In recent years, many investment vehicles tied to ultra-wealthy families have shown a growing preference for buying stakes in private companies directly, rather than investing through traditional private equity funds that charge fees and limit investor control.

However, direct investing is far from simple. It often requires building a dedicated in-house investment team capable of sourcing deals, conducting due diligence, and managing portfolio companies — a costly and complex undertaking that not every family office is prepared to handle.

To balance independence with practicality, an increasing number of family offices have adopted a hybrid approach: they commit capital to private equity funds while also co-investing alongside those funds in select deals.

Under these arrangements, family offices make a significant investment in a fund in exchange for the opportunity to invest additional capital directly into specific portfolio companies. In most cases, they benefit from reduced management or performance fees on these co-investments, while relying on the private equity sponsor to handle deal sourcing, analysis, and oversight.

Legal advisors and fund managers say this model has gained traction over the past decade, driven by family offices seeking greater direct exposure and private equity firms facing tougher fundraising environments.

According to Scott Beach, who leads a family office practice at a major law firm, this structure allows families to participate in direct investing without shouldering the full operational burden themselves. By partnering with experienced sponsors, they can share risks, costs, and expertise.

Industry lawyers note that co-investing also gives family offices access to deals they might otherwise be priced out of. In competitive mid-market transactions, private equity funds often have more firepower than individual family offices, making it difficult for them to win auctions on their own.

To attract capital from these sophisticated investors, private equity firms have become more flexible in negotiating co-investment rights. Some sponsors allow family offices to maintain their ownership percentage when new shares are issued, or provide deeper financial and operational insights into portfolio companies than typically offered to standard fund investors.

Despite these advantages, family offices remain minority participants in most co-investment deals. They generally lack the governance rights or decision-making power they would have if they acquired a company outright. They are not directly involved in negotiations with sellers and must ultimately defer to the private equity sponsor’s strategy.

A key limitation is that family offices usually cannot block a fund’s decision to sell a company. This can be problematic for families that prefer long-term holdings, creating potential tension when private equity firms seek a timely exit.

On the other hand, co-investing enables family offices to deploy capital more quickly than if they were sourcing deals independently or relying solely on fund investments. Some families now allocate as much as 15% to 20% of their portfolios to co-investments.

Advisors caution, however, that families must carefully manage liquidity and be selective about both sponsors and companies. An invitation to co-invest does not automatically signal a high-quality opportunity — in some cases, it may reflect a sponsor’s uncertainty or a riskier asset.

Ultimately, lower fees can improve returns, but co-investing is not a guarantee of superior performance. It is best viewed as a strategic tool that offers access and efficiency, rather than a sure path to outperformance.