How much should I co-invest?

I am currently an Senior Associate at a MM fund with strong historical returns (3x-4x MOIC over an, on average, 4-6 year hold period across their exits). As a benefit of the firm, we are allowed to co-invest on a deal-by-deal basis (no management fees) - looking ahead, we have a few sizable deals in the pipeline for 2024 that I would like to contribute to. To add context to my specific situation, I have ~$300k to my name which is mostly relatively liquid ($250k liquid to semi-liquid, $50k in retirement accounts). I recognize this answer varies based on my financial goals/conviction in the particular deal, but I would really appreciate any advice from anyone who has found themselves in a similar situation.

Thank you all in advance.

 
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Starting my PE role this summer and thinking through the same thing and in a similar situation. Way I thought about it was private v public and liquid v non-liquid.

Any co invest money I’d put in I would have to feel comfortable not seeing (potentially ever), but definitely not for the next 4-5 years at least. Couldn’t be an amount I’d lose sleep over as I already do enough of that with this job.

Portfolio allocation wise, illiquid investments like co invest thus wouldn’t be more than 25-30% of my portfolio. I value access to my money, but it’s personal preference.

We all like to think our fund will 3-4x every time, but if that’s the average with a few home runs, then there’s going to be a few duds. Hardly experience the same risk in large cap public stocks of it going straight to zero. Risk you take for the (hopefully) higher returns. Thus, would average in on a deal by deal basis and keep this in mind when thinking of portfolio allocation.

In your situation, that translates to roughly 5-10K per deal per year, assuming your firm closes 3-4 deals a year.

Do you have any investment minimums? Typically it’s 5 or 10K. Does your fund allow you to defer portions of your bonus into co invest? Have heard of this at others and it seems like a win win for everyone except Uncle Sam (making it a win win win) as you don’t pay taxes up front.

 

Like most things in life - in moderation. PE investments are way riskier than you may think. If you choose to co-invest - do a reasonable amount. You are triple-levered - (1) the underlying investment itself is levered, (2) you are levered to performance through co-invest, (3) your career/job/income are levered to the performance of the underlying investment. If underlying investments are poorer than expected - (1) through (3) may be simultaneously impacted adversely. 

 

Very much appreciate the responses by everyone. I think this will ultimately be my approach when the time comes this year (consistent $10k-$15k/deal unless an a “obvious” home run). We put a 1.0x liquidation preference on all of our deals, so I imagine this limits my downside to an extent (but please correct me if I am wrong). I feel very confident in my firm’s strategy given my GPs’ extensive track record plus how selective we are (0-2 investments/year), but definitely won’t let that sway my decision-making too much (aka not deploying an irresponsible amount of capital into these deals).

 

I agree with the advice to consistently invest smaller amounts vs. trying to hit a home run on one deal. I typically see Associates invest $10-$20k per deal. I can think of one instance where an Associate fell in love with a deal and wanted to put a big chunk of their net worth in it. Ultimately, the firm decided to cap them at $50k on that deal.

 

Candidly I think most advice on this thread is a little conservative. I’m about your level and I assume age.

We are at a point in our life where we really don’t need significant liquidity. You probably don’t have anyone depending on your income and you are young enough to tolerate significant risk and come back from it. It is very likely you will generate a far higher IRR in privates than you can in a liquid PA or ETFs.

Given our investment time horizon, the ability to jam a lot of money into something that can compound rapidly is very valuable. I’d be as aggressive as you can stomach. Currently jamming about 150k / year into my private fund and ok not seeing it for 5-8 years because I don’t need the money. Live off base, roll the bonus into coinvest. 🫡

 

Are they providing a capital call facility? This was for our coinvest, partners funds / SBS. First Republic did ours, the more senior folks, used it double what they would commit. But the junior folks used it as a stress reliever. The bank would cover 50% of your called amount, but they are ahead of you in distributions 100/0 until they get their basis back and then depending on how they structure it’s a waterfall until they their specific return.

 

Anecdotally, co-investing alongside your deals is typically well received by the senior team. Shows you’re willing to put skin in the game and align incentives. I’d say contribute 15% to retirement, save a 6 month emergency fund, keep 10-20% of your income after expenses for general savings / fun, then dump the rest into co-invest. Why not? Nobody ever got wealthy by playing it safe.

 

Think some are overstating the risk of allocating money to PE buyouts vs. public equity benchmarks. Say you commit equal amounts deal by deal to each deal in a fund. Target fund returns are 2.5x / 20% IRR, even if the fund underperforms and generates half of that (10% IRR) you’re still slightly outperforming S&P. Alternatively how likely is it a PE fund has a fund that fails to return cost? Sure it’s a tail scenario but well worth the risk imo

 

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