Record co-investment activity is reshaping institutional investing, fund economics and the balance of power between limited partners and private equity managers.
Private equity co-investment is moving from a fee-saving option to a core institutional investment strategy. As limited partners (LPs) take greater responsibility for evaluating individual transactions, the traditional relationship between investors and fund managers is changing. Capital allocation is no longer determined solely by commitments to blind-pool funds. Increasingly, it also depends on an institution's ability to underwrite deals independently.
The shift is accelerating as co-investment volumes reach record levels while conventional private equity fundraising grows more slowly. Lower fees remain an attraction, but the larger development is a redistribution of investment responsibility, bargaining power and execution risk.
Private equity co-investment reaches a record US$198 billion
Private equity co-investments reached a record US$198 billion in the first half of 2026, more than doubling year over year, according to S&P Global Market Intelligence data reported by the Financial Times. Conventional private equity fundraising increased just 5% to US$312 billion over the same period, remaining below its 2021 peak.
The two measures are not directly equivalent. Fundraising represents capital commitments, while co-investment volume reflects participation in individual transactions. Nevertheless, the comparison illustrates the growing importance of direct deal exposure. Reported co-investment volume was equivalent to approximately 63% of conventional private equity fundraising during the period.
For institutional investors, the significance extends beyond scale. Co-investment allows LPs to allocate capital alongside general partners (GPs) in selected transactions, frequently with reduced or no management fees and carried interest. It also requires investors to assess company valuations, financing structures, downside scenarios and portfolio concentration at the deal level.
The LP is no longer simply choosing a manager. It is increasingly helping determine which assets receive capital.
Why institutional investors are expanding co-investment
Large pension funds are developing the governance, staffing and analytical capabilities needed to support direct deal participation.
Pennsylvania's Public School Employees' Retirement System (PSERS) has identified potential returns improvement of approximately 400–500 basis points from co-investment fee savings, subject to operational capacity, manager access and investment selection. This is a potential benefit under specified conditions, not a guarantee of outperformance.
North Carolina's Investment Authority reported in February 2026 that several large private equity and commercial real estate debt co-investments were undergoing diligence or negotiation.
CalPERS has disclosed a US$1.95 billion commitment to its 2022 California co-investment partnership. Its published fund-performance data show a 17.6% net internal rate of return and a 1.4-times investment multiple. Separately, CalPERS reported that private equity fees as a share of assets had declined 35% since 2024.
These figures reflect different programmes and measurement periods, so they should not be interpreted as a direct performance comparison. Together, however, they demonstrate that major institutions are investing in the infrastructure required to participate more actively in private market transactions.
How co-investment changes private equity fund economics
The traditional private equity model delegates investment selection and portfolio management to the GP. LPs commit capital to a fund, pay management fees and carried interest, and rely on the manager to identify, acquire and exit portfolio companies.
Private equity co-investment modifies that arrangement without eliminating the GP's role. Sponsors generally retain responsibility for sourcing, negotiating and managing transactions, while participating LPs make separate decisions about additional deal-level exposure.
This creates three important changes.
Fee savings become a structural advantage
Co-investment enables institutional investors to combine flagship fund commitments with selected lower-fee transactions. The economic comparison increasingly concerns the total cost of the manager relationship rather than the headline fee of a single fund.
Management fees, carried interest, transaction expenses, monitoring arrangements and internal underwriting costs all affect the net outcome. Reduced fees can improve returns, but only if investment selection and execution remain disciplined.
Underwriting speed becomes a competitive advantage
Co-investment opportunities often require decisions within compressed timelines. Institutions with dedicated sector specialists, investment committees and established diligence processes can respond more quickly and negotiate access to attractive transactions.
Investors without these capabilities may remain dependent on blind-pool commitments while larger peers secure more direct exposure and potentially better economics.
Speed, however, is valuable only when supported by independent analysis. A faster investment decision is not necessarily a better one.
Sponsors gain another source of deal financing
For GPs, co-investment provides additional equity capital without requiring the flagship fund to absorb the entire transaction. This can reduce portfolio concentration and, in some circumstances, lessen dependence on expensive financing.
The same flexibility can also support larger acquisitions and higher purchase prices. Whether co-investment improves transaction resilience therefore depends on how sponsors deploy the additional capital.
