Historically, co-investments were used for specific transactions and offered to a select group of strategic Limited Partners (LPs). They were predominantly deployed in the context of infrastructure projects requiring substantial capital commitments. Such structures were not integrated in the core investment strategy and remained opportunistic in nature, as funds were generally able to finance most transactions through their own capital raising.
Today, this dynamic has shifted significantly. Co-investments have become a central component of transaction financing and, more broadly, a key fundraising tool for managers. Access to co-investment opportunities is increasingly viewed as a prerequisite for committing to a fund. In response to growing pressure from LPs, most managers now position co-investment as an integral part of their investment offering.
In practice, co-investments offer advantages for both investors and managers. For investors, they address a number of strategic priorities. First, they offer cost efficiencies: co-investment structures made available to existing investors typically do not charge management fees or carried interest, thereby enhancing net returns. They also provide direct access to underlying assets, enabling investors to select specific opportunities and better control the timing of their capital deployment.
This is particularly relevant in the current environment, where liquidity constraints are prompting investors to manage cash more actively and accelerate the deployment of unallocated capital.
In parallel, the growing sophistication of certain investors, now equipped with in-house teams capable of analyzing, and executing direct investments, has further reinforced the appeal of co-investments as a means of combining greater autonomy with improved performance.
For managers, co-investments have likewise become an essential tool. They facilitate the financing of increasingly large transactions while allowing funds to remain within their concentration limits. They also provide access to a broader investor base, including parties who may not invest in the main fund. This expansion to new investor profiles marks a significant recent development, with family offices in particular emerging as prominent stakeholders alongside traditional institutional investors. Their typically more flexible investment approach allows them to act with greater agility and responsiveness. Moreover, their longer investment horizons, well aligned with private market assets, combined with a preference for direct exposure and greater control over allocations, make co-investments especially well suited to their needs.
With the alternative market moving towards this direction, LPs have shifted from being passive investors to active partners, capable of selecting and co-financing transactions, and enhancing both control and alignment with managers’ strategies.
This shift, however, brings important governance and structuring considerations. Alignment and coordination among stakeholders must be planned from the outset when establishing a co-investment structure. Tax matters, in particular, require careful attention, as certain exemptions that apply to main funds do not automatically extend to co-investments. For example, Circular LIR No. 168quarter/2, issued on 12 August 2025 by the Luxembourg tax authorities, clarified the rules applicable to reverse hybrid structures, notably providing helpful guidance on the concept of a “collective investment undertaking.” In practice, however, these clarifications are likely to benefit only a limited number of co-investment structures, making a thorough assessment of the resulting tax implications essential.
Close collaboration between the manager’s and the investor’s teams therefore remains critical to ensure net returns meet expectations and to support the success of these structures, which have now become a cornerstone of the alternative investment market.