The Fee Killer: Co-Investments & Direct Deals
The Fee Killer: Co-Investments & Direct Deals
How to bypass the “2 & 20” fee model and double down on high-conviction winners alongside top-tier sponsors.
Executive Summary
- The Co-Invest Alpha: Instead of investing blindly in a PE fund (Blind Pool), you invest directly into a specific company alongside the fund. The key benefit is typically Reduced or Zero Fees (No 2/20).
- Concentration Power: Diversification maintains wealth, but concentration builds it. Direct deals allow you to allocate heavy capital ($5M-$20M) to a single “Home Run” opportunity.
- J-Curve Mitigation: Capital is deployed immediately into a live deal, eliminating the 3-5 year waiting period typical of primary funds.
The “Adverse Selection” Risk
Why is the GP (General Partner) sharing this deal? Are they sharing it because it’s too big for their fund (Good), or because they are unsure and want to offload risk (Bad)? Rigorous independent Due Diligence is mandatory.
Mechanic: The Fee Arbitrage
0% / 0%
Typical Fees
High
Concentration
2-4 Wks
DD Window
Alpha
Outcome
Simulation: Net Multiple on Invested Capital (2.5x Gross Return)
Net Return Comparison (Same Asset Performance)
| Feature | Blind Pool Fund | Co-Investment / Direct |
|---|---|---|
| Discretion | GP Decides All | LP Selects Specific Assets |
| Economics | 2% Mgmt / 20% Carry | Often 0% / 0% or 1% / 10% |
| Speed | Passive / Slow | Active / Must Move Fast |
“Diversification preserves wealth, but concentration builds it. Co-investments are the sniper rifle in a portfolio of shotguns.”
Essential Resources
INTERNAL
BMT Playbooks