Big investors are no longer content to just back funds, they increasingly want to invest directly in the deals those funds pursue. According to reports from Mint, this push for co-investment rights is giving limited partners (LPs) more control over where their money goes and better economics, while encouraging fund managers to offer such access to secure commitments and execute larger deals. Co-investment has become almost a common ask by investors in any new fund raise, as explained by Siddharth Shah, senior partner at law firm Khaitan & Co. General partners (GPs) are at times able to get co-investment interest ranging from 25% to 50% of their fund size and in some cases almost 100% of the fund size, making it a strong pull from a fundraise perspective.
The shift is visible in recent trends, with India's overall fundraising activity hitting an all-time high of $23.2 billion across 123 funds, according to an EY report. As reported by Mint, this renewed appetite also reflects India's rising allocation among global LPs amid China's slowdown. Fund managers are increasingly using co-investment access as a lever to attract capital, with the co-investment right being equal to the amount invested by a LP to maximize their investment in the fund. Elev8 Venture Partners, along with its limited partners, invested ₹300 crore in nutraceutical brand Fast & Up's parent Fullife Healthcare in March, with the growth-stage venture capital firm closing its inaugural fund at ₹1,400 crore in September last year.
A survey by McKinsey of more than 50 global LPs found nearly 60% have done co-investments in India, with 54% reporting outperformance relative to underlying fund investments, 42% seeing similar returns and 4% underperforming. According to Mint, co-investment activity has grown from negligible levels two decades ago to 25-28% of deployment value and around 20% of volume over the past five years. The backdrop is improving with stronger deal activity and exits, as PE/VC deals rose 1.6x to $207 billion between 2016-20 and 2021-25, while exits more than doubled to about $120 billion, as noted by McKinsey in a recent report.
Co-investments allow LPs to increase exposure to specific deals and gain flexibility on exits, with exits typically aligned with the fund's timeline but instances where LPs can control timing depending on deal structure. As reported by Mint, co-investment activity is strongest in new technology, followed by financial services, consumer goods, IT and IT services, and pharma and healthcare. Firms are using co-investments to compete for larger transactions, with ChrysCapital backing Mankind Pharma with an investment of about $350 million from a $600 million fund, with a significant portion coming from five co-investing LPs. The Securities and Exchange Board of India's new co-investment schemes, introduced last year under rules for alternative investment funds (AIFs), are simplifying structures by reducing reliance on the costlier PMS route while offering greater flexibility and lower compliance requirements.