Where private equity co-investment capital may move next
As institutional investors expand their underwriting capabilities, capital is likely to favour structures that provide greater investment discretion and deal-level transparency.
Separately managed accounts, dedicated co-investment programmes and pre-committed investment sleeves can help institutions participate in transactions without relying exclusively on conventional fund allocations. Specialist underwriting teams and stronger reporting infrastructure will become increasingly important.
The implications also extend to private credit.
Institutions capable of evaluating sponsor-backed equity transactions may apply similar capabilities to club lending, senior-secured financing and asset-backed credit investments. Private credit co-investment can offer greater influence over loan terms, collateral protection, covenants and information rights.
The underwriting requirements are different, however. Credit investors must evaluate repayment capacity, collateral value, capital structure priority, intercreditor agreements and amendment provisions. Lower fees cannot compensate for weak creditor protections or poorly understood downside exposure.
Secondaries and continuation funds may also attract institutions seeking greater control over portfolio pacing and vintage diversification. Combining fund commitments, co-investments and secondary purchases can provide more flexibility than a blind-pool-only strategy.
That flexibility introduces additional concentration risk when multiple investments are exposed to the same sponsor, company or financing ecosystem.
Private equity co-investment risks: Selection, conflicts and concentration
The central challenge in private equity co-investment is the information imbalance between GPs and LPs.
Sponsors typically have deeper knowledge of the target company, its management and the transaction process. Co-investors may face limited diligence windows, incomplete information and pressure to preserve valuable manager relationships.
Academic research offers mixed findings on performance. An influential study identified underperformance relative to corresponding private equity funds, while subsequent research using a broader sample found no evidence of adverse selection and broadly comparable returns.
The evidence does not establish that co-investment consistently outperforms or underperforms traditional fund investing. Outcomes depend on transaction selection, governance, execution and portfolio construction.
Conflicts of interest create another concern. Investors need clarity on how co-investment opportunities are allocated, whether the flagship fund receives its appropriate share, and how transaction fees, monitoring fees and broken-deal expenses are distributed.
The Institutional Limited Partners Association (ILPA) recommends transparent allocation policies, conflict management, appropriate concentration limits and clear fee treatment.
For GPs, a larger co-investment programme also creates operational costs. Additional diligence, reporting and investor negotiations can complicate execution. Managers may increasingly reserve opportunities for LPs that offer strategic value, speed and reliable capital commitments.
The most significant risk for institutions is straightforward: savings on management fees can be erased by a single poorly underwritten or excessively concentrated investment.
What Manhattan is watching
The next phase of private equity co-investment will be determined by performance and execution rather than transaction volume alone.
Five developments deserve attention: whether record activity persists as private equity exits recover; whether co-investment rights become central to flagship fund negotiations; whether net returns remain attractive after internal diligence and staffing costs; whether sponsors use additional equity to reduce leverage or support larger acquisitions; and whether private credit adopts similar LP-led underwriting structures.
The last question is particularly consequential. If institutions increasingly negotiate direct participation in sponsor-backed credit, the balance of influence over pricing, covenants and financing terms could shift beyond traditional manager-led allocation models.
Manhattan view: The LP is becoming the underwriter
The rise of private equity co-investment represents a transfer of investment responsibility, not the elimination of financial intermediation.
GPs still control origination, transaction information and portfolio-company governance. LPs, however, are assuming greater responsibility for evaluating individual assets, managing concentration and determining whether lower fees justify additional risk.
The durable advantage will belong to institutions that combine manager access with independent underwriting, efficient governance and disciplined portfolio construction.
Investors without those capabilities risk exchanging a visible management fee for a less visible selection problem.
Structure first. Yield second. Access only matters when the structure is worth accessing.
Sources
- Financial Times — Institutional investors challenge PE fund model with direct deals (9 October 2026)
- Pennsylvania PSERS — Private Markets Strategic Plan
- North Carolina Investment Authority — Strategic asset allocation and co-investment update
- CalPERS — Private Equity Program Fund Performance Review
- CalPERS — Private-assets leadership and fee update
- ILPA Principles 3.0 — Co-investment allocation, conflicts and fees
- Journal of Financial Economics — Adverse selection and the performance of private equity co-investments
This material is for general financial information only and does not constitute investment, legal, tax or accounting advice. It is not an offer or recommendation to buy or sell any security or private-market interest.