A Look Inside Our Co-Investment Playbook: Top 3 Takeaways

The co-investment landscape has transformed significantly over the past decade. Once the domain of only the largest LPs, co-investment opportunities are now more widely available and have become a common feature in private markets portfolios.

At Cambridge Associates, we’ve witnessed this evolution firsthand. We’re excited to share a few key insights from our own playbook to help you navigate this dynamic environment.

1.   Access + Selection + Execution = Success

We believe success in co-investing relies equally on access to the best deals, rigorous deal selection, and effective execution. Weakness in any area can undermine portfolio outcomes. Luckily today there are multiple ways for investors to add co-investment exposure, including building a direct program, investing in a co-investment fund, or creating a bespoke single client vehicle (typically for larger investors). Adopting the optimal implementation strategy—which may involve combining more than just one of these approaches—is crucial to achieving strength across all three pillars.

Always ask: Is my co-investment program strong across these three pillars? If not, how can I improve my implementation methodology to address any gaps?

2.   Don’t Let Fee Savings Cloud Your Judgment

Co-investments often feature zero management fee and carried interest, making them attractive from a cost perspective. However, fee savings alone shouldn’t drive your decision. As a co-investor, you should have access to detailed underwriting information. Take advantage of this (plus other data sources available to you) to fully evaluate the company alongside the sponsor’s value creation plan, considering historical growth rates and margins, competitive positioning, customer concentration, sector trends, valuation, leverage, exit options and other critical factors that will actually drive returns (or mitigate downside risk).

Always ask: Do the company’s fundamentals support our expected future return, regardless of the fee savings?

3.   Diversification Means More Than A Handful

We believe effective risk management in co-investing requires maintaining proper diversification, which we target at 15-18 active deals (built over three years for new portfolios). Why 15-18? Our experience has shown that this threshold tends to position portfolios well to help capture the outsized winners that have driven returns, while providing a buffer against potential losses, enabling investors to benefit from strong direct exposure with manageable downside. Whether you decide to invest directly or through a co-investment vehicle, you are making a conscience decision to invest in individual deals, partner with a co-investment partner, or construct a portfolio programmatically.

Always ask: Do I have all the essential ingredients (access, selection, and execution) in place to reach optimal diversification?

Co-investments can offer a powerful way to enhance returns, lower costs, and gain targeted exposures for all types of investors. We believe success requires access to robust deal flow, sharp opportunity assessment, and effective execution.

For more insights, listen to the full co-investment episode on our podcast, Cambridge Conversations.

If you’re interested in learning more about co-investing or want to discuss how to build the right portfolio for your needs, contact us to start the conversation.