structuring-co-investment-vehicles

# Structuring Co Investment Vehicles

Designs co-investment fund structures with deal-specific and programmatic formats, fee terms, and allocation methodology.

## When To Use

- Structuring a deal-specific co-investment vehicle alongside a main fund investment
- Designing a programmatic or evergreen co-investment program for repeat LP participation
- Analyzing fee and carry economics for co-invest allocations versus the main fund
- Evaluating allocation methodology across LP tiers (anchor, strategic, standard)
- Reviewing GP obligations under side letters granting co-investment rights

## Inputs To Gather

- **Main fund terms**: fund size, target return, management fee rate, carried interest waterfall, GP commitment percentage
- **Deal parameters**: target company, equity check size, total enterprise value, anticipated hold period, sector
- **Co-invest allocation pool**: total co-invest capacity, number of eligible LPs, side letter co-invest commitments, minimum ticket sizes
- **Fee structure preferences**: no-fee/no-carry, reduced fee/carry, main-fund-equivalent, or hybrid arrangements
- **Vehicle type decision**: deal-specific SPV, programmatic sidecar fund, or blocker entity (for tax-exempt / non-US investors)
- **Regulatory and tax considerations**: ERISA plan asset thresholds, UBTI sensitivity, FIRPTA exposure, withholding obligations [VERIFY jurisdiction-specific rules]
- **GP economics**: whether the GP is waiving or reducing fees to incentivize co-invest participation, offset provisions against main fund fees

## Workflow

1. **Determine vehicle format**
   - Deal-specific SPV: single-asset, formed per transaction, dissolved at exit — simplest but highest administrative volume
   - Programmatic sidecar: committed capital vehicle that invests alongside the main fund across multiple deals — reduces formation friction but requires broader LP commitment
   - Blocker corporation: interposed C-corp or offshore entity for tax-exempt or foreign LPs to avoid UBTI/ECI — adds cost and complexity
   - Choose based on LP base composition, expected deal flow, and GP administrative capacity

2. **Design allocation methodology**
   - Define allocation priority: pro-rata to main fund commitment, rotational, discretionary, or hybrid
   - Set minimum and maximum co-invest ticket sizes per LP per deal
   - Address over-subscription mechanics: scale-back formula, GP discretion, or waitlist rotation
   - Document side letter commitments that guarantee co-invest rights or first-look privileges
   - Specify opt-in/opt-out timelines (typically 5–10 business days from offer)

3. **Set fee and carry terms**
   - **No-fee/no-carry**: most LP-favorable; common for deal-specific vehicles to reward large commitments
   - **Reduced fee/carry**: e.g., 0.5% management fee / 10% carry versus main fund 2%/20%
   - **Main fund parity**: co-invest subject to same economics — less common, used when demand exceeds supply
   - Address management fee offset: whether co-invest fees reduce main fund management fees dollar-for-dollar
   - Define carry calculation basis: deal-by-deal or aggregated across the co-invest program [VERIFY LP agreement language]

4. **Structure the waterfall**
   - Preferred return threshold (typically 8% IRR or aligned with main fund)
   - GP catch-up percentage and rate
   - Carried interest split above the hurdle
   - Clawback provisions: escrow percentage, timing, and GP personal guaranty scope
   - Treatment of organizational and broken-deal expenses (allocated to co-invest vehicle or absorbed by GP/main fund)

5. **Address governance and operational terms**
   - LP consent rights: material amendments, key-person events, related-party transactions
   - Information rights: quarterly reporting, capital account statements, K-1 delivery timeline
   - Transfer restrictions: lock-up period, GP consent to transfer, ROFR mechanics
   - Indemnification and exculpation provisions for the GP in the co-invest vehicle
   - Dissolution triggers and liquidation procedures

6. **Handle regulatory and tax structuring**
   - Calculate ERISA plan asset threshold (25% benefit plan investor test) and structure to stay below or elect the VCOC/REOC exemption [VERIFY current DOL guidance]
   - Evaluate need for parallel blocker entities for tax-exempt or non-US LPs
   - Assess state and local tax filing obligations based on portfolio company jurisdiction
   - Confirm securities law exemptions: Section 4(a)(2), Regulation D, or non-US exemptions for offshore vehicles [VERIFY applicable exemptions]

## Output

Deliver a structured co-investment vehicle recommendation containing:

- **Vehicle summary**: entity type, jurisdiction of formation, anticipated fund life or deal-specific term
- **Allocation framework**: methodology, eligible LP list with committed or indicative amounts, over-subscription protocol
- **Economics table**: side-by-side comparison of main fund vs. co-invest fee/carry terms, including offset provisions
- **Waterfall illustration**: numerical example showing preferred return, catch-up, and carry distribution at target and downside return scenarios
- **Tax and regulatory notes**: ERISA status, blocker structure if applicable, withholding and filing obligations
- **Key LP terms**: governance rights, transfer restrictions, reporting commitments
- **Open items**: flagged decisions requiring GP/LP negotiation or counsel review

## Quality Checks

- Allocation methodology is consistent with side letter co-invest commitments — no LP guaranteed a right is excluded from the allocation framework
- Fee/carry terms are internally consistent: offset provisions do not create double-counting or negative fee scenarios
- Waterfall math is verified with at least two return scenarios (target case and loss case)
- ERISA threshold calculation uses correct denominator (total equity, not total commitments) [VERIFY with fund counsel]
- Vehicle jurisdiction matches GP's existing fund family structure unless deviation is justified
- All terms flagged with [VERIFY] are identified as requiring jurisdiction-specific or deal-specific confirmation before finalization