The 2026 evidence supports a strong story, but with an important distinction: institutional investors are not abandoning private equity funds. They are increasingly treating access to individual deals as part of the value they expect from a fund manager.
McKinsey’s 2026 survey of 300 limited partners found that 52% considered co-investment access a requirement when committing to a fund, while another 39% of LPs without a formal requirement still preferred managers that offered it. The same research found that around 70% of LPs planned to maintain or increase private equity deployment in 2026. This points to a change in how institutions invest not an exodus from private equity.
A second important 2026 development is the scale of reported activity. The Financial Times reported that private equity co-investment value more than doubled year on year to a record $198 billion in the first half of 2026. That is a significant indicator of momentum, although deal-value growth alone does not establish that every type of investor is participating equally or that co-investments are outperforming funds.
1. A Changing Relationship Between LPs and Private Equity Funds
For decades, institutional investors have accessed private companies primarily by committing capital to private equity funds. Pension funds, insurers, university endowments and sovereign wealth funds provide money to a general partner (GP), which selects businesses, manages investments and eventually distributes proceeds.
That model remains central to private markets, but some large investors increasingly want another option: investing in individual transactions alongside the fund manager.
This is the appeal of private equity co-investment. Rather than relying entirely on a pooled fund, an investor can contribute additional capital to a specific acquisition or investment. It can gain greater visibility into the underlying business and potentially reduce certain investment fees.
The shift is becoming more visible in 2026. According to the Financial Times, co-investment activity reached $198 billion in the first half of the year, more than double the comparable period in 2025. The figures suggest that co-investments are becoming a more important part of private equity dealmaking.
However, the development is better understood as a change in the relationship between investors and fund managers than as the end of traditional private equity funds.
2. What Is Private Equity Co-Investment?
A private equity co-investment occurs when a limited partner (LP) invests directly in a company alongside a private equity sponsor.
For example, a GP identifies a business it wants to acquire for $1 billion. Its fund may provide $700 million, while selected LPs contribute the remaining $300 million through a separate investment vehicle or another agreed structure.
The LP receives exposure to the individual company rather than simply increasing its commitment to the GP’s pooled fund.
This arrangement differs from three investment structures:
Traditional fund investing: The LP commits capital to a pooled fund. The GP selects and manages investments, and the LP participates in the overall portfolio.
GP-led co-investment: The LP invests alongside a GP in a particular transaction. The sponsor generally leads the acquisition, management strategy and eventual exit.
Independent direct investing: The institution identifies, negotiates and invests in a business without relying on a private equity sponsor to lead the transaction.
Co-investment therefore sits between passive fund participation and independent dealmaking. The LP gains exposure to a specific asset but usually depends on the GP’s expertise and operational capabilities.
3. Why Institutional Investors Are Increasingly Interested
The growing demand reflects several considerations beyond fees.
More selective capital allocation
Traditional funds require investors to commit capital to a strategy before knowing every company the GP will eventually acquire. Co-investments provide an opportunity to evaluate individual transactions and decide whether a particular business fits the institution’s portfolio.
An investor interested in healthcare technology, for example, may choose to participate in a healthcare acquisition without increasing its exposure to unrelated industries.
Greater deal-level visibility
Co-investors generally receive information about the individual transaction, including its business model, financing arrangements, valuation assumptions and potential risks. The level of access depends on the agreement, but it can provide more insight than a conventional fund commitment.
Portfolio flexibility
Large institutions may already have substantial exposure to a particular industry, geography or company type. Co-investments allow them to manage additional exposure selectively rather than increasing their entire private equity allocation.
Stronger GP relationships
Co-investment access can also strengthen relationships with established sponsors. A pension fund that regularly supports a GP’s flagship funds may receive opportunities to participate in selected transactions.
McKinsey’s 2026 research found that 52% of surveyed LPs considered co-investment access a requirement when committing to a private equity fund. Another 39% of LPs without a formal requirement preferred managers that offered opportunities.
This suggests that co-investment access is increasingly influencing manager selection and fundraising negotiations, not simply investment decisions after a fund has been established.
4. The Financial Appeal: Lower Fees and Greater Exposure
Traditional private equity funds commonly use a management fee and carried-interest structure. The familiar industry reference is 2% in annual management fees and 20% of investment profits as carried interest, although actual arrangements vary considerably.
Co-investments can have more favorable economics. Some are offered without management fees or carried interest, while others involve reduced charges or separate expenses.
The difference can matter when an investment performs well. However, lower fees do not automatically produce better returns. The underlying purchase price, operating performance, debt structure, exit valuation and investment period remain critical.
A simplified hypothetical example
Assume an institution invests $10 million in a private equity transaction.
| Item | Traditional fund illustration | Co-investment illustration |
|---|---|---|
| Initial investment | $10,000,000 | $10,000,000 |
| Gross value at exit | $15,000,000 | $15,000,000 |
| Gross investment profit | $5,000,000 | $5,000,000 |
| Illustrative management fees | $1,000,000 | $0 |
| Illustrative carried interest | $1,000,000 | $0 |
| Additional co-investment costs | — | $150,000 |
| Amount after listed costs | $13,000,000 | $14,850,000 |
Illustrative only. Assumes a five-year investment, a constant 2% annual management fee on the original $10 million, 20% carried interest on the full $5 million profit, and no management fee or carry on the co-investment. The co-investment includes $150,000 in additional diligence and administration costs. Taxes, fund expenses, preferred returns, fee offsets and other contractual terms are excluded. This is not a like-for-like comparison of actual fund structures or performance.
The example demonstrates how fee differences can affect the amount investors retain. It does not establish that co-investments will outperform traditional funds. A poorly selected business can produce a loss regardless of its fee structure.
