LP Governance in Co-Investments: Key Challenges and Solutions

LP Governance in Co-Invested Deals: Navigating the Complexities with Evolve Venture Capital

Co-investments have become an increasingly popular way for Limited Partners (LPs) to improve their returns and get direct access to attractive deals in the venture capital and private equity space. With the growing popularity of co-investing, LPs are now faced with new governance frameworks that come with their own set of challenges and complexities. This article will dive into the many dimensions of LP governance in co-invested deals, outlining the pain points, providing an analysis of the particulars, and illustrating how Evolve Venture Capital can address these concerns.

The Attractive Hook: The Promise and Peril of Co-Investments

Co-investments offer LPs an attractive possibility of higher returns for less cost. Direct investment in the flagship fund by LPs avoids the standard “2 and 20” fee arrangement, with usually no management charges, and no carried interest. This can add significantly to their net returns. But this is accompanied with its own governance challenges that can make decision-making and risk management challenging.

Pain Points: The Governance Quagmire

1. Limited due to: Unlike principal funds with a standard Limited Partner Advisory Committee (LPAC) to advise on crucial decisions, co-investment vehicles never have one. LPs in co-investments will hence lack significant control over critical matters, and this may lead to a possible lack of consistency with their investment strategy and risk tolerance.
2. Quick Decision-Making Needs: Co-investments require prompt decisions, usually even within 10-15 business days. This requires effective in-house approval procedures and resource deployment for due diligence, which can be quite draining on LPs, particularly those with more intricate in-house setups.
3. Regulatory and Compliance Complexity: The growing focus on regulatory filings, e.g., Foreign Direct Investment (FDI) filings and the Committee on Foreign Investment in the United States (CFIUS), is another complexity. These have to be managed quite often at very short notice, and so accurate and timely due diligence becomes essential.

In-Depth Analysis: Understanding the Governance Frameworks

In order to navigate such challenges, it is critical to appreciate the common governance structures within co-investments:

• Heavy Reliance on Main Fund Governance: Co-investment vehicles tend to lean heavily on the governance arrangements of the main fund. This is easy to do but can cause conflicts if LPs in the co-investment vehicle have different opinions than those in the main fund.
• Investment Opportunity Allocation: Typically, the primary fund would have the first right of investment, with co-investors getting to put their money into only the remaining opportunities. This has the possibility of creating tensions over the allocation of good deals.
• Fee Architecture and Commitments: Co-investments will have lower or no management fees and carried interest, but could impose an upfront administrative fee. The cost structure can encourage LPs to get involved, yet needs to be well weighed in terms of costs versus benefits.

Evolve Venture Capital: Your Partner in Navigating Co-Investment Governance

At Evolve Venture Capital, we understand the complexities and the challenges of LP governance on co-invested deals. We are best at helping LPs to navigate through these challenges with:

• Enhancing Governance Frameworks: We work very closely with LPs so that they can have reasonable governance rights in co-investment funds. It means negotiating terms that provide LPs with input in making significant decisions, without undermining the lead fund’s investment strategy.
• Streamlined Decision-Making: We help LPs create efficient internal approval processes to meet the co-investments’ pressing decision-making requirements. Due diligence assistance from us ensures LPs have the data on which to make timely, informed decisions.
• Compliance and Regulatory Support: Evolve Venture Capital offers start-to-finish support for issues pertaining to compliance and regulation. Our experts offer extensive and timely completion of all due diligence and filings required to minimize the chance of regulatory problems.
• Optimization of Fee Structures: We help LPs to analyze the fee structures of co-investments to achieve maximum returns. Our negotiation skills to secure optimal terms help LPs achieve best economic returns.

In summary, though co-investments hold great promise for higher returns, the governance structures of such deals can be complex and daunting. Evolve Venture Capital is determined to assist LPs in managing these intricacies so that they can take maximum advantage of the opportunities that co-investments have to offer while minimizing the risks involved.

For additional information and assistance in managing LP governance in co-invested transactions, contact Evolve Venture Capital. We are your go-to partner in delivering successful investment results.