casemark/structuring-co-investment-allocations

Structuring Co Investment Allocations

Designs co-invest offerings with allocation methodology, LP terms, and fee/carry structure for direct investment opportunities.

When To Use

• Structuring a co-investment vehicle alongside a main fund deal
• Allocating excess deal capacity beyond fund concentration limits or GP appetite
• Designing LP co-invest programs with standing or deal-by-deal terms
• Setting fee and carry arrangements for co-invest participants
• Determining allocation priority among LPs with co-invest rights or side letter commitments
• Evaluating whether to offer co-invest on a no-fee/no-carry, reduced-fee, or full-economics basis

Inputs To Gather

• Deal parameters: Total enterprise value, equity check size, fund commitment amount, and excess capacity available for co-invest
• Fund documents: LPA provisions on co-invest rights, concentration limits, and GP discretion language
• Side letter commitments: LP-specific co-invest rights (pro-rata, priority, minimum allocation thresholds)
• LP profile data: Commitment size to main fund, historical co-invest participation rate, response time track record, and LP type (pension, sovereign wealth, endowment, family office, etc.)
• Target economics: Proposed management fee (if any), carried interest, preferred return, and waterfall structure for the co-invest vehicle
• Tax and structuring constraints: Blocker entity needs, UBTI sensitivity, ERISA plan status, and non-US LP withholding considerations
• Timeline: Expected signing-to-close window and LP response deadline

Workflow

1. Size the co-invest pool — Calculate excess equity beyond the main fund's allocation. Factor in concentration limits (typically 10-20% of fund NAV per deal), GP co-invest, and any follow-on reserve needs. Determine total co-invest capacity available.

2. Map LP eligibility and priority — Review side letters and LPA for contractual co-invest rights. Rank LPs into tiers:

   • Tier 1: Contractual pro-rata or priority rights (must be offered first)
   • Tier 2: Discretionary allocation based on relationship, fund commitment size, and strategic value
   • Tier 3: New or smaller LPs offered remaining capacity
   • Flag any most-favored-nation (MFN) provisions that could cascade co-invest rights [VERIFY]

3. Design the allocation methodology — Select and document the approach:

   • Pro-rata by commitment: Each LP offered co-invest proportional to main fund commitment
   • Rotational/sequential: LPs offered deals in rotation to spread access over fund life
   • Discretionary: GP allocates based on strategic criteria (speed of execution, sector expertise, relationship depth)
   • Hybrid: Contractual rights satisfied first, remaining capacity allocated discretionally

4. Set fee and carry structure — Determine the economic terms for the co-invest vehicle:

   • No fee / no carry: Most common for large LPs; GP incentivized by management fee on main fund and relationship maintenance
   • Reduced fee / reduced carry: Typical range of 0-1% management fee and 0-10% carry
   • Full economics: Rare; used when co-invest is structured as a parallel fund or when deal sourcing justifies it
   • Confirm whether economics differ by LP tier or allocation size [VERIFY against side letter MFN provisions]

5. Select vehicle structure — Determine the legal wrapper:

   • SPV (most common for single-deal co-invest)
   • Sidecar fund (for programmatic co-invest across multiple deals)
   • Direct LP investment into deal entity (rare; simplifies structure but limits GP control)
   • Address blocker entities for tax-exempt and non-US investors as needed

6. Draft allocation memo and LP communication — Prepare:

   • Internal allocation memo documenting methodology, LP rankings, and rationale
   • LP offering materials with deal summary, co-invest terms, timeline, and subscription documents
   • Response deadline (typically 5-10 business days given deal timing)

7. Finalize and close — Collect LP commitments, handle oversubscription or shortfalls (scale back pro-rata or offer to next tier), and coordinate with deal counsel on subscription agreements and closing mechanics.

Output

• Co-invest allocation memo: Documents total capacity, LP priority ranking, allocation methodology, and final allocations with supporting rationale
• Term summary: Fee/carry structure, preferred return, waterfall mechanics, and any clawback provisions
• LP communication package: Deal overview, co-invest terms, response timeline, and subscription instructions
• Vehicle structure diagram: Entity chart showing main fund, co-invest SPV/sidecar, blocker entities, and deal-level structure
• Compliance checklist: Confirmation that side letter rights are honored, MFN provisions reviewed, and ERISA/tax considerations addressed

Quality Checks

• Verify all contractual co-invest rights from side letters are satisfied before discretionary allocations
• Confirm allocation methodology is consistent with LPA terms and prior fund practice — deviation from precedent should be flagged and justified
• Ensure fee/carry terms do not trigger MFN cascading that would repricing the main fund [VERIFY]
• Check that ERISA plan participation stays below 25% benefit plan investor threshold in the co-invest vehicle [VERIFY against current ERISA regulations]
• Validate that the co-invest timeline aligns with the deal closing schedule — LP response deadlines must allow sufficient time for internal IC approvals
• Confirm tax structuring (blockers, withholding) is appropriate for the LP mix
• Cross-check that total equity (main fund + co-invest + GP co-invest) equals the required equity check — no gaps or overcommitment