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What Is an Equity Co-Investment?

Geri Terzo
Geri Terzo

Some of the deals that unfold in the financial markets are simply too big for one investment firm accomplish alone. Or, an investor may just not be willing to take on all of the risk associated with an investment. Equity co-investment involves the participation of more than one investment firm, such as a private equity company, to achieve a deal such as a buyout of a corporation. Making a co-investment gives the investor a minority stake in a transaction alongside other buyers.

A co-investment is also productive when an investment company is acquiring a business in another region. In this scenario, a buyer could use the local support of another firm with management who are knowledgeable about the region, the acquisition target, and regulations. It is possible that an investment firm will limit co-investment opportunities to a certain region.

Man climbing a rope
Man climbing a rope

Private equity firms are active in the equity co-investment process. Traditionally, these investment firms frequently acquire minority or majority stakes in businesses, hold those assets in portfolios, attempt to improve upon the businesses, and then sell the interests several years later for profit. Some private equity firms have entire portfolios dedicated to equity co-investment opportunities.

There are different reasons for pursuing an equity co-investment as opposed to obtaining a majority stake in an entity alone. A transaction may simply be too expensive for one firm to do by itself. It is also possible that an investment firm prefers to invest only a percentage of the total price tag associated with a deal. The relationship between co-investors typically is one in which the shared investment is welcome as opposed to any contentious competition for ownership.

In a leveraged buyout (LBO) transaction, a type of acquisition in which private equity firms often participate, much of the deal is paid for with debt. These deals can be extremely expensive, especially when the target company is a large, industry-leading entity. Subsequently, private equity firms may turn to an equity co-investment structure and create partnerships with other investment firms, including other private equity investors or venture capitalists, in order to get an LBO accomplished.

Other than private equity, there are other types of investors that participate in equity co-investment deals. Even if a private equity firm is leading a deal, other co-investors might extend to insurance companies, nonprofit organizations, and even wealthy individuals. Such partnerships might limit investment into deals that are considered small to mid-sized relative to other deals that occur in the markets.

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