What Should Be Checked Before Investing Alongside a Sponsor in a Co-Investment?

A co-investment can increase your exposure to one company while leaving important decisions with the sponsor. Before committing, confirm what you will own, how your position relates to the sponsor's fund, and what rights you have if plans change. Use the sponsor's diligence as input, then review the opportunity yourself.

Trace the Investment Structure

Determine whether you are buying directly into the company or investing through a special purpose vehicle managed by the sponsor. Request the ownership chart, offering materials, subscription documents, governing agreement, and any side letter. Identify the issuer, security, use of proceeds, voting path, and holder of legal title to the investment. Ask how the co-investment connects to the fund's investment and whether both invest at the same time.

Compare the terms received by the fund and co-investment vehicle. Ask whether they receive the same price and security, and whether they have equal priority. Check information access and treatment in a sale or financing. If terms differ, request a written explanation and assess whose interests the difference favors. Check whether the sponsor or an affiliate controls the vehicle, keeps records, or receives compensation for arranging or managing the investment.

Understand Economics and Future Funding

Request a full schedule of management fees, carried interest or promote, organizational costs, transaction expenses, monitoring fees, and other charges. Identify fees paid to sponsor affiliates and how shared costs are allocated. Ask for a sample distribution calculation showing how proceeds would flow through the structure. A lower headline fee does not mean the economics are simple.

Review capital call terms and default consequences. Find out how dilution works and what happens if the company needs another financing round. Ask who can approve follow-on funding and whether you can participate on the same terms. If you cannot fund a future call, determine whether your interest can be diluted, sold, or otherwise affected. For a direct investment, an IRR and multiple of invested capital model can show how timing and cash flows affect the proposed outcome. A simple ownership illustration should show your position after expected financing, not only at closing.

Check Control, Reporting, and Exit Rights

Identify who decides on a sale or refinancing. Ask who approves follow-on investment and how the sponsor responds to company underperformance. Review voting rights and consent matters. Check transfer restrictions, information rights, and dispute provisions. Ask how often you receive financial and operating reports, what those reports include, and whether you can speak with company management. If you have no direct access, understand what information the sponsor will provide and how quickly.

Ask: "Who controls a sale, and can I object?" "What happens if the sponsor and I disagree?" "Can I transfer my interest, and who must consent?" "What information will I receive after closing?" Talk with your attorney about how these rights work under the actual documents. A right that is hard to exercise or depends on sponsor cooperation may offer limited practical protection.

Underwrite the Company and the Concentration

Review the company's operating evidence and financial information. Check its capitalization and the assumptions that drive value. Consider a downside case with slower growth, higher costs, delayed financing, or no timely exit. Identify how much of your portfolio and staff time this single position would require. Co-investment can offer direct exposure alongside a sponsor's management team, while a poor outcome concentrates the loss as well as the gain.

Write down unresolved questions, the evidence needed, and conditions that would cause you to pause. For sponsor background and checks on its structure or control persons, use the sponsor and GP due diligence checklist. Keep the company review specific to this co-investment's ownership and terms. Set out how you will monitor the position.

Checklist

• Confirm direct ownership or SPV structure and identify all controlling parties.
• Compare fund and co-investment terms, including timing and priority. Check information rights.
• Model fees, expenses, distribution order, and the effects of follow-on funding.
• Review voting and sale provisions. Check transfer, reporting, and dispute terms.
• Check the company's evidence and model a delayed or unavailable exit.
• Decide whether the concentrated position fits your ability to fund and monitor it.

Read next: What diligence should be completed before investing in a private credit deal? and What investor protections should be negotiated before funding a private investment?

A co-investment is an attractive solution for single family offices looking to invest directly without foregoing all of the benefits of the usual investment fund structure and without committing too much capital to a single investment.

Sources: Family Office Club investor due diligence framework, The Single Family Office. Informational only, not financial, legal or tax advice.