Search
July 30, 2025 | 5 min read
Limited partners (LPs) have been operating in a capital-constrained environment for several years as macroeconomic volatility has contributed to reduced distribution and exit activity. Many investors have been driven to make difficult capital deployment choices, including consolidating the number of general partners (GPs) with whom they do business and limiting re-ups to existing core manager relationships. As a result, portfolio-level diversification could suffer, potentially leading to higher overall risk profiles in private markets portfolios.
We believe direct co-investment funds can help provide needed diversification to LPs investing with a limited subset of managers. Below we examine the current co-investing landscape, assess whether the number of underlying companies in a direct co-investment fund affects performance, and show how increasing direct co-investment allocations can improve portfolio performance.
Traditional private equity GPs are facing fundraising challenges with today’s LPs investing fewer new dollars relative to the past few years. Longer fundraising cycles are also causing many GPs to turn to co-investment dollars to complete deals and deepen relationships with select LPs.
Source: PitchBook, Q2 US PE Breakdown, data as of June 30, 2025.
At the same time, LPs have been navigating lower distributions and investing in fewer funds, which is impacting the diversification and risk profile of their broader portfolios. As LPs reduce the number of GPs and deals held in their portfolio, concentration increases along with exposure to similar styles, geographies, sectors, and vintages. The impact in the current environment is clear—as LPs reduce their GP rosters, portfolio concentration increases, potentially reducing risk-adjusted returns and increasing the likelihood of underperformance.
Co-investment funds can provide exposure to a wide variety of managers with a single fund commitment, access to high-quality transactions at reduced fee and carry levels, and the potential for enhanced diversification and improved risk-adjusted returns.
A direct co-investment is an investment made alongside another party or group into a single company. While a single co-investment can be a valuable contributor to a private markets portfolio, individual co-investments do not provide the same diversification benefits as a broadly diversified co-investment fund. Direct co-investment funds offer a single-ticket method for investing in a diversified portfolio that can include upwards of 60-80 companies accessed through 40-50 GPs across different sectors, vintages, and geographies.
The following analysis displays this more nuanced principle by evaluating a direct co-investment allocation in a range of six to 50 companies. We see that increasing the number of companies in a US buyout co-investment portfolio can potentially increase risk-adjusted returns, as measured by Sortino ratio. Further, the probability of returns falling below the 1.5x hurdle rate is significantly higher in the six-company portfolio (24%) relative to a 3% probability of underperformance in the portfolio with 50 companies. In short, we see the dispersion of returns and the risk of underperformance decrease as the number of companies increases.
Source: HarbourVest. Not representative of any HarbourVest fund, account, and not representative of any HarbourVest experience. For illustrative purposes only. The graphic and data above are based on a Monte Carlo simulation as of August 2022. Simulation parameters include co-investment vintage years for 2004-2018. Three-year even allocation, 100% US/100% buyout. Calculations are net of management fees of 1.0% and 12.5% carried interest for third-party funds and gross of HarbourVest management fees and carried interest. Other expenses borne by investors in the HarbourVest managed funds / accounts may reduce returns. The Sortino ratio is a calculation of the expected return, or minimal acceptable return (MAR), divided by downside deviation, and similar to the Sharpe ratio, the higher the Sortino ratio the better. Sortino in this simulation assumes a minimum acceptable return (MAR/hurdle) of 1.5x for TVPI. Interquartile range is the difference between the upper quartile (75th percentile) and the lower quartile (25th percentile). Diversification does not ensure a profit or protect against a loss. Past performance is not a guarantee of future results.
Taking the next step in the portfolio construction process, we can now evaluate the impact of adding a diversified co-investment fund to a broader portfolio. Our simulation shows that as larger co-investment allocations are added to a primary portfolio both risk and return improve. In fact, relative to a 100% primary portfolio with a TVPI of 2.07x, allocating 30% of the portfolio to direct co-investment can potentially increase absolute returns to 2.14x and significantly reduce the probability of returns below the 1.5x hurdle rate.
Source: HarbourVest proprietary data set comprised of information aggregated from multiple data sources, including HarbourVest and third-party data providers. Not representative of any HarbourVest fund, account, and not representative of any HarbourVest experience. The graphic and data above are based on a Monte Carlo simulation as of June 2025. Simulation Parameters: Co-investment: Vintage years for TVPI 2004 – 2018; Three-year investment period, 60% North America, 30% Europe, 10% Asia; 100% Buyout. Returns are net of management fee of 1.0% and 12.5% carried interest on realized returns for third-party funds and gross of HarbourVest management fees and carried interest. Other expenses borne by investors in the HarbourVest managed funds / accounts may reduce returns. The Sortino ratio is a calculation of the expected return, or minimal acceptable return (MAR), divided by downside deviation, and similar to the Sharpe ratio, the higher the Sortino ratio the better. Sortino in this simulation assumes a minimum acceptable return (MAR/hurdle) of 1.5x for TVPI. Diversification does not ensure a profit or protect against a loss. Past performance is not a guarantee of future results.
Collectively, these analyses show that a co-investment fund commitment can provide LPs with the potential for enhanced diversification, improved risk-adjusted returns, and better exposure to a wide variety of managers—all of which are critical to balancing the effects of shrinking GP rosters due to ongoing liquidity challenges and an uncertain macroeconomic outlook.
