Associate level co-invest
Has anyone done it? If so, how much did you put in and what does your leverage look like? What happens if you leave the firm after 2 years?
Recently got offered the opportunity but not sure if I’m liquid enough to make that commitment.
Based on the most helpful WSO content, co-investing opportunities at the associate level in private equity firms are indeed a reality, though the specifics can vary widely from one firm to another. Here's a breakdown of the key points related to your query:
Opportunity at Associate Level: It's not uncommon for PE firms to offer co-investing opportunities to their employees, including those at the associate level. This allows associates to invest alongside the firm in deals, potentially benefiting from the firm's investment acumen and the performance of the portfolio companies.
Investment Amount: The amount an associate can or should invest can vary significantly. It depends on the firm's policy, the deal size, and the associate's financial situation. There's no standard amount, and it's essential to consider your liquidity and risk tolerance before committing.
Leverage: Some firms may offer leverage to their employees for co-investing, often in the form of a loan. This leverage is almost always recourse, meaning you would be personally responsible for repaying the loan if the investment does not perform as expected. The terms of leverage, including interest rates and repayment schedules, can vary.
Exiting the Firm: The implications of leaving the firm after co-investing depend on the specific terms of the co-investment agreement. Some agreements may allow you to maintain your investment, while others might require liquidation or selling your stake back to the firm or other investors. It's crucial to understand these terms before making a commitment.
Considerations: Before deciding to co-invest, consider your liquidity, the potential risks and rewards of the investment, the terms of leverage (if applicable), and the implications of leaving the firm. It's also wise to consult with a financial advisor to ensure that the investment aligns with your overall financial goals and risk tolerance.
Remember, co-investing can offer a unique opportunity to benefit from the deals your firm is making, but it also comes with its risks, especially when leverage is involved. Make sure you're fully informed and comfortable with the commitment before proceeding.
Sources: What returns have you achieved from co-investing in your fund?, Does Your PE Fund Let You Co-Invest?, What returns have you achieved from co-investing in your fund?, Direct Invest to FoF/Co-Invest?, PE Co-Investment Associate Compensation
Bump
Currently have around $240k in contributed equity in co-invest (deal-by-deal basis) leveraged to around 65% LTV - if I leave the firm the coinvest essentially gets treated the same as institutional coinvest accounts (essentially fee-free contributions by LPs the firm uses as a sweetener for some large pension funds). I'm fortunate to be in the position where I don't have to worry about liquidity issues / had enough saved up, so I was able to be very aggressive with coinvest. Logic for putting so much in was that (1) I have more conviction in the work of my coworkers and my own than I do in other alternative investment paths where I'm essentially along for the ride, (2) Historically the firm's funds have had great track records with a loss ratio close to 0, (3) much better avenue to wealth creation with the potential for the deals I coinvested in to average 3x+ MOIC over 4-6 years fee-free than to just park the money in some index fund achieving 9-10% annual returns, and (4) I'm still young and I have a good support network so the risk / reward trade off is worth it at my age.
Thanks for sharing, very helpful. Any advise on how you would allocate how much to co-invest? Apparently depends on personal financial status and risk tolerance but was wondering what are some top factors to consider. I heard many of my colleagues max out co-invest amount allowed
The two most important factors (for me at least when I was considering) are (1) liquidity and (2) your desired risk / reward profile. Your coinvest will be locked up for several years at least, and your mentality should essentially be to treat it as if it's gone from your net worth for 4-5 years. Decide how much easily accessible money you'll need over the next 4-7 years based on your lifestyle (e.g. whether or not you'll be buying a house, getting an MBA, your regular lifestyle expenses, large ticket items like a car or new furniture, etc), multiply that by 1.5 for safety, and then look at how much excess cash / investments you have after that for coinvest. You also need to decide if you can handle the mentality of having a lot of your money locked up for years. Furthermore, if you use leveraged co-invest, you also have to take that into consideration for your liquidity. I pay low to mid single digit % for my line of credit for leveraged coinvest, but at the level I coinvested that's still a hefty chunk of cash. Thankfully, I live a pretty simple lifestyle and have more than enough cash flow to handle it, but if you want to lever up or can, you really need to take into account your cash flow.
Wrt. risk / reward, you just have to acknowledge that there's no such thing as free money and have the mentality that you are taking a lot of risk with coinvest - you have close to zero liquidity, there's still a chance your investments go to 0, and if you use leverage that will hurt even more. I can't help you with this - each person has their own stomach for risk and reward. Personally, I viewed it as being worth the risk because I'm still young. If I lose half a million from coinvest, that will hurt without a doubt, but I'm in my 20s and I have a long career to make up for it, so the potential returns are worth the risk for me. I also look to my parents as an example - they worked in tech in the mid 90s through the early 2000s, saw a sizable portion of their net worth evaporate after the dot-com bubble burst, my mother pivoted to finance, slowly recovered their net worth through the 2000s, and then got hit pretty hard with the GFC. Yet, after all of those setbacks, they still ended up at a place where they are more than enough comfortable today. Looking at my parents' trajectory and how they recovered from such setbacks, I've accepted that even though the risk is high, it's a risk I can afford and recover from over the long term. With coinvest, you should go into it with the mentality that you're putting your money into something else with a high risk / reward profile; ask yourself, can you stomach losing $200k from a very speculative investment? If the answer is no, don't put that much into coinvestment. At the end of the day, there is nothing wrong with having a lower risk / reward profile - remember, the vast majority of whie collar professionals put most of their money into SPX or other broad index funds and still end up doing well for themselves. Don't FOMO into something your mentality can't handle when slow and steady returns are available.
Stupid question but do you pay your interest on the entire loan or just the portion that is drawn during a capital call?
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