Structuring Co-Investments and Club Deals: Current Outlook

Co-investments and club deals remain attractive tools for deploying capital alongside sponsors and strategic partners. These structures can offer enhanced economics, greater investment selectivity, and access to institutional-quality transactions. At the same time, they introduce a range of legal, governance, and operational considerations that require careful planning and negotiation.

Based on a recent Morgan Lewis webinar, this Insight discusses the current co-investment landscape, evolving deal structures, negotiation trends, and key risk areas affecting private capital participants.

CO-INVESTMENT ACTIVITY CONTINUES TO EXPAND

Institutional and private investors continue to seek increased access to co-investment opportunities as a way to gain exposure to private equity and other illiquid assets with reduced fee burdens and enhanced alignment with sponsors. Sponsors, meanwhile, are increasingly using co-investment rights as a fundraising and relationship management tool in a more competitive capital-raising environment.

Several themes are shaping the current market:

• Technology, media, telecommunications, and healthcare remain among the most active sectors for co-investment activity
• Sponsors are seeking broader investor diversification and additional capital flexibility
• Single-asset continuation vehicles continue to gain traction as sponsors look for longer hold periods and liquidity solutions
• Family offices are increasingly participating in direct and syndicated transactions alongside traditional institutional investors

These dynamics are contributing to more sophisticated and highly negotiated co-investment structures.

SELECTING THE APPROPRIATE CO-INVESTMENT STRUCTURE

Co-investments can be structured in a variety of ways depending on governance expectations, tax considerations, operational complexity, and investor preferences. The webinar highlighted several common approaches.

Direct Investments

In direct investments, the co-investor acquires equity directly in the portfolio company. These structures often provide the greatest degree of control and governance participation but generally require substantial internal capabilities related to diligence, execution, and ongoing oversight.

Fund Investment Vehicles

Under a fund investment vehicle structure, co-investors participate through the same acquisition vehicle used by the sponsor’s primary fund. These structures may simplify administration and alignment while limiting direct governance involvement.

Aggregation Vehicles and SPVs

Sponsors frequently utilize aggregation vehicles or sponsor-managed SPVs to pool co-investment capital. These arrangements can streamline execution and administration but require careful review of voting rights, economics, reporting obligations, and allocation mechanics.

Fund-of-One and Overage Structures

Some sponsors establish dedicated “fund-of-one” vehicles or overage/top-up funds that permit investors to participate in multiple future co-investment opportunities through a single negotiated framework. These structures can improve efficiency and create more predictable access to future deal flow, but they also raise important questions around discretion, conflicts management, and investment scope.

KEY TERMS CONTINUE TO RECEIVE SIGNIFICANT NEGOTIATION FOCUS

While co-investment arrangements are often marketed as simplified alternatives to blind-pool fund investments, the governing documents can involve extensive negotiation. The panel identified several provisions that continue to receive heightened investor attention.

Economic Alignment and Pari Passu Treatment

Investors generally expect co-investment vehicles to invest and divest alongside the sponsor’s main fund on substantially similar terms, subject to regulatory, tax, or structural differences. Sponsors and investors should carefully evaluate how expenses, allocation mechanics, and governance rights operate across the overall investment structure.

Fees and Carried Interest

Reduced or zero management fees remain common for direct co-investments. However, market practice continues to vary significantly, particularly for commingled co-investment vehicles. Sponsors may still seek carried interest or portfolio company–level fees, including monitoring or arrangement fees.

The discussion also highlighted growing investor focus on organizational and ongoing expense caps, especially as sponsors continue to seek broader flexibility regarding extraordinary expenses and fund-level cost allocations.

Capital Calls and Liquidity Timing

Unlike traditional private funds, co-investment vehicles often require a substantial percentage of capital commitments to be funded shortly after signing or closing. Wet closings and immediate draw mechanics can create operational challenges for investors that do not have prearranged liquidity solutions in place.

Borrowing and Recycling Flexibility

Sponsors are increasingly seeking flexibility to incur leverage at the co-investment vehicle level and recycle distributions into follow-on investments or operational needs. Investors continue to scrutinize these provisions closely, particularly where borrowing authority may affect risk exposure or dilute expected liquidity timing.

Governance and Information Rights

Investors are also negotiating enhanced governance protections, including:

• Consent rights over major decisions
• Board observer or director rights
• Portfolio company reporting obligations
• Anti-dilution protections
• Key person and removal rights
• Continuation vehicle approval rights

These provisions are especially important where investors are participating alongside larger institutional sponsors with differing investment horizons or liquidity objectives.

CVS AND EXIT RIGHTS REMAIN AN EVOLVING AREA

Continuation vehicles continue to reshape the private equity landscape and are increasingly relevant in co-investment arrangements. Investors are focusing on whether sponsors have broad discretion to transfer assets into continuation structures and whether investors have meaningful consent, liquidity, or valuation protections in those transactions.

Key negotiation considerations include:

• Whether transfers require investor consent
• How valuation methodologies are determined
• Whether third-party fairness opinions are required
• Whether rollover vehicles must provide terms that are no less favorable than the original co-investment structure

As continuation transactions become more common, sponsors and investors alike are placing greater emphasis on upfront documentation of exit mechanics and conflict-management procedures.

MANAGING COMMON CO-INVESTMENT PITFALLS

Recurring issues can create friction or unexpected exposure in co-investment transactions. Areas warranting particular attention include:

• Tight transaction timelines and accelerated diligence periods
• Unclear expense allocation provisions
• Insufficient understanding of capital commitment mechanics
• Weak anti-dilution protections
• Limited information and reporting rights
• Investor giveback obligations
• Regulatory filing and compliance requirements
• Ambiguity surrounding continuation vehicle rights and approvals

For investors participating in increasingly complex private market transactions, careful diligence and thoughtful negotiation remain critical to preserving alignment and managing long-term investment risk.

LOOKING AHEAD

Co-investments and club deals continue to evolve as important components of private market investing strategies for institutional investors. As fundraising markets remain competitive and sponsors pursue more flexible capital solutions, these arrangements are likely to become even more customized and strategically significant.

Successful execution increasingly depends on balancing speed and flexibility with robust governance, economic alignment, and clear contractual protections. Early legal involvement and careful structuring remain essential to navigating the growing complexity of the co-investment market.