Does Your PE Fund Let You Co-Invest?

Hi all,

It's been a minute. I wanted to know if your PE fund let's you co-invest and at what level they typically allow this? The Analyst level? Post-MBA Associate? Etc.

Every time I mention co-investing and private equity people assume I am referring to LPs, and that's an entirely different story.

Would really appreciate your input. Even if you are not 100%, let me know what you've heard.

Thanks!

 

 

 

Comments (51)

Oct 23, 2019 - 7:10pm

Thank you!! That's the majority of what I have heard but I wanted to see if there were any new trends on this

Array

Oct 24, 2019 - 2:24am

From my personal experience, PE fund would allow you to invest at the management company level - for VP and above level. Most GP (including the senior members of the fund management team) is expected to put in 5-10% of the fund size with their own money. For co-investing, I think as long as other LPs are fine - shouldn't be a problem. However, I have seen co-investing mostly in real estate deals with smaller funds - rather than a generalist fund with large fund size with more brand named GPs.

Oct 24, 2019 - 12:07pm

Yes - starting at analyst level. No fees or carry on co-invest either.

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  • 1
Oct 24, 2019 - 3:18pm

Not really for me to say as I'm not an associate, but it would depend on the fund/carry structure, deal size/flow, and vesting period.

Co-invest doesn't mean a whole lot to me right now, because I don't have a ton of money to invest. However, you can easily see how carry adds up pretty quickly.

On a 20% promote, $50MM deal, if you make $50MM or such, your 1-2% carry looks pretty good. It depends on if you get carry in deals or in the fund, but you get the idea.

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  • 1
Most Helpful
Oct 24, 2019 - 3:57pm

Middle market firm (~1ish Billion Fund). Associates allowed up to $250,000 co-invest with a line of credit to cover 75% of the capital calls. That $250k was your % of the total fund so to co-invest it all you would have to be around for life of the fund investment period. Most associate would end up co-investing ~100-150K over their 2-year roll.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
  • 7
Oct 24, 2019 - 9:12pm

Correct. then the debt gets paid back from your returns. Virtually impossible not to make money. You are getting 75% leverage investing into LBO's with ~60% leverage... Even crappy PE firms with 10% IRRs means solid returns for you,

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
Oct 24, 2019 - 9:15pm

No. I was liable for it. You had the choice as an associate the % of debt you wanted. However, assuming you didn't leave the firm on bad terms (e.g. - leave your 2 yr program early, etc.) the debt wouldn't start amortizing until 5 years after your last day. In other words, it is likely that you would see exits paying down the debt before you were forced to start paying it down.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
  • 1
Oct 24, 2019 - 10:50pm

My fund (upper middle market) allows co-invest, no fee, no carry starting at analyst and including non IPs. However we do not have leverage and its a bit murky on who qualifies under the qualified purchaser exemptions.

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  • 1
Oct 25, 2019 - 3:52pm

For those of you that don't get leverage, you can usually get interest-only lines of credit from First Republic of Silicon Valley Bank. PE associates are amazing prospective long term clients. My employer brought them into our office to have all the associates setup with one of these firms directly.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
  • 1
Jun 18, 2020 - 9:42pm

Unless you've seen otherwise, FR will only provide a loan with a minimum of $60k if you have cash / public equities in a non retirement account at 1.5x the value of the loan (so you need $90k to qualify). SVB will only do a line of leverage if you have a $250k line of credit with them to invest, or if you've formed a group with other employees and have a group of people above $250k.

Oct 28, 2019 - 3:37pm

Please let me know if I am interpreting this thread correctly.

PE employees are co-investing in their funds by taking out personal lines of credit?
If true, it reaffirms my bubble thesis.

If only there was easy way to short private equity. The illiquidity premium may live on for a while. Unsophisticated LPs (pensions) love mark-to-model accounting, and the illusionary smooth returns.

