The evolution of the private equity co-investment model
Co-investment is becoming more sophisticated. As private equity managers seek capital beyond the initial transaction, the ability to act as a long-term strategic partner is becoming an increasingly important source of differentiation.
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For much of its history, the appeal of private equity co-investments has been a relatively straightforward story.
Investors can put additional capital to work by directly backing individual companies that the fund they are invested in is acquiring. In this way they can add high-conviction, concentrated investments to their portfolio, alongside a private equity manager they know well, and typically at reduced (or no) fees and carry with the effect of blending down their overall fee load.
For managers, meanwhile, co-investment provides additional equity to help complete buyout transactions. This might help to bridge a capital gap where a fund is still being raised and wants to retain dry powder, or where an older fund further into its investment phase simply doesn’t have the remaining capital to execute.
That model has not disappeared. The core benefits of co-investing for both investors and managers – trading off a fee-efficient direct investment access point, in return for equity to get deals over the line – very much remain at the core of the proposition. But this is increasingly only one perspective on what is now a much broader market.
For example, private equity managers are increasingly seeking capital at different stages of an investment's life. Sophisticated co-investors are developing the capabilities to provide it – and taking advantage of evolving investment structures to do so.
Co-investing now encompasses supporting an acquisition at initial buyout, providing follow-on equity several years into an investment to fund add-on acquisitions, investing through preferred equity structures, or, in some cases, remaining invested when an existing owner seeks liquidity.
This is changing what it means to be a successful co-investor. Capital remains important. Increasingly, however, so does execution capability, experience and the ability to become a strategic partner to a private equity manager.
Supply and demand
There are supply and demand dynamics behind this evolution.
On the supply side, the needs of private equity managers have become more complex. The prolonged slowdown in exits has left the industry with a substantial stock of unrealised portfolio companies. Some of these businesses have been held for longer than originally anticipated, but that does not necessarily mean their growth story is over.
For a high-quality company with a proven management team, strategic follow-on investment to fund additional acquisitions, further geographic expansion or other growth initiatives offers the potential to unlock additional value.
The question is how to finance this when an existing fund may be several years into its life, or where committing new capital to an existing investment may tip over a fund concentration limit for individual investments.
That is creating opportunities for mid-life equity investments. Rather than entering alongside a manager when it first acquires a company, a co-investor might enter a few years after acquisition, providing fresh capital for the next stage of growth.
Much like continuation investments, these deals have obvious risk mitigation benefits that come with investing in a known quantity and established growth plan, rather than taking the leap of faith on a new buyout. The potential for transformational growth within a proven asset remains.
Traditional vs mid-life co-investments
New buyout co-investment | Mid-life co-investment | |
|---|---|---|
Point of entry | Alongside the GP at initial acquisition | During the GP’s ownership period, often several years after initial acquisition |
Use of capital | Fund the acquisition and initial value-creation plan | Support further growth, M&A or other strategic initiatives |
Company visibility | Underwritten based on performance before GP ownership and the forward business plan | Benefits from evidence of performance during GP ownership |
Underwriting focus | Entry valuation and future value creation | Performance to date, rationale for additional capital and remaining value-creation potential |
Source: Schroders Capital.
Structuring solutions
But what about the challenges with encouraging investors to double down on investments in existing assets in the face of a challenging exit market, and amid a volatile investment backdrop?
In this context, preferred equity is increasingly providing a valuable option for investors, offering capital with a different risk and return profile from ordinary equity.
Preferred equity allows a co-investor to provide capital that is contractually treated as equity, retaining flexibility for deal sponsors, but which provides a pre-set preferred return before profits are distributed to the equity owners. It also ranks above equity in the event of liquidation scenario, providing a valuable cushion against downside risk.
Standard equity vs preferred equity
Standard equity | Preferred equity | |
|---|---|---|
Position in capital structure | Sits behind debt and preferred equity | Sits ahead of standard equity, but behind debt |
Return profile | Returns driven primarily by growth in the value of the business | Typically offers a more structured, fixed or preferential return |
Downside protection | First equity capital to absorb losses | Greater structural protection than common equity |
Source: Schroders Capital.
Evolving co-investment capabilities
Mid-life situations require a different kind of due diligence.
