Credit Co-Investing

Based on the most helpful WSO content, here’s a breakdown of your questions regarding credit co-investing:

1. What % of credit fund LPs actually want to do co-investing alongside the GP?

   • The interest in co-investing varies significantly among LPs. Some LPs actively seek co-investment opportunities as they are often fee-free or carry-free, which can enhance returns on high-conviction investments. However, not all LPs are equally interested, as co-investing requires additional resources, expertise, and due diligence capabilities. Some LPs prefer to rely solely on the GP's expertise and avoid the complexities of direct involvement.

2. Do co-investors normally have veto rights on any investment, or do they rely on the GP's expertise?

   • Co-investment agreements can differ widely. In some cases, co-investors rely entirely on the GP's underwriting and credit selection expertise, participating without conducting detailed due diligence themselves. This is particularly common when LPs trust the GP's track record and processes. However, other co-investors, especially those with sophisticated internal teams, may perform their own due diligence and even have veto rights or the ability to decline participation in specific deals. Some LPs set up blind pool co-invest accounts with the GP, which simplifies the process and reduces the need for deal-by-deal decision-making.

3. How frequently do timing issues arise, and do they impact deal execution?

   • Timing issues can indeed be a challenge in credit co-investing. GPs, being more sophisticated and experienced, can often approve credit deals within a week or two. Co-investors, on the other hand, may require more time for internal approvals and due diligence, which can delay the process. This timing mismatch can sometimes jeopardize the ability to close a deal, especially in competitive situations where other parties can move faster. To mitigate this, some GPs streamline the co-investment process or work with co-investors who have pre-approved capital commitments.

4. What is the duty owed to co-investors when selling debt in the secondary market?

   • The duty owed to co-investors in secondary market transactions depends on the specific terms of the co-investment agreement. In some cases, GPs may have an obligation to inform co-investors and provide them with the opportunity to sell their share alongside the GP. However, there are also scenarios where co-investors are free to pursue liquidity independently, without coordination from the GP. The level of involvement and communication is typically outlined in the co-investment agreement, and there is no uniform standard across the industry.

If you’re diving into the credit co-investment space, understanding these nuances and aligning with a GP whose processes and terms match your expectations will be key!

Sources: Differences between Co-invest and Secondaries?, What returns have you achieved from co-investing in your fund?, What returns have you achieved from co-investing in your fund?