Andrew Ross Sorkin
In recent years, investment arms of ultra-wealthy families have increasingly shown a preference for acquiring stakes in private companies directly, rather than investing exclusively through traditional private equity funds. For many family offices, this shift reflects a desire to avoid high management and performance fees, gain greater transparency, and exercise more influence over how capital is deployed. Direct ownership can offer a sense of control and alignment that fund structures often lack.
However, bypassing private equity funds entirely is rarely simple. Sourcing high-quality private deals, conducting due diligence, negotiating transactions, and managing portfolio companies all require deep expertise and substantial resources. Building an in-house investment team capable of handling these responsibilities can be costly and time-consuming, particularly for family offices that want to remain lean and flexible.
To balance these competing goals, many family offices have adopted a hybrid approach that allows them to benefit from both worlds. Instead of choosing between private equity funds and direct investments, they are increasingly investing alongside private equity sponsors through structured co-investment arrangements. This strategy enables families to maintain exposure to direct deals without shouldering the full operational burden on their own.
Under typical co-investment agreements, a family office commits a significant amount of capital to a private equity fund. In return, it receives the right to invest additional capital directly into specific portfolio companies that the fund acquires. These side-by-side investments are often made on more favorable terms than the main fund commitment. Management fees and carried interest on co-invested capital are usually reduced or eliminated, while the private equity firm remains responsible for sourcing opportunities, conducting due diligence, and overseeing execution.
According to legal advisors who work closely with both family offices and fund managers, these co-investment structures have become far more common over the past decade. Two major forces are driving this trend. On one side, family offices are increasingly seeking direct exposure to private companies as part of a broader push toward more customized and transparent investment strategies. On the other, private equity firms are facing a more competitive fundraising environment and are therefore more willing to offer attractive co-investment rights to secure large, stable investors.
For many families, the appeal lies in efficiency. By partnering with established private equity funds, they can leverage institutional-level expertise without replicating it internally. As Scott Beach, who leads the corporate and business law department and family office practice at Day Pitney, has noted, the ability to share costs and rely on private equity sponsors for deal sourcing, due diligence, execution, and ongoing management is highly attractive. It allows families to access direct investments while avoiding the need to build a fully independent investment platform on their own balance sheet.
Another important advantage is access. Many family offices, even very wealthy ones, struggle to compete directly with private equity funds in auction-driven transactions, especially in the middle market. Private equity sponsors often have greater scale, deeper relationships with intermediaries, and a track record that makes them more competitive bidders. By investing alongside these sponsors, family offices gain exposure to deals that would otherwise be out of reach.
As Michael Schwamm, a partner at Duane Morris and co-chair of its family office practice, has observed, private equity funds almost always outbid family offices when competing head-to-head. Most families recognize that they are unlikely to be the highest bidder in competitive processes. Co-investing allows them to participate without needing to win the deal outright.
From the perspective of private equity firms, offering co-investment rights has become a useful tool for attracting capital. According to Kevin Shmelzer, co-leader of Morgan Lewis’s private equity practice and family office strategic initiative, sponsors are increasingly flexible when negotiating with family offices. In some cases, they may grant rights that help families maintain their ownership percentage if additional shares are issued in the future. They may also provide more detailed financial, operational, or strategic information about portfolio companies than standard limited partners typically receive.
Despite these benefits, co-investing does not place family offices on equal footing with private equity sponsors. Families investing alongside funds are almost always minority investors. They do not sit at the negotiating table with sellers, nor do they enjoy the same governance rights or operational control they would have if they acquired companies independently. Strategic decisions ultimately rest with the private equity firm.
As Shmelzer has pointed out, family offices are not directly involved in negotiating the initial transaction. Their position is shaped by the sponsor’s decisions, and they remain dependent on the private equity firm’s judgment throughout the investment lifecycle. In practical terms, this means that while families gain exposure, they also accept a degree of dependency.
One of the most significant limitations concerns exit timing. Family offices are often known for their long-term investment horizons and their willingness to hold assets across generations. Private equity firms, by contrast, operate within defined fund lifecycles and are under pressure to exit investments in order to return capital to investors. In most co-investment structures, family offices do not have the right to block or delay an exit.
This mismatch can create tension. When a private equity firm decides to sell a portfolio company, it typically seeks to deliver full ownership to the buyer. As a result, co-investors are often subject to drag-along rights that require them to sell their shares at the same time and on the same terms. For families that prefer to hold onto high-quality assets over the long term, this loss of control can be frustrating.
Still, many family offices are willing to accept these trade-offs in exchange for speed and scale. By participating in co-investments, they can deploy capital more quickly than if they relied solely on sourcing proprietary deals. They can also avoid the administrative complexity of managing multiple small fund commitments while still benefiting from reduced fees on a portion of their capital.
Doug Macauley, a partner in the private client practice at investment advisory firm Cambridge Associates, believes co-investing will continue to grow as private markets become more attractive overall. In his experience, some family clients already allocate between 15% and 20% of their portfolios to co-investments. For these investors, the structure provides a meaningful way to increase exposure to private assets without abandoning diversification or discipline.
However, Macauley also cautions that co-investing is not without risks. Family offices must carefully monitor liquidity, as co-investments can tie up capital for extended periods. They also need to be selective about which fund managers they partner with and which deals they choose to back. Not every co-investment opportunity is created equal.
In some cases, an invitation to co-invest may signal that a sponsor is seeking additional capital because a deal is particularly large, complex, or risky. It may also reflect limited conviction on the part of the fund. While this does not automatically make an investment unattractive, it does mean that families should apply the same level of scrutiny they would to any direct deal.
Ultimately, co-investing should not be viewed as a shortcut to superior returns. As Macauley has emphasized, lower fees can certainly improve net performance, but the structure itself does not guarantee better outcomes. A co-investment is not inherently better or worse than the rest of a fund’s portfolio. Its success depends on the underlying asset, the sponsor’s capabilities, and the alignment of interests among all parties involved.
As private markets continue to evolve, co-investment strategies are likely to remain a central feature of how family offices allocate capital. By blending direct exposure with institutional partnerships, families can pursue greater control and efficiency while still leveraging the expertise of seasoned private equity firms. The challenge lies in striking the right balance between opportunity, risk, and long-term objectives.
