Monkeys,
A few years ago I asked this forum whether it was a smart idea or not to lever up on my employee co-invest (see this thread: https://www.wallstreetoasis.com/forum/private-equity/levering-up-for-co-invest-good-or-bad-idea). Three years later I figured I'd provide an update to this community to give-back and help people better understand how PE employee co-invest works. A few caveats and notes below:
- I no longer work at the GP that this employee co-invest is linked to
- All figures and numbers are 100% vested
- Employee leverage was provided up to a $ cap (I put $175K as a hypothetical example); I did not take on additional leverage from family
- I won't provide any color on fund vintage or identifying information on my former employer but fund size is >$10B+
- Co-invest is offered fee and carry-free on a deal-by-deal basis
- Numbers are rounded for ease of reference and are directionally accurate
During my Associate (and Senior Associate) years I contributed across two funds as I joined mid-fundraise.
My main takeaway is that unless you have access to employee leverage; employee co-invest is just an OK value proposition. I put in about ~$100K of my own capital with an additional $175K of leverage (hit my employee cap). I know it's still quite early in the fund life-cycle so silly to expect material gains but dumping into the S&P or QQQ would still have been a better option. I expect to end up closer to a 2.5x MOI on my money when all is said and done (vs 3.0x+ initially as I hoped).
That said, my co-invest is non-recourse and my leverage facility is offered at a very low interest rate so it's basically free money/impossible to lose on this deal. I encourage all PE Associates to max out their employer credit line but limit the amount of personal capital deployed. A few additional stats below:
- One investment was a dud (0.0x MOI due to bankruptcy)
- Two investments were 2.5x+ MOIs however most fell within a typical distribution curve (1.2x - 1.5x MOIs so far)
- The timing of when I joined was both fortunate and unfortunate; I missed out on an excellent deal that was closed 3 weeks prior to me joining (which is >2.0x+) but also avoided a few meh deals that are tracking to a 1.5x final MOI
Happy to answer any additional questions people might have.
Based on the most helpful WSO content, here are the key takeaways from the PE employee co-invest update:
Leverage and Returns:
Investment Performance:
Timing and Opportunity:
Advice for PE Associates:
This update provides a realistic perspective on the pros and cons of PE employee co-investments, emphasizing the importance of leverage and timing in achieving favorable returns.
Sources: What returns have you achieved from co-investing in your fund?, What returns have you achieved from co-investing in your fund?, https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, PE Outlook over the next decade, Corp Dev LBO returns question: Levered and Unlevered IRR
Given it’s on a deal by deal basis, did you size your invested dollars differently in certain deals, or did you stick to the same dollar amount for each? Just curious
Nah, the way it worked for me was that during the co-invest calendar year (usually around June/July to align with most Associates start/stop dates) you elected to invest $x per $10M of invested capital. So you weren't able to cherry-pick deals or allocate more/less to a specific one.
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