SPV/sidecar, blocker entities, and deal-level structure
- **Compliance checklist**: Confirmation that side letter rights are honored, MFN provisions reviewed, and ERISA/tax considerations addressed

## Quality Checks

- Verify all contractual co-invest rights from side letters are satisfied before discretionary allocations
- Confirm allocation methodology is consistent with LPA terms and prior fund practice — deviation from precedent should be flagged and justified
- Ensure fee/carry terms do not trigger MFN cascading that would repricing the main fund [VERIFY]
- Check that ERISA plan participation stays below 25% benefit plan investor threshold in the co-invest vehicle [VERIFY against current ERISA regulations]
- Validate that the co-invest timeline aligns with the deal closing schedule — LP response deadlines must allow sufficient time for internal IC approvals
- Confirm tax structuring (blockers, withholding) is appropriate for the LP mix
- Cross-check that total equity (main fund + co-invest + GP co-invest) equals the required equity check — no gaps or overcommitment