CVs threaten fee-free co-invest
Fee-free co-investment is central to driving down the costs of PE investing for institutional investors. But the growing continuation fund market threatens their ability to hold onto these hard-earned economic rights.
The most sophisticated pension fund managers, such as CPP Investments, have long track records of investing directly into companies alongside PE fund managers on a no-fee, no-carry basis. Many more are fighting for a piece of the action, even if it means paying up.
LPs increasingly have to decide whether to sell their co-investment positions or stay invested by rolling into a continuation vehicle. In 2025, total secondary market volume was up 41% year-over-year to $226 billion, according to the intermediary Evercore, largely due to managers using these vehicles to extend their hold over companies they can’t or don’t want to sell.
In most cases, the agreements governing co-investments don’t address what happens if a company is subject to a CV transaction, said Genie Cesar-Fabian, general counsel and chief operating officer at Institutional Limited Partners Association, a trade association for institutional investors in private equity.
While fund commitments are subject to the terms of a limited partnership agreement, co-investments are governed by the specific contractual terms agreed in the initial deal.
Co-investors are entitled to proceeds from exits, but they don’t have an explicit right to roll into the CV with the existing no- or low-fee stipulations. Therefore, if they want to maintain exposure to the asset, they may need to exit and reinvest the proceeds on a full-fee basis, Cesar-Fabian said.
LPs are saying, “I had this co-invest deal with a GP that I’ve been investing in for several legacy funds. We’ve had this financial partnership for 15, 20 years. Now CVs are a thing, and my economics are changing dramatically. I can’t really do anything about that,” Cesar-Fabian said.
“The reality is the legal structure of these investments is different. You don’t have the same kinds of protections in the co-investments because it’s not a co-investment into a fund. It’s a standalone investment.”
ILPA released new guidance last week that details disclosure and best-practice expectations for GPs running CVs, including instances in which co-investments are rolled into a continuation fund.
The industry group, which represents more than 600 institutional investors in private markets, called for no net increase in fees or carry costs for rolling LPs in CV processes.
It also called for early engagement of the limited partner advisory committee—which must waive conflicts associated with CV deals—for independent price validation and for LPs to have at least 20 business days to make an investment decision, among other stipulations.
GPs should disclose and explain any departures from these practices, ILPA added.
“We’re saying, going forward, as LPs enter co-invests with GPs, bear in mind that a CV may be an option down the road. So if you want to preserve economics, pay attention to the terms of your co-investment documents,” Cesar-Fabian said.
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Capital Pool is written by Jessica Hamlin and edited by Rod James.
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