• Co-investment can be a powerful motivational tool
  • Firms that offer co-investment do so because of the deep alignment it creates with management
  • Co-investing also carries risk, so diligence these opportunities with the right amount of rigor

Your belief in the deal is only part of the equation. 

When considering a new opportunity, executives with private equity experience know to conduct thorough due diligence before accepting a role. A misstep or oversight in diligencing could result in the loss of millions of dollars, not to mention the sunk opportunity cost and potentially damaged career trajectory.

See also: How to Diligence a PE-Backed CFO Opportunity 

The commitment that a willingness to co-invest demonstrates, the alignment it creates, and the general confidence in one’s own abilities that it shows continue to be desirable qualities in candidates. Despite these benefits to the firm, utilization of co-investment is spotty across the middle market, so you may not have yet encountered a co-investment opportunity. You must always seek concrete alignment with your sponsor on the expectations of your co-investment payout and conduct strong due diligence before entering into an agreement.

Diligencing for Co-Investment

Thoroughly diligencing the company’s debt status and capital structure are paramount before making a co-investment. Customer concentration, EBITDA multiple, total debt, and covenant health are all attributes that should factor into your diligencing plan. 

See Also: What Are Covenants in Private Equity?

Another area of diligence that can expose instabilities is to examine patterns of follow-on capital injections. These do not always indicate poor performance and are often necessary for add-o...