Over the past decade, co-investment demand has surged as institutional LPs have increasingly funneled capital into private markets. With co-investments often offered on a reduced carry and fee basis, LPs have leveraged these opportunities to blend down the cost of their private equity exposures, driving higher risk-adjusted returns. Today, many reserve as much as 15-30% of their total private investment allocation for these opportunities.
However, while rising co-investment activity is often attributed to growing demand from LPs, GPs also reap significant advantages. By leveraging co-investment capital, GPs gain the flexibility to pursue high-potential deals without exceeding portfolio concentration limits or straying from diversification targets. The additional capital also allows them to act on opportunistic M&A deals or fund growth initiatives for portfolio companies that may fall outside the scope of the original investment strategy.
Yet, despite strong interest from both GPs and LPs, co-investment deal flow and participation remain heavily influenced by broader market dynamics. Here, we examine the key supply and demand forces shaping co-investment activity and highlight emerging trends in the space, such as the growing popularity of co-underwriting.
Over the past several years, a difficult fundraising environment and higher capital costs have emerged as two of the strongest catalysts fueling the supply side of co-investment opportunities.
For one, GPs are weathering one of the toughest fundraising environments in decades. Global buyout funds raised 23% less capital last year than in 2023, with fewer funds closing and over a third taking two or more years to cross the finish line. The picture is even bleaker in venture capital, where fundraising conditions have deteriorated further.
As fund closing times lengthen, and some firms close with smaller fund sizes than initially targeted, co-invest capital has emerged as a strategic tool for incentivizing new commitments and extending the deployment runway of existing funds.
Elevated capital costs have also fueled supply side opportunities. Although recent interest rate cuts have offered some relief, credit remains significantly more expensive than historical norms. As a result, many GPs are opting to contribute larger equity stakes to finance transactions, driving increased interest in co-investment capital.
Even as supply-side factors such as rising capital costs and a tough fundraising environment have fueled co-investment opportunities, broader dealmaking challenges continue to weigh on the market. Over the past several years, deal activity has been stifled by wide bid-ask spreads, interest rate uncertainty, and persistent macroeconomic headwinds.
While deal volume showed signs of life last year, M&A, exits, and new investments remain well below the pace needed to absorb the record levels of capital raised and deployed in 2021. These ongoing challenges in the broader dealmaking environment inevitably affect the overall supply of co-investment opportunities.
On the demand front, a major barrier to broader LP participation in co-investments in recent years has been illiquidity. Facing a lack of distributions or overallocation concerns, many have been less inclined to take on additional, concentrated private equity exposure, especially via co-investments — one of the few active measures they can use to adjust their private equity portfolios. Ultimately, LPs that have been best positioned to capitalize on recent market opportunities are those with dedicated co-investment teams and specific co-investment allocations.
Co-investment deal data offers a glimpse into the push and pull of these supply and demand dynamics. While fundraising challenges and rising capital costs have fueled a surge in co-investment opportunities, this has had a mixed impact on actual deal activity.
On one hand, global capital raised through co-investments hit a record $33.2 billion in 2024. But that capital was spread across just 40 deals — the lowest deal count since 2013. In North America, the numbers were even more underwhelming, with the region recording only $4.5 billion in total deal value for the year — a notable drop from the $8.73 billion raised in 2023.
Looking ahead to the remainder of 2025 (and beyond), a wave of pent-up transaction activity is expected to hit the market. As liquidity strengthens and M&A activity picks up, co-investment participation is poised to follow suit, with LPs more likely to capitalize on opportunities to deploy capital.
As the influx of “tourist” co-investors from the 2021 boom recedes and GPs aim to mitigate execution risk from post-closing syndication, pre-signing and co-underwriting deals have become increasingly prevalent. According to StepStone data, deal volume in this category has grown fivefold over the past two decades.
In these deals, co-investors collaborate with GPs before a transaction is secured, co-underwriting opportunities and helping facilitate deal execution. This approach requires co-investors to shoulder significant responsibilities under uncertain conditions — including conducting risk assessments, absorbing broken deal costs, pricing and structuring capital, and offering strategic insights.
For LPs with the resources and expertise to navigate these complex deals, the benefits are compelling. Pre-signing deals are often less competitive than syndicated deals and can provide access to coveted deal flow, particularly in the mid-market. Additionally, pre-signing-only co-investments have shown a clear performance advantage, with StepStone data showing an average gross TVPI of 2.7x for these deals — outpacing post-signing deals, which average 2.2x.
As the landscape evolves, LPs adopting a more active strategy across co-investments and directs must effectively toggle the line between LP and GPs. While understanding strategy performance, concentration, and exposures is crucial for allocators, they also need the capability to conduct deep due diligence, model their own valuations, and assess portfolio company-level reporting as active stakeholders in individual assets.
Further, as GPs increasingly prefer co-underwriters, robust processes and infrastructure to support a co-investment program with the necessary granularity are essential for securing favorable deal flow. Here, robust technology infrastructure provides an invaluable tool for streamlining co-investment strategies.
Request a demo to learn how Chronograph allows LPs to seamlessly aggregate co-investment exposures, create quarterly valuations, and more.
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