5. The Risks Behind the Co-Investment Opportunity
The financial appeal comes with responsibilities that institutions cannot ignore.
Concentration risk: A traditional fund generally spreads capital across multiple companies. A co-investment may expose an institution to a single business. If that company underperforms, the effect on the investment can be substantial.
Due diligence costs: Evaluating a private company requires financial, legal, commercial, operational and regulatory analysis. Institutions need experienced professionals who can assess the transaction independently rather than simply accepting the sponsor’s investment case.
Short decision windows: Co-investment opportunities can arrive close to a transaction’s signing or closing. Investors may have limited time to review complex documentation, obtain internal approvals and commit capital.
Allocation conflicts: GPs may face difficult decisions when allocating attractive opportunities between their own funds, co-investors and other investors. LPs need transparency about allocation policies and potential conflicts of interest.
Dependence on the sponsor: The GP usually leads negotiations, appoints management, oversees operations and determines the exit strategy. A co-investor may have limited influence over these decisions.
Valuation and liquidity uncertainty: Private companies do not have continuously observable market prices. Investors may have difficulty determining the true value of their holdings, and selling an investment before the planned exit can be difficult.
The governance arrangements also matter. Co-investors should understand voting rights, information access, transfer restrictions, exit provisions and what happens if the GP sells the company or transfers it into a continuation vehicle.
These issues help explain why sophisticated institutions increasingly negotiate co-investment rights and governance protections before committing capital.
6. How the Shift Is Changing Private Equity Fundraising
The growth of co-investments is changing what LPs expect from private equity managers.
Historically, access to individual deals was often discretionary. A GP could offer opportunities to selected investors based on the size of their commitments, their relationship with the manager or their ability to provide capital quickly.
That arrangement is becoming more structured. Investors increasingly discuss co-investment access during fundraising and may negotiate allocation preferences or other rights through side letters.
For GPs, the arrangement has advantages. Additional capital can help finance larger acquisitions, particularly when a transaction exceeds the concentration limits of a single fund. It can also help sponsors complete deals without bringing in another competing financial sponsor.
But there is a trade-off. If LPs expect access to attractive deals at reduced fees, traditional fund managers may face pressure on their economics.
The negotiating balance is also changing. Large institutions can use their ability to provide substantial capital as leverage when discussing investment terms. Yet this does not mean every LP has equal bargaining power. Established managers with strong investment records may still control access to their most attractive opportunities.
The result could be a more differentiated private equity market: large, experienced LPs secure negotiated co-investment arrangements, while smaller institutions continue to depend more heavily on pooled funds.
7. The Future of Private Equity: Replacement or Complement?
Co-investment is likely to become a more important component of institutional private equity portfolios, but traditional funds remain useful.
Large pension funds and sovereign wealth funds may have the resources to build dedicated co-investment teams. Smaller institutions may not have sufficient staff, capital or transaction experience to evaluate individual opportunities efficiently.
Family offices are also exploring direct private-market exposure, although their capabilities vary considerably. For investors interested in alternative assets, adjacent areas such as sports franchises as family office assets and farmland as a strategic real asset illustrate how investment decisions increasingly extend beyond conventional listed securities.
The broader private equity market is also developing new financing and liquidity structures. For example, NAV lending and liquidity solutions for private assets demonstrate how investors and managers are looking for additional ways to manage capital tied up in illiquid portfolios.
The more likely outcome is a combination of approaches. Institutions will continue committing capital to established managers while selectively participating in transactions that match their investment objectives.
Conclusion: More Control Requires More Responsibility
Private equity co-investment is changing how institutional investors access private companies. It offers greater deal-level visibility, more selective capital allocation and the possibility of lower investment charges.
But these advantages require resources. Investors need the expertise to assess individual businesses, the ability to respond quickly and the discipline to understand concentration, governance and liquidity risks.
The central development is not that institutions are abandoning private equity funds. It is that large LPs increasingly want more influence over where their capital goes and what they pay to access individual opportunities.
For private equity managers, offering co-investments is becoming an increasingly important part of maintaining investor relationships. For LPs, the challenge is determining whether greater access genuinely improves their portfolios.
Ultimately, co-investment rewards investors who can combine strong GP relationships with independent investment judgment. Without that capability, lower fees alone are not enough.
Frequently Asked Questions
1. What is private equity co-investment?
Private equity co-investment occurs when an LP invests directly in a company alongside a private equity GP, rather than gaining exposure only through the GP’s pooled fund.
2. Why are institutional investors increasingly choosing co-investments?
They seek greater deal-level visibility, selective investment opportunities, portfolio flexibility and potentially lower fees. Co-investments can also strengthen relationships with established private equity sponsors.
3. How do private equity co-investments differ from traditional funds?
Traditional funds pool capital across multiple investments selected by the GP. Co-investments allow LPs to participate in specific transactions alongside the sponsor.
4. Do co-investments have lower fees than traditional private equity funds?
They often have reduced management fees and carried interest, but arrangements vary. Due diligence, legal, administration and other expenses can still be significant.
5. What are the main risks of private equity co-investing?
Major risks include concentrated exposure, limited liquidity, valuation uncertainty, short investment deadlines, due diligence costs and dependence on the lead GP.
6. Can smaller institutional investors participate in co-investment opportunities?
Yes, although access can be limited by minimum investment requirements, internal resources, transaction experience and relationships with private equity sponsors. Some investors participate through pooled co-investment vehicles.
7. Will co-investments replace traditional private equity funds?
Unlikely. Traditional funds provide diversification and professional investment management, while co-investments offer selective exposure. Many institutions are likely to use both.
Contributing Writer for Alt Finances with experience in luxury events, travel, fashion, and the arts. Active investor through her family office across real estate, energy, and private equity. University of Miami – BBA.
