Co-Investment
Co-investment in commercial real estate means committing equity to a single transaction alongside a sponsor, fund or other investors. The capital can come in as a limited partner interest or, for larger investors, as a co-GP seat. The label settles very little until the interest acquired, the review rights and the cost layers above the asset are known.
A side-by-side commitment can take two different seats
Co-investment puts capital into one named transaction next to the main sponsor or fund. The investor owns a slice of that deal, and the slice is separate from any commitment to the sponsor’s pooled vehicle.
The seat matters more than the label. A passive limited partner interest carries economics and little control. A co-GP seat carries a different role, with a different position in decision making and in the cash flow.
One fund platform set a minimum investment of $250,000 with an average check of $1 million, and allowed larger family offices to co-invest as co-GPs. Deal-level seats with a GP role sit at the larger end of that range of investors.
The first question on any co-investment term sheet is which entity the investor holds an interest in, and what that interest is entitled to.
Review time and document access decide whether the right is usable
A co-investment invitation is only as useful as the time and information that come with it. An LP can push for terms that allow a thorough review of the potential co-investment and enough time to evaluate the same due diligence documents the fund itself is relying on.
The test is when the response clock starts. If the deadline runs from the invitation and the diligence package arrives days later, the gap comes straight out of the evaluation window.
Process counts as much as paper. The investment committee is a gathering to discuss best ideas and to administer the process, and the process is where a family office focuses. For a co-investment, a usable file records what was reviewed and when, alongside the vote.
“For example, an investor may push for terms that allow the LP to thoroughly review the potential co-investment and have proper time to evaluate the due diligence documents that the fund itself is relying on to make a sound investment.”
Why families gravitate to deal-level capital
Some families form industry-specific syndicates to discuss investment ideas and co-investment opportunities with other families. Within multifamily office groups, some member families value privacy while others welcome co-investment and economies of scale.
Time horizon also shapes appetite. A significant portion of family office capital is less focused on immediate returns and more focused on the total return benefits of holding real estate longer term, which suits a deal-level hold.
Management partnerships let a family extend its expertise without keeping a large team in house. A co-investor that relies on the lead sponsor’s execution makes the same trade, so the sponsor’s role in the deal carries real weight.
Worked example: a $2 million co-investment with and without a carry layer
The inputs below are hypothetical and illustrative. A deal raises $10,000,000 of equity. A family office funds $2,000,000 from surplus cash with no borrowing at the investor level, which is $2,000,000 divided by $10,000,000, multiplied by 100, or 20 percent of the equity. At sale, $13,000,000 returns to equity. Both cases use the same capital, the same hold and the same asset result.
Case one is a direct deal-level interest with no carry. The family office receives $13,000,000 multiplied by ($2,000,000 divided by $10,000,000), which is $2,600,000. Profit is $2,600,000 minus $2,000,000, or $600,000. The return over the hold is $600,000 divided by $2,000,000, multiplied by 100, or 30 percent.
Case two holds the same slice through a vehicle that charges a 20 percent carry on profit, with no preferred return, to keep the arithmetic plain. The carry is $600,000 multiplied by 20, divided by 100, or $120,000. Net profit is $600,000 minus $120,000, or $480,000. Net proceeds are $2,600,000 minus $120,000, or $2,480,000. The return over the hold is $480,000 divided by $2,000,000, multiplied by 100, or 24 percent.
The asset delivered the same $13,000,000 in both cases. The carry layer alone moves the investor’s return from 30 percent to 24 percent, a gap of 6 percentage points and $120,000 on the same $2,000,000.
Mistakes in reading co-investment terms and returns
Reading co-investment and co-GP as the same thing is the first error. A co-investor can hold a passive limited partner interest, and a co-GP seat is a distinct role. Underwriting the economics of one while holding the other produces numbers that belong to a different position.
Comparing returns across gross and net bases is the second. In the example above, the same asset yields 30 percent on a direct interest and 24 percent after a 20 percent carry. A co-investment set against a fund deal on mismatched bases looks better or worse by the carry alone, with no change in the real estate.
Treating an invitation as completed diligence is the third. An invitation shows that participation is on offer. The diligence package and the days available to review it decide whether an independent decision is possible, and a clock that starts before the documents arrive shortens the real window.
Treating the sale profit as an answer to liquidity is the fourth. A holding-period gain says nothing about cash needs during ownership. Funding deal-level commitments from surplus funds and keeping borrowing limited is one way to address cash-flow and liquidity concerns directly.
Checklist questions for a co-investment seat
What interest is being acquired? The answer separates a passive limited partner position from a co-GP seat.
Which entity holds the asset? The answer fixes where the investor sits relative to the sponsor and any fund vehicle.
Does any fee or carry layer sit above the deal-level interest? The answer determines whether returns are gross or net, as the 30 percent versus 24 percent gap in the example shows.
When does the review clock start? The answer shows whether the evaluation window runs from the invitation or from delivery of the documents.
Which diligence documents are available? The answer indicates whether the investor sees the same materials the lead investor relied on.
How is the decision recorded? The answer shows whether the file captures what was reviewed and when.
What cash is available during the hold and at exit? The answer separates interim liquidity from final proceeds.