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.
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.
|
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 |
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.
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.