Oct 28, 2019 - 3:45pm

Co-Investing can happen in many different forms. Some funds do allow for employees to borrow from their year end bonus, though this is not the standard.

For the most part employees at the post-MBA associate level are able to co-invest but there are exceptions to this. Some funds let analysts do this as well. Some also require minimums for the investment size.

According to one user though some are taking personal lines of credit to do this if their fund requires a minimum - atleast that was my understanding.

Array

  • 1
Oct 28, 2019 - 3:52pm

Thanks for the comment.

In my experience, HFs let employees invest in $250k clips. This happens after several years of saving. Whether it's a good idea to pile into your own fund (as a non GP), is another matter.

I'm surprised to hear that PE employees would co-invest with leverage. A reasonable markdown (see WeWork) will obliterate those who are all in on the fund.

Oct 28, 2019 - 4:06pm

Yeah everything is over inflated now VC and PE wise. A lot of that has to do w SoftBank setting a standard of creating massive funds and throwing money all over the place. WeWork is just one of their soon-to-be-many disasters..

A lot of people go into co-investing with too much trust. I would never take out a line of credit and I'm sure this happens in growth-stage VC funds too.

Array

  • 2
Jun 18, 2020 - 9:44pm

In theory, if you're leveraging up 50/50 the fund would have to achieve a 0.5x for the bank to get repaid. I don't have the numbers in front of me but I can't imagine there's many funds that achieve less than 0.5x, All the while the bank is charging an interest rate paid in cash out of the persons salary and even if the fund does less than 0.5x the person is individually liable.

  • Principal in PE - LBOs
Jan 14, 2022 - 10:19am

At the fund level, you'd have to be devastatingly bad to lose money. PE as an asset class is a pretty safe bet.

Cherry picking a single venture investment  (WeWork) that happens to be one of the premier dumpster fires of the last 5-10 years isn't exactly an intellectually honest framework.

Go look at the calpers PE database or any of the public PE firms fund performance. 1.8-2.0x MOIC is pretty bankable at a place like Blackstone. There's lesser known LMM and MM funds that absolutely crush it where 2.5-3.0x is pretty bankable. Put 2-3x leverage on that and see what it spits out. The vast majority of wealth creation in the industry is not from base+bonus. It's from carry and these sorts of comp enhancers.

Depending on where you work and the track record, levered co-invest can be a very meaningful wealth creation tool.

Oct 28, 2019 - 5:14pm

I am a senior associate at a small growth equity firm and junior employees get unlimited 1x levered co-invest on a deal-by-deal basis, with the "leverage" paid out on exit out of the carried interest pool. For example, if an associate invests $50k in a deal that returns 3x MOIC, they would get a distribution of $150k for their investment plus an additional $150k from the levered co-invest.

Nov 11, 2019 - 6:22am

Couple of blue chip large cap funds have a programme that lets you end up with $200-300k investment over a 2-year programme, with leverage ranging from 0% (only a one-year advance on the bonus on a rolling basis) to 75% @ ~4.5% (not the best interest rate).

People commit either an amount within an eligible range to the fund and receive pro-rata capital calls everytime the fund issues / LPs receive a call, or at other funds commit a fixed absolute amount ($10k, $20k, $30k) per investment - in the former scenario the private portfolio distribution / diversification would match the fund's (i.e. large deals = large exposure), in the latter the personal portfolio distribution would differ from the fund's (largely a good thing, as small deals tend to outperform larger ones).

In addition, some funds issue "shadow" co-investment / equity, which vests over a couple of years and effectively is a non-recourse interest-free loan (e.g. $75k shadow co-investment makes 3x, associate gets 2x proceeds but repays the principal; if it makes

  • Associate 1 in PE - LBOs
Nov 15, 2019 - 1:52am

Curious if you can share - at a MF myself - who does this? Haven't seen this so pretty curious

Nov 19, 2019 - 10:39am

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  • Analyst 2 in IB-M&A
Apr 8, 2021 - 6:33pm

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