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Key takeaways
- Direct and co-investments both offer greater control, transparency, and fee efficiency than traditional fund investing.
- The key difference lies in who leads the deal: direct investors originate and manage opportunities themselves, while co-investors join deals alongside an established fund manager.
- For RIAs and individual investors, access and execution have historically been limited, but that landscape is beginning to change.
What are direct and co-investments?
In private markets, investors are increasingly looking for ways to deepen exposure to high-conviction opportunities while reducing fee drag. Direct and co-investments each offer compelling pathways to do this, providing flexibility, efficiency, and alignment that can enhance long-term portfolio outcomes.
Both strategies sit between traditional fund commitments and full control investing, offering investors the ability to participate in specific deals rather than a blind pool of capital.
Why you should be excited about direct and co-investments
Fee efficiency: Both structures may help investors bypass or minimize traditional “two and twenty” economics, increasing net return potential.
Control and customization: Direct investing allows for bespoke deal structures and active governance, while co-investments provide tailored exposure to individual opportunities within a manager’s portfolio.
Enhanced access: Co-investments, in particular, may open the door to opportunities that would otherwise be inaccessible.
Direct vs. co-investments
|
Dimension |
Direct investment |
Co-investment |
|
Deal sourcing |
Investor originates and negotiates transactions directly with companies or founders |
Investor participates in a deal sourced and led by a fund manager (the GP) |
|
Due diligence & management |
Fully handled by the investor, requiring significant internal resources and expertise |
Led by the GP; though co-investors can overlay their own processes and oversight |
|
Fees |
Minimal or no external fund fees; returns accrue directly to the investor |
Typically offered with reduced or waived management and performance fees |
|
Control |
High. The investor sets terms, governance, and exit strategy |
Limited. The GP typically retains decision-making control |
|
Diversification |
Basically none, as a single, concentrated deal |
Also basically none, but easier to scale across deals and managers if you have GP relationships |
|
Operational burden |
Heavy. Requires infrastructure, legal, and monitoring capabilities |
Moderate. Requires tactical skillset to determine allocation benefits, but can leverage GP’s infrastructure and reporting |
The risks of direct and co-investments
As with any private markets strategy, these opportunities come with trade-offs.
Illiquidity: Typical direct and co-investments remain long-term, often requiring several years before returns are realized.
Concentration risk: Direct investments, in particular, can result in exposure to a small number of companies or sectors. Typically this is why they are only a small component of fund vehicles/portfolios.
Operational complexity: Conducting or evaluating diligence, legal structuring, and ongoing monitoring can be resource-intensive.
Manager dependence: Co-investors must to some extent rely on the lead fund manager’s judgment and execution, which can create exposure to manager-specific idiosyncratic risks.
Understanding these risks - and ensuring proper diversification, diligence, and governance - is essential to effectively executing these types of investments.
The RIA challenge
While the appeal of direct and co-investing may be strong, execution has historically been difficult, particularly for RIAs and smaller institutions.
Access to top-tier deal flow is often gated by the need for relationships with private equity and venture managers. Building the diligence, legal, and operational capacity to underwrite and monitor direct deals can be resource-intensive. Meanwhile, large, institutional investors and family offices have typically been preferred co-investment partners for GPs.
However, as private markets mature, new structures and partners - like Opto - enable advisors and their clients to participate meaningfully in institutional-grade opportunities.
For those able to access and execute these deals effectively, direct and co-investing can help create more intentional, efficient, and participatory private markets portfolios for investors.
Opto can help RIAs, family offices, and private banks access compelling deal flow, and facilitate single- or multi-asset vehicle creation - featuring both funds and direct/co-investments. Read more here and email us at partner@optoinvest.com.
Important disclosures
Opto Investment Management, LLC (the “Firm”) is a wholly-owned subsidiary of Opto Investments, Inc. and is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. This website is operated and maintained by Opto Investments, Inc. Certain products described herein and institutional relationships may involve investment advisory services provided by the Firm. This website is presented for financial institutions and investment professionals only and is not intended for individual consumers or retail investors, unless specifically noted. Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by the Firm or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from external, linked or independent sources, is believed to be reliable, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. We disclaim any responsibility for information, services or products found on linked websites. Images and photographs are included for the sole purpose of visually enhancing the website. None of them show current or former clients and should not be construed as an endorsement or testimonial. All investing is subject to risk, including loss of principal. Historical performance is not a guarantee of future performance and clients may experience different results. This information contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of the depicted investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting operations that could cause actual results to differ materially from projected results. See related disclosures at https://www.optoinvest.com/disclaimers.