Investors are not simply assessing whether a company is attractive at acquisition. They must understand what has happened since the original investment, how the manager’s value-creation plan has developed, why additional capital is required, and whether incentives remain aligned.
As co-investment has grown, investors have therefore had to become increasingly sophisticated in how they approach it. Dedicated teams, direct underwriting capabilities and deeper sector expertise mean some investors can assess opportunities that sit well beyond the traditional co-investment model – and so beyond the reach of more passive co-investors.
This creates an important distinction between having capital available for co-investment and having a repeatable and differentiated co-investment capability.
Relationships are central to that distinction. An established partner brings knowledge of how a manager invests, its strengths and weaknesses, how it behaves when circumstances change and how previous investments have performed.
Equally, a broad co-investment programme can provide insight from underwriting hundreds of opportunities across managers and sectors. Schroders Capital’s European private equity platform, for example, draws on an extensive network of around 400 GP relationships and investment activities across primary fund investments, co-investing and continuation investments, enabling a highly selective, but also readily deployable and scalable, investment process.
Co-investing in practice
The combination of established manager relationships, direct underwriting experience and the ability to provide capital at different points in a company’s development is particularly valuable in mid-life situations. Investors can assess a business after part of the original value-creation plan has already been put into practice, while retaining exposure to its next phase of growth.
From an underwriting perspective, prior exposure to a company and established relationship with the manager can provide a stronger basis for assessing a later-stage opportunity, while a broader range of financing structures allows capital to be tailored to the needs of a more mature business.
Sabseg
Take Sabseg, an independent insurance brokerage platform operating across Spain, Portugal and Italy. Schroders Capital played a pivotal role in supporting Miura, one of our core private equity relationships in Iberia, in building the company.
Since Miura’s initial investment in 2021, the business has developed into a leading independent insurance brokerage platform in Iberia, with M&A playing an important role in its expansion. In 2024 and 2026, Schroders Capital invested further in the business, providing capital to support continued consolidation of a fragmented market with attractive fundamentals.
For investors, the rationale for providing capital at this stage lies in the balance between greater visibility and continued growth potential.
By the time of the follow-on investments, there was more evidence with which to assess the original investment thesis and its execution: the platform had scaled, the consolidation strategy had been demonstrated and the established relationship with Miura provided deeper insight into the manager and its approach. At the same time, significant runway remained, with a fragmented brokerage market offering scope for further M&A and continued expansion.
Pharmacy2U
Preferred equity provides another example of how the toolkit is expanding. Schroders Capital has worked with healthcare specialist G Square for more than 15 years and had already invested alongside the manager in Pharmacy2U, the UK's largest digital healthcare services platform focused on NHS prescription fulfilment.
Schroders Capital later provided preferred equity to finance an add-on acquisition. When the company subsequently underwent a continuation investment, our established relationship with G Square provided access to co-invest directly into Pharmacy2U alongside the transaction.
The example demonstrates how longstanding GP relationships can provide access to increasingly bespoke opportunities beyond the traditional acquisition-stage co-investment model.
The significance of examples such as these extends beyond individual transactions. They demonstrate how co-investment capital can increasingly follow a company through different stages of its development rather than appearing only at the point of acquisition. For investors with the relationships, underwriting capabilities and flexibility to assess these situations, that can create access to a broader range of opportunities as companies mature.
Experience becomes the differentiator
There is an apparent paradox in today's co-investment market. More investors want access to it, yet the most interesting opportunities may increasingly favour a relatively small group of experienced participants.
That is because complexity raises the cost of getting the decision wrong. Mid-life investments can present questions around valuation and alignment that are different from those at initial acquisition. Industry practitioners consequently report applying a higher threshold to such opportunities.
This is also why the evolution of co-investment should not be reduced to a discussion about lower fees. Economics remain part of its appeal, but they increasingly tell only part of the story.
As private equity's backlog of unrealised assets creates new financing needs, managers have more reason to value co-investors capable of providing flexible capital throughout an investment's life. Investors, in turn, need the experience and infrastructure to distinguish an attractive opportunity from one that merely needs more money.
The result is a more demanding co-investment market, but potentially a more interesting one. The next phase will be defined less by who can provide capital and more by who can provide the right capital, at the right point in an asset's development, with the experience to act as a genuine strategic partner.
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