What is co-investment, and why do LPs value it and GPs offer it?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A co-investment is an LP investing directly into a specific deal alongside the fund, on top of its fund commitment — usually in larger deals where the GP needs more equity than the fund alone provides. LPs value it because co-invest is typically offered with reduced or no management fee and carry ('fee-free, carry-free'), which lowers their blended cost and boosts net returns, and it gives them more exposure to deals they like and a closer look at the GP's work. GPs offer it to get equity for big deals without breaching concentration limits or syndicating to rivals, to deepen relationships with key LPs (and reward them ahead of a next fundraise), and to win competitive deals by showing certainty of funds. The tensions: allocation fairness among LPs, speed (co-invest LPs must move fast), and adverse selection concerns (are the best deals kept in-fund or shared?). It's a major and growing part of how large PE deals are financed and how LPs reduce fees.
WHAT INTERVIEWERS LISTEN FOR
- ✓LP invests directly in a deal alongside the fund
- ✓Usually reduced/no fee and carry → lower blended cost for LPs
- ✓GPs use it for big-deal equity, LP relationships, deal certainty
- ✓Tensions: allocation fairness, speed, adverse-selection
COMMON MISTAKES
- ✗Confusing co-invest with the fund commitment
- ✗Not knowing the fee/carry advantage
- ✗Ignoring allocation-fairness issues
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS