Institutional investors are expanding private equity co-investments, seeking greater control and lower fees while balancing execution risks, concentration and uncertain investment performance in evolving markets.
Institutional Investors Reconsider the Traditional Private Equity Model
The relationship between institutional investors and private equity firms is evolving as Limited Partners (LPs) increasingly explore co-investments alongside General Partners (GPs). The shift reflects a broader effort to gain greater control over capital allocation, potentially reduce investment costs and selectively access attractive private companies.
According to Financial Times reporting published on 9 October 2026, citing S&P Global Market Intelligence, private equity co-investment activity more than doubled year over year to $198 billion in the first half of 2026. By comparison, global private equity fundraising grew 5% over the same period, reaching $312 billion.
These figures highlight the growing importance of co-investments within private markets. They do not, however, establish that capital is moving directly from traditional funds into co-investments. The two figures measure different activities and should be interpreted separately.
Why LPs Are Exploring Co-Investments
Traditionally, institutional investors have allocated capital to private equity funds managed by GPs. These managers identify investment opportunities, conduct due diligence, acquire companies and oversee portfolio development. LPs receive exposure to the resulting portfolio in exchange for investment commitments and the fees specified in their fund agreements.
Co-investments offer a different approach. Rather than participating only through a pooled fund, an LP can invest directly in a particular company alongside a private equity manager.
One attraction is the potential to reduce investment fees. Depending on the arrangement, co-investments may carry lower fees than conventional fund commitments. This can improve net returns if the underlying investment performs well, although lower costs alone do not guarantee superior performance.
Co-investments can also give LPs greater control over their exposure to specific companies, sectors and investment opportunities. For pension funds and other institutional investors operating under defined mandates, this flexibility can help align capital deployment with portfolio objectives.
The strategy nevertheless requires expertise, resources and effective investment oversight.
Pension Funds Seek Greater Investment Flexibility
Institutional pension funds are important participants in this changing landscape. The Financial Times report highlights the North Carolina Investment Authority and the Pennsylvania State Employees' Retirement System (PSERS) in the context of co-investment opportunities and experience.
CalPERS, the California Public Employees' Retirement System, provides an important counterpoint. The report notes concerns about historical co-investment underperformance, illustrating why direct participation should not automatically be regarded as superior to conventional fund investing.
These examples demonstrate that institutional investors face different considerations when deciding how to deploy capital. Some may prioritize cost efficiency and investment selection, while others must weigh internal capabilities, diversification requirements and the resources needed to evaluate individual transactions.
The available reporting does not establish individual co-investment amounts for these institutions or suggest that all of them participated in the same deals.
What the Trend Means for General Partners
For General Partners, the expansion of co-investments presents both an opportunity and a challenge.
On the positive side, co-investment capital can supplement a fund's investment capacity and help finance larger transactions. GPs may be able to maintain closer relationships with institutional investors by offering access to selected opportunities that fit their investment mandates.
However, LPs seeking greater participation may also demand more transparency, faster access to investment information and stronger evidence of deal quality. Managers must carefully balance these expectations with their existing fund structures, allocation policies and responsibilities to other investors.
The competitive advantage may increasingly belong to GPs that combine strong deal sourcing and execution capabilities with credible investor relationships.
Summation Capital is another firm identified in the reporting. Its founder, Roger Vincent, described co-investments as an increasingly established part of institutional investors' investment approach. The firm had made approximately a dozen co-investments, according to the article.
This illustrates how co-investments can form part of a broader portfolio-construction strategy rather than simply replacing traditional private equity funds.
The Risks Behind the Growth
Despite their potential benefits, co-investments introduce several material risks.
First, LPs may have limited time to assess opportunities before a transaction closes. Compressed timelines can make comprehensive due diligence more difficult, particularly for investors without dedicated direct-investment teams.
Second, adverse selection can arise if the opportunities offered to co-investors are less attractive than other investments available to a GP. LPs must evaluate the investment rationale and understand how opportunities are allocated.
Third, direct investments can create concentration risk. Selecting individual companies may expose an investor more heavily to a particular business, industry or economic development than a diversified fund portfolio would.
Finally, institutional investors must consider operational capacity. Direct investments require legal, financial and commercial analysis, ongoing monitoring and appropriate governance. These demands can offset some of the potential benefits of lower fees.
Co-investment performance therefore depends on more than the structure of the transaction. Deal selection, valuation, governance, portfolio construction and execution remain critical.
What Comes Next for Private Capital?
The reported growth in co-investments raises an important question for the private equity industry: how will LP-GP relationships develop as institutional investors seek more flexibility in deploying capital?
Traditional fund commitments continue to offer diversification and access to professional investment management. Co-investments provide another mechanism for selected opportunities, but they require additional capabilities and do not eliminate investment risk.
For LPs, the strategic priority is to determine when direct participation complements their existing portfolios and when traditional fund exposure remains more appropriate.
For GPs, the challenge is to attract institutional capital while demonstrating investment quality, transparent processes and the ability to execute successfully alongside their investors.
The increase in co-investment activity to $198 billion in the first half of 2026 provides a significant indicator of investor interest. Whether that growth translates into consistently better outcomes will depend on the quality of opportunities, the discipline of investment decisions and the ability of LPs and GPs to manage risks together.
Co-investments are becoming an increasingly important component of the private equity landscape. The trend does not necessarily signal the end of traditional funds; rather, it suggests that institutional investors are broadening their options and placing greater emphasis on control, economics and selective access to private-market opportunities.
Source: Financial Times
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