Connect with HarbourVest
We believe broadly diversified co-investment funds play an important role as a core allocation in any private markets portfolio. Near-term, they can be a valuable tool for LPs in a difficult market environment by providing timely and valuable diversification benefits. As GPs continue to navigate longer fundraising cycles, we expect they will continue to offer significant co-investment opportunities going forward.
Market dislocations can create distinct opportunities for direct co-investments, but not all co-investment funds are created equal. There are several factors to consider when choosing a co-investment fund, including stage and geographic exposure, tenure of the investment team, and the optimal number of underlying portfolio companies. In addition to these factors, it is critical for co-investment managers to have strong GP relationships, access to robust deal flow from top-tier sponsors, and deep due diligence resources to evaluate and execute on multiple opportunities across the globe at any given time.
HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy, or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
Nothing herein should be construed as a solicitation, offer, recommendation, representation of suitability, legal advice, tax advice, or endorsement of any security or investment and should not be relied upon by you in evaluating the merits of investing in HarbourVest funds or in any other investment decision.
Monte Carlo Simulations: (if shown) These model (hypothetical) portfolios, if shown, are intended for illustrative purposes only. Performance information for each hypothetical portfolio utilized a Monte Carlo Simulation and are based on the actual cash flows of a proprietary data set that includes partnership investments made by Funds, along with partnership data from external sources. The capital calls and distribution data are based on historic partnership investment cash flows, but does not represent the actual experience of any investor or Fund. The results of the simulation are impacted by an uneven representation of funds with different vintage years, sizes, managers, and strategies, and a limited pool of investment cash flow data. The actual pace and timing of cash flows is likely to be different and will be highly dependent on the underlying partnerships’ commitment pace, the types of investments made by the Fund(s), market conditions, and terms of any relevant management agreements. The results presented are hypothetical and based entirely on the output from numerous mathematical simulations. The simulations are unconstrained by the fund size, market opportunity, and minimum commitment amount, and do not take into account the practical aspects of raising and managing a fund. The simulated hypothetical portfolio results should be used solely as a guide and should not be relied upon to manage your investments or make investment decisions.
Simulated Management Fee and Carry: (if shown) The simulated performance presented herein is hypothetical and does not reflect any actual fees or expenses experienced by a client or investor. Instead, the simulated performance utilizes model management fees and carry that are assumed for modeling purposes only and applied as described below. No actual client or investor attained the performance presented here. Management fees are calculated either based on committed or invested capital and applied to portfolio’s gross capital calls according to a specified fee rate and a fee term. Carry is accrued based on a specified carry rate and applied to a portfolio’s total value after the applicable carry hurdle rate is met. Accrued carry is applied to gross NAV. Carry starts being distributed (paid out of distributions) once committed capital has been returned to investors.
“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:
(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;
(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;
(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;
(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;
(e) any scheme which-
(i) is a collective investment scheme authorised under section 104 of the SFO; or
(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,
or any person by whom any such scheme is operated;
(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;
(g) any scheme which-
(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or
(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,
or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;
(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;
(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-
(i) a wholly owned subsidiary of-
(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or
(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;
(ii) a holding company which holds all the issued share capital of-
(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or
(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or
(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or
(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.
The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:
(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-
(i) as stated in the most recent audited financial statement prepared-
(A) in respect of the trust corporation; and
(B) within 16 months before the relevant date;
(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-
(A) in respect of the trust or any of the trust; and
(B) within 16 months before the relevant date; or
(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-
(A) in respect of the trust or any of the trusts; and
(B) within 12 months before the relevant date;
(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-
(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or
(ii) as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;
(m) any corporation or partnership having-
(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or
(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-
(iii) the most recent audited financial statement prepared-
(A) in respect of the corporation or partnership (as the case may be); and
(B) within 16 months before the relevant date; or
(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and
(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-
(i) a trust corporation that falls within the description in paragraph (k);
(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);
(iii) a corporation that falls within the description in paragraph (m);
(iv) a partnership that falls within the description in paragraph (m).
For the purposes of paragraphs (k) to (n) above:
An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:
(a) the Singapore Government;
(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;
(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —
(i) to manage its own funds;
(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or
(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;
(d) any entity —
(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and
(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);
(e) a bank that is licensed under the Banking Act 1970;
(f) a merchant bank that is licensed under the Banking Act 1970;
(g) a finance company that is licensed under the Finance Companies Act 1967;
(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;
(i) a company licensed under the Trust Companies Act 2005;
(j) a holder of a capital markets services licence;
(k) an approved exchange;
(l) a recognised market operator;
(m) an approved clearing house;
(n) a recognised clearing house;
(o) a licensed trade repository;
(p) a licensed foreign trade repository;
(q) an approved holding company;
(r) a Depository as defined in section 81SF of the SFA;
(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;
(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;
(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;
(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;
(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;
(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;
(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;
(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.
An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:
(i) an individual —
(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;
(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —
(BA) a deposit as defined in section 4B of the Banking Act 1970;
(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or
(BC) any other asset as may be prescribed by regulations made under section 341; or
(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;
(ii) a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —
(A) the most recent audited balance sheet of the corporation; or
(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;
(iii) A trustee of a trust which all the beneficiaries are accredited investors; or
(iv) A trustee of a trust which the subject matter exceeds S$10 million; or
(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or
(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or
(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.
Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).
