The Fee Killer: Direct Co-Investments
The Fee Killer: Direct Co-Investments
How to invest alongside KKR and Blackstone in their best deals without paying the standard “2 & 20” fees. The secret to blended fee reduction.
Executive Summary
- The Concept: When a Private Equity firm (GP) wants to buy a massive company (e.g., $10B deal), they often don’t want to use only their fund’s money. They invite trusted LPs to invest directly into that specific deal. This is Co-Investment.
- The “No Fee” Advantage: To incentivize LPs to provide this extra capital quickly, GPs typically charge 0% Management Fee and 0% Carried Interest on the co-investment portion. It is essentially “wholesale” pricing.
- Selection Bias: You are not buying a blind pool; you are picking the GP’s “highest conviction” deal. If they are putting their own money and reputation on the line for one massive deal, the success probability is often higher.
The Concentration Risk
Warning: Unlike a fund with 20 companies, Co-Investment is a bet on one single company. If that specific deal fails, you lose 100% of that capital. You must have a large enough portfolio to diversify across multiple co-investments.
Mechanic: Blended Fee Efficiency
0% / 0%
Co-Invest Fees
High Alpha
Best Ideas Only
J-Curve
Mitigated Impact
Single Asset
Higher Risk
Simulation: $10M Allocation (Fund vs. Blend)
Net Return Impact over 5 Years (2x Gross MOIC)
| Feature | Standard LP Fund Interest | Direct Co-Investment |
|---|---|---|
| Management Fee | 2.0% Annually | 0.0% (Typically) |
| Performance Fee (Carry) | 20% of Profits | 0% – 10% (Reduced) |
| Due Diligence | Trust the GP | You must analyze the deal |
“Co-Investment is the ultimate loyalty perk. If you support the GP with your fund commitment, they reward you with fee-free access to their crown jewels.”
Essential Resources
INTERNAL
BMT Playbooks