How a co-investment deal is structured

Co-investment in private equity is a minority stake an investor takes directly in a portfolio company, on the same terms as the lead fund and right alongside it. The investor isn’t hunting for a company from scratch. The manager has already found it, studied it, and negotiated the price. The investor is being offered a seat in a deal that is already well along. The investor is simply being offered extra room in that deal.

When a fund spots a strong company, it doesn’t always have the room, or the appetite, to fund the whole round on its own. Fund size, limits on how much can go into a single company, and the manager’s own comfort with risk all decide how big a cheque one scheme can write. Co-investment is the answer. The fund manager invites selected investors to put in additional capital, directly into that one deal, alongside the fund.

For investors, it is a way to deepen exposure to a company they already like. Co-investment helps managers close bigger deals without overextending the main fund. Here’s how a typical co-investment structure plays out, from the first look at a deal to the final exit.

Step 1: Sourcing the opportunity

Every co-investment deal begins with the lead fund. A manager might spot a company through its own network, its own research, or promoters it has known for years. Once the fund decides to invest, the next question is simple: is this round bigger than what the fund wants to hold? If it is, the extra portion becomes the co-investment allocation.

Managers usually go to their existing investors first, particularly those who have shown interest before and can decide quickly. Speed matters here. The round has a deadline, and the company isn’t going to wait around.

Step 2: Co-investment due diligence

Just because the fund has done its homework doesn’t mean a co-investor can skip theirs. In practice, it is a mix of trusting the manager’s work and checking it yourself.

The manager shares what it found: 

• the financials, the legal review, the market analysis, and the background on the promoters. The investor then puts their own questions to it. 

• Is the valuation fair compared with similar companies? How much does the business lean on a handful of customers or on one founder?

• Special attention goes to alignment. How much has the fund itself put in? Is the manager's carry linked to this deal's outcome?

Good co-investment due diligence isn’t only about the company. It is about the manager too. As a co-investor, you are partly backing the manager’s judgment, so how fairly deals are allocated and how conflicts of interest are handled matter just as much as the company’s numbers.

Step 3: How the deal is structured and approved

This is where things have changed in India. In September 2025, SEBI amended the AIF Regulations so that Category I and Category II AIFs can now offer co-investment through a dedicated Co-investment Vehicle (CIV) scheme, set up inside the AIF framework itself.

A few rules shape how it works: the older route, a co-investment portfolio manager under the PMS regulations, still exists as an alternative.

The key features of the co-investment vehicle in India:

• Only accredited investors of the relevant AIF can participate.

• One CIV scheme per investee company. A separate scheme is launched for each co-investment, under a shelf placement memorandum filed with SEBI through a merchant banker.

• Ring-fenced assets, with separate bank and demat accounts for each CIV.

• No borrowing or leverage inside the CIV.

• A limit on exposure: An investor’s co-investment in a company through a CIV cannot be more than three times what they have put into that same company through the main AIF scheme. Some institutional investors, such as development finance institutions and sovereign funds, are exempt from this cap.

• No special treatment: the terms for co-investors cannot be more favorable than those of the main AIF scheme in that company. Investors who defaulted on, or were excused or excluded from, the main scheme's contribution cannot co-invest in that company.

• Rights and costs follow your cheque: Each investor’s rights and share of expenses are proportionate to what they contribute.

The practical result is that co-investment now sits inside a regulated, reportable structure. Earlier, such deals were often arranged case by case.

Step 4: Co-investment fees and carry explained

This is the question most investors ask first. In global private markets, co-investments have often carried lower fees, or sometimes no fee and no carry, as a reward for investors who bring capital quickly. India's framework is more restrictive on this point: because co-investment terms cannot be more favorable than the main scheme, fee discounts need careful structuring.

What you should expect to see in the offer documents:

• Management fee: whether one is charged at all and whether it is on committed or invested capital.

• Carry (performance fee): usually charged only on profits above a hurdle rate, if it applies.

• Deal expenses: legal, diligence, and admin costs, normally shared in proportion to each investor’s ticket size.

• Indirect costs: expenses borne at the AIF, affiliate, or portfolio-company level can still reach co-investors in a roundabout way.

Always ask for the full fee waterfall in writing before you commit. Co-investment can work out cheaper than investing through the fund, but it is not automatically free.

Step 5: Holding the investment

Once funds are called and deployed, the CIV holds the stake in the company alongside the main scheme. Co-investors normally get information rights and reporting similar to the fund's investors, though governance decisions usually stay with the manager and sit within the shelf PPM.

Step 6: Co-investment exit strategy

Co-investors usually exit at the same time as the lead fund and on the same terms. That keeps everyone’s interests pointing in the same direction. The manager can’t quietly sell its own stake first and leave co-investors behind. The common routes are

• IPO, with units sold during or after the lock-in period.

• Strategic sale to a larger company or another investor.

• Secondary sale to another financial investor.

• Buyback by the promoter or the company.

Under the SEBI framework, a CIV is tied to a single investment and is wound up once that investment is exited. Returns are distributed after fees and carry, if applicable.

It helps to see co-investment as an add-on to fund investment, not a substitute for it. A common approach is to build a core portfolio through funds, which gives you spread across many companies, and then use co-investments to lean in where your conviction is highest.

A CIV scheme is open only to accredited investors of the related AIF. So for an HNI, the first step is usually to check whether you qualify as an accredited investor, and the second is to be an investor in the main fund. The co-investment offer follows from that relationship.

Benefits and risks of co-investing alongside a fund manager

Benefits

• Access to deals curated and diligenced by an experienced manager

• Potentially lower fee drag

• Targeted exposure to a company you believe in

• Alignment, since the fund is invested on the same terms

Risks

The upside is clear: you get access to a deal the manager has already vetted, with potentially lower fee drag. The risks are just as real and worth stating plainly:

• Concentration: with one company, you have one point of failure.

• Illiquidity: unlisted holdings can take years to exit.

• Time pressure: short decision windows can make it harder to do your own diligence properly.

• Information dependence: you rely heavily on the manager's findings.

• Adverse selection: managers may be more willing to share deals they are less sure of.

A well-run co-investment structure gives investors targeted access to a deal the manager has already vetted, inside a framework SEBI now formally recognizes. Even so, read the PPM carefully, check the fee waterfall, do your own diligence, and size your ticket to an amount you can comfortably afford to lock away.