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I don't think so. But wait for more responses before making any conclusions...
Co-invest in PE is supposed to be long term. But (pre-MBA) PE associate is usually a "two years and out" program. I don't know how someone who is expected to leave after two years can get to do co-invest.
I would guess it is not typical. At my firm and many of my firms where I have friends, it tends to only be available to more senior level guys. I think it tends to be a nuisance from a documentation standpoint to have a bunch of very small investors in deals with many millions of equity so it just is not that prevalent. I think firms typically use it at the associate level to attract talent because a kid has an offer some place else and it is another perk or they are offering less cash but offering the opportunity to co-invest to make up for it.
Many top MM and MFs allow associates to co-invest. Know some even let you leveraging co-invest at very low interest rates.
Are they post-MBA associates or pre-MBA associates? I won't be surprised if post-MBA associates are allowed to co-invest. But I would be surprised if they allow pre-MBA associates to co-invest.
Pre-MBA. Pretty normal part of compensation package offered at many firms.
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What happens when they are supposed to leave the firm after two years? The investment is illiquid, so they can not cash it out. Would they keep the investment after they leave the firm?
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do you not understand how co-invest and capital structures work?
Pre-MBA Associates at my firm co-invest, and there is some borrowing against end of year bonus to temporarily finance. I have heard some funds do co-invest on a deal-by-deal basis, but we basically pick a number for the year, and any deal we do gets that amount.
When you leave, you keep what you have until the investment is realized, but once you're no longer part of the fund, you could get diluted if additional equity is required for follow-ons / other reasons.
Do firms typically offer either co-invest or carry as compensation or do they offer both? How would you evaluate each option?
Firms will offer co-invest before they offer you carry. The GP has already committed 2% to 5% of the fund (on a $500M fund this means the GP is on the hook for $10M to $25M). Many times these dollars are coming from the founders so they are happy with "offering" you the chance to decrease their own equity commitment. There is also risk that you lose the entire co-investment amount for a particular deal if it goes sour. You invest real dollars at the date of acquisition and you receive real dollars when liquidated. Also, typically your returns are net of a high % of the fees so you will have better returns than a regular LP.
Carry requires no upfront capital investment and entitles you to a percent of the profits after the fund's hurdle is met (0% of the invested capital, 20% of the profits after X hurdle). The dynamics of carry vary from fund to fund, but carry is usually a long-term game (European vs American carry) so you might not see cash for a while. Carry also vests over a certain time/funds deployed.
We allow our youngins to co-invest. We don't manage outside money, it is all our own capital, so every additional dollar of equity we can find we'll use. We remind them on every deal that it may be 14 years before they get their principal back - once reminded of this they usually cut the amount they're willing to invest by 50%.
14 years sounds like a crazy lockup period...certainly enough time to exit even the most illiquid of positions, no? Or are you saying may be 14 years in the case that a few positions in a fund go south and capital markets aren't permitting an adequate IRR at the time of ideal exit? Or more likely I just don't understand your funds investment mandate.
EDIT: dang just saw this is a 2016 post, question still stands I suppose though lol
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