casemark/structuring-co-investment-vehicles

Structuring Co Investment Vehicles

Designs co-investment fund structures with deal-specific and programmatic formats, fee terms, and allocation methodology.

When To Use

• Structuring a deal-specific co-investment vehicle alongside a main fund investment
• Designing a programmatic or evergreen co-investment program for repeat LP participation
• Analyzing fee and carry economics for co-invest allocations versus the main fund
• Evaluating allocation methodology across LP tiers (anchor, strategic, standard)
• Reviewing GP obligations under side letters granting co-investment rights

Inputs To Gather

• Main fund terms: fund size, target return, management fee rate, carried interest waterfall, GP commitment percentage
• Deal parameters: target company, equity check size, total enterprise value, anticipated hold period, sector
• Co-invest allocation pool: total co-invest capacity, number of eligible LPs, side letter co-invest commitments, minimum ticket sizes
• Fee structure preferences: no-fee/no-carry, reduced fee/carry, main-fund-equivalent, or hybrid arrangements
• Vehicle type decision: deal-specific SPV, programmatic sidecar fund, or blocker entity (for tax-exempt / non-US investors)
• Regulatory and tax considerations: ERISA plan asset thresholds, UBTI sensitivity, FIRPTA exposure, withholding obligations [VERIFY jurisdiction-specific rules]
• GP economics: whether the GP is waiving or reducing fees to incentivize co-invest participation, offset provisions against main fund fees

Workflow

1. Determine vehicle format

   • Deal-specific SPV: single-asset, formed per transaction, dissolved at exit — simplest but highest administrative volume
   • Programmatic sidecar: committed capital vehicle that invests alongside the main fund across multiple deals — reduces formation friction but requires broader LP commitment
   • Blocker corporation: interposed C-corp or offshore entity for tax-exempt or foreign LPs to avoid UBTI/ECI — adds cost and complexity
   • Choose based on LP base composition, expected deal flow, and GP administrative capacity

2. Design allocation methodology

   • Define allocation priority: pro-rata to main fund commitment, rotational, discretionary, or hybrid
   • Set minimum and maximum co-invest ticket sizes per LP per deal
   • Address over-subscription mechanics: scale-back formula, GP discretion, or waitlist rotation
   • Document side letter commitments that guarantee co-invest rights or first-look privileges
   • Specify opt-in/opt-out timelines (typically 5–10 business days from offer)

3. Set fee and carry terms

   • No-fee/no-carry: most LP-favorable; common for deal-specific vehicles to reward large commitments
   • Reduced fee/carry: e.g., 0.5% management fee / 10% carry versus main fund 2%/20%
   • Main fund parity: co-invest subject to same economics — less common, used when demand exceeds supply
   • Address management fee offset: whether co-invest fees reduce main fund management fees dollar-for-dollar
   • Define carry calculation basis: deal-by-deal or aggregated across the co-invest program [VERIFY LP agreement language]

4. Structure the waterfall

   • Preferred return threshold (typically 8% IRR or aligned with main fund)
   • GP catch-up percentage and rate
   • Carried interest split above the hurdle
   • Clawback provisions: escrow percentage, timing, and GP personal guaranty scope
   • Treatment of organizational and broken-deal expenses (allocated to co-invest vehicle or absorbed by GP/main fund)

5. Address governance and operational terms

   • LP consent rights: material amendments, key-person events, related-party transactions
   • Information rights: quarterly reporting, capital account statements, K-1 delivery timeline
   • Transfer restrictions: lock-up period, GP consent to transfer, ROFR mechanics
   • Indemnification and exculpation provisions for the GP in the co-invest vehicle
   • Dissolution triggers and liquidation procedures

6. Handle regulatory and tax structuring

   • Calculate ERISA plan asset threshold (25% benefit plan investor test) and structure to stay below or elect the VCOC/REOC exemption [VERIFY current DOL guidance]
   • Evaluate need for parallel blocker entities for tax-exempt or non-US LPs
   • Assess state and local tax filing obligations based on portfolio company jurisdiction
   • Confirm securities law exemptions: Section 4(a)(2), Regulation D, or non-US exemptions for offshore vehicles [VERIFY applicable exemptions]

Output

Deliver a structured co-investment vehicle recommendation containing:

• Vehicle summary: entity type, jurisdiction of formation, anticipated fund life or deal-specific term
• Allocation framework: methodology, eligible LP list with committed or indicative amounts, over-subscription protocol
• Economics table: side-by-side comparison of main fund vs. co-invest fee/carry terms, including offset provisions
• Waterfall illustration: numerical example showing preferred return, catch-up, and carry distribution at target and downside return scenarios
• Tax and regulatory notes: ERISA status, blocker structure if applicable, withholding and filing obligations
• Key LP terms: governance rights, transfer restrictions, reporting commitments
• Open items: flagged decisions requiring GP/LP negotiation or counsel review

Quality Checks

• Allocation methodology is consistent with side letter co-invest commitments — no LP guaranteed a right is excluded from the allocation framework
• Fee/carry terms are internally consistent: offset provisions do not create double-counting or negative fee scenarios
• Waterfall math is verified with at least two return scenarios (target case and loss case)
• ERISA threshold calculation uses correct denominator (total equity, not total commitments) [VERIFY with fund counsel]
• Vehicle jurisdiction matches GP's existing fund family structure unless deviation is justified
• All terms flagged with [VERIFY] are identified as requiring jurisdiction-specific or deal-specific confirmation before finalization