Part 31 covers a distinction that gets blurred often in casual industry conversation, but carries real regulatory significance — the difference between an investor's contractual co-investment right and a formally structured co-investment vehicle.
Q1. What is a "co-investment right" as commonly negotiated by large investors in an AIF?
A co-investment right is a contractual entitlement, typically negotiated by larger institutional investors, giving them the option to invest additional capital directly alongside the AIF into a specific portfolio company, outside the main fund vehicle — usually to gain greater exposure to a particularly attractive deal beyond their pro-rata allocation within the fund itself.
Q2. How does a co-investment made under such a right differ structurally from investing through the main AIF?
A co-investment made pursuant to such a right is typically a direct investment by the investor into the portfolio company (or through a separate special-purpose vehicle set up for that specific co-investment), rather than through the pooled AIF structure — meaning the co-investing investor bears that specific position's risk and return directly, without pass-through mechanics or fund-level fee/carry economics necessarily applying in the same way.
Q3. What is a formally structured "co-investment portfolio" or "co-investment scheme" as distinct from ad hoc co-investment rights?
This refers to a more formalised vehicle or arrangement — potentially itself a distinct AIF scheme, or a defined structure under the fund's broader framework — specifically designed to aggregate co-investment capital from multiple interested investors into a designated deal, rather than relying on informal, deal-by-deal bilateral co-investment arrangements.
Q4. Does SEBI's AIF regulatory framework specifically define or regulate co-investment arrangements?
Yes — SEBI has, through amendments to the AIF Regulations, specifically addressed the co-investment framework, recognising co-investment as a regulated activity with its own conditions, distinct from a simple side arrangement outside the AIF Regulations' purview.
Q5. Why does it matter whether a co-investment arrangement falls within or outside the formal regulatory co-investment framework?
Because arrangements falling within the formal framework carry specific regulatory conditions and protections (relevant to fair treatment of investors, disclosure, and process), whereas informal, purely bilateral side arrangements outside this framework could raise different regulatory and fairness considerations — particularly around whether co-investment access was offered equitably rather than selectively favouring certain investors without disclosed criteria.
Q6. Should co-investment rights be disclosed to all investors in the fund, or can they be privately negotiated with select large investors only?
Co-investment rights are commonly negotiated selectively with larger investors (often via side letters — see Part 5 of this series), but the fund's overall approach to who is offered co-investment access, and on what basis, should be handled consistently with the fund's disclosed most-favoured-nation and fair treatment commitments in the PPM, to avoid unfair or opaque preferential treatment concerns.
Q7. Does a co-investing investor pay management fee or carry on their direct co-investment position?
This varies significantly by arrangement — some co-investment structures charge no fee or a reduced fee (since it's a more direct investment with less ongoing management overhead from the manager), while others may still involve a fee or carry component, depending entirely on what's negotiated for that specific co-investment arrangement; there's no single market-standard answer.
Q8. How does deal allocation between the main AIF and a co-investment opportunity get decided?
This should follow the fund's documented deal allocation policy (see Part 6 of this series on investment restrictions and deal allocation), typically ensuring the main fund's allocation needs are satisfied first (or per an agreed allocation formula) before co-investment capacity is offered to interested investors, to avoid the perception that co-investment opportunities are being carved out to the main fund's detriment.
Q9. Can the manager itself participate in a co-investment alongside the fund and other co-investing parties?
Yes, this is common practice and can serve an alignment-of-interest function, but where the manager participates directly (as opposed to through its role managing the fund), this itself becomes a related-party consideration requiring the same governance scrutiny discussed in Part 21 of this series.
Q10. What happens if demand for a co-investment opportunity from eligible investors exceeds the available co-investment capacity in a specific deal?
The fund should have a documented, consistently applied allocation methodology for such scenarios (such as pro-rata allocation among eligible interested investors, or a defined priority order), disclosed in advance rather than decided informally deal-by-deal, to maintain fairness and defensibility.
Q11. Are co-investment vehicles subject to the same reporting obligations (AAR/LQAR) as the main AIF?
Where a co-investment arrangement is structured as its own separate AIF scheme, it would generally be subject to the applicable AIF reporting framework in its own right; a purely direct, non-AIF-structured co-investment (investor investing individually into the portfolio company, outside any AIF wrapper) would not carry the same AIF-specific reporting obligations, though other applicable regulatory requirements for that direct investment would still apply.
Q12. What should investors specifically negotiate for when securing co-investment rights in an AIF's PPM or side letter?
Clarity on the process and timeline for being offered co-investment opportunities, the basis for allocation if demand exceeds capacity, the fee/carry treatment applicable to co-investment positions, and confirmation of how the arrangement interacts with the main fund's own allocation policy — vague or undefined co-investment rights are difficult to enforce meaningfully when an actual opportunity arises.
Structuring Co-Investment Arrangements That Are Fair and Defensible
We advise fund managers on structuring co-investment frameworks — whether informal rights or formal co-investment schemes — that satisfy both regulatory expectations and investor fairness considerations.
This FAQ is for general informational purposes and does not constitute legal advice on co-investment structuring specific to any fund.