Co-investment is when an asset owner invests directly into a specific deal alongside a private-equity fund it already backs, typically paying little or no management fee or carried interest. Direct investment is when the asset owner sources, leads and controls the deal itself, without a sponsor. Co-investment lowers fees while keeping the manager in control; direct investing removes fees entirely but requires the owner to build in-house deal capability.
For decades, the standard way a pension fund or endowment accessed private markets was simple: commit capital to a private-equity fund, pay the manager a management fee and a share of the profits, and wait. As asset owners grew larger and more sophisticated, many concluded that those fees were eating too much of their return. Co-investment and direct investment are the two main ways they have responded. The terms are often used loosely, but the distinction matters — and it shapes how the world's biggest allocators build their private-market programmes.
The two models, defined
A co-investment is when an asset owner invests directly into a single company alongside a private-equity fund it already backs. The fund — the sponsor — sources the deal, leads the negotiation, conducts the primary due diligence and controls the investment afterwards. The asset owner simply puts additional capital into that specific transaction, usually on highly favourable fee terms. The owner is a passenger in a car the sponsor is driving.
A direct investment is when the asset owner sources, leads and controls the deal itself, with no external fund manager involved. The owner's own team originates the opportunity, performs the diligence, structures the transaction, sits on the board and manages the holding over time. Here the owner is driving.
The common thread is that both deploy capital into individual companies outside a traditional commingled fund. The dividing line is control — and control is what determines the fees, the capability required, and the risk.
Why asset owners co-invest: the fee story
The single biggest motivation for co-investment is cost. Traditional private-equity funds charge a management fee plus carried interest — historically the "2 and 20" model — which compounds into a very large drag over a fund's life. Co-investments, by contrast, typically carry no or sharply reduced management fee and carried interest on the co-invested capital, because sponsors offer them as a benefit to their most valued limited partners.
The savings are substantial and well documented. CalSTRS, the California teachers' pension, reported that its "Collaborative Model" — a mix of co-investments, internally managed assets and separately managed accounts — has saved the fund more than US$550 million in fees and carried interest. It has become the rule rather than the exception that large institutions negotiate access to fee-free or low-fee direct co-investment opportunities as a condition of their fund commitments.
There is a second benefit beyond cost: selectivity. Co-investment lets an owner lean into specific deals it finds especially attractive, concentrating capital where its conviction is highest rather than accepting whatever the blind-pool fund happens to buy.
The catch: "no fee, no carry" is not the whole truth
Experienced co-investors know to read the fine print. While the headline economics on co-invested capital may be fee-free, sponsors can still extract value at the portfolio-company level — monitoring fees, transaction fees and other charges that disproportionately affect co-investors. The marketed "no fee, no carry" can therefore overstate the saving.
There is also a structural distinction worth noting. Direct co-investments alongside a sponsor often do carry the low- or no-fee economics. But dedicated co-investment funds — pooled vehicles that a manager assembles to make co-investments on behalf of many LPs — typically do charge management fees and carried interest, even though they invest in the same kinds of deals. An owner pursuing the fee benefit needs to know which structure it is actually buying.
Direct investing: more control, far higher demands
Direct investing removes the sponsor — and the sponsor's fees — entirely. In principle this captures the maximum economic benefit, since there is no manager taking a cut at all. In practice it is the hardest model to execute, and only a minority of asset owners can sustain it.
Direct investing requires an in-house team capable of originating deals, conducting institutional-quality due diligence, structuring and negotiating transactions, and then governing and adding value to companies over many years. It demands competitive compensation to attract that talent, robust internal governance to make fast decisions, and the scale to diversify across enough deals that a single failure does not sink the programme. This is why direct investing at scale is largely the province of the very largest funds — the major Canadian pensions, large sovereign wealth funds, and substantial family offices — that have deliberately built operating teams rivalling private-equity firms.
The shared risks
Both approaches abandon the diversification of a commingled fund and replace it with concentration in individual companies. When a co-invested or directly held deal goes wrong, it hurts the portfolio more than a single bad holding inside a diversified fund would. Both also compress the time available for diligence — co-investment opportunities in particular often arrive with short deadlines, testing whether the owner's team can move quickly without cutting corners.
And both depend on adverse selection being managed. An owner must ask why a sponsor is offering a co-investment at all: is it sharing its best deals, or syndicating the ones it could not fully finance itself? Disciplined co-investors evaluate each opportunity on its own merits rather than assuming access is a favour.
How to think about the choice
For most asset owners, the practical answer is a spectrum, not a binary. Smaller and mid-sized institutions concentrate on co-investment, which captures much of the fee benefit and selectivity without the cost of building a full direct-investing capability. The largest and most sophisticated owners run both — co-investing broadly while reserving direct investing for areas where they have genuine, durable expertise.
The strategic logic is the same one that runs through all of institutional investing: fees compound relentlessly against the investor, and control is valuable but expensive. Co-investment and direct investment are simply two points on the trade-off between cutting fees and taking on the burden of doing the work yourself. The right mix depends on an owner's scale, governance and honest assessment of its own capability.