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Co-Investing as a Competitive Advantage

Sep 1, 2023

Halle Kaplan-Allen

Co-investment strategies have gained popularity over the past several years. Co-investing allows LPs to back individual deals alongside fund managers rather than (or in addition to) committing to a blind pool fund. Emerging managers often use co-investments as a way to build relationships with and create value for prospective fund LPs. High-net-worth individuals and family offices, who often back emerging managers as LPs, are particularly drawn towards co-investment opportunities given that they tend to prioritize customized and relationship-based investing more than institutional investments. Co-investment strategies are particularly attractive to investors during periods of macroeconomic volatility because it allows them to deploy capital more slowly and with more control. 

We recently hosted an office hours session with Coolwater Capital to discuss the value a co-investment strategy can play for emerging fund managers. The conversation was full of rich insights and tactical takeaways, so we’re sharing an overview along with the full recording with our community. If you’re an emerging manager or syndicate lead who’s looking to expand your investor base and strengthen relationships with LPs, this is for you.

Coolwater Capital is an educational community and fund-of-funds for emerging managers. Since launching in 2021, they have:

  • $1.5B raised across cohort funds

  • 298 LP-led themed modules

  • 924 1:1 value-added intros made

  • 41 in-person events hosted since 2022

  • 62% funds with diverse GPs across 159 funds

  • 3600+ portfolio companies across funds pre-cohort

  • 2500+ portfolio companies targeted across funds by 2025

  • 83 NPS score rated by GPs

Sydecar and Coolwater have partnered to provide emerging fund managers with the full-stack resources they need to launch and manage their investment business while setting the foundation for an enduring firm past Fund I. 

Co-Investing as a Competitive Advantage

Key takeaways:

  • Co-investment has distinct benefits for managers, LPs, and founders

  • Managers can deploy more (and increase their upside) into deals they love

  • Managers can split economics with other funds or syndicates to align incentives

  • Potential LPs can get deal-by-deal access before committing to the fund

  • LPs who are already in the fund can increase their exposure to exciting deals

  • Managers can increase their value-add to founders and win more deals if they can deploy larger checks through a co-investment network 

  • Co-investments can give founders access to additional value-add angels that may not be able to meet fund minimums 

Should co-investment opportunities only be offered to fund LPs?

  • Up to the manager to decide how to leverage the opportunity.

  • Can be used as a way to build trust with potential future LPs.

  • Can also be used as an exclusive benefit of being in the fund.

  • A hybrid solution is to offer different terms for different participants. For example, LPs in the fund could pay 10% carry while potential future LPs could pay 20%.

How can managers avoid making one-off SPV investments feel transactional?

  • Be intentional with your outreach and positioning. Approach LPs with investments that you believe will be especially valuable and relevant to their strategy.

  • If you’re investing out of your fund and using a co-investment SPV to top off allocation, the conviction is clear.

  • If you’re not also investing out of a fund, be active and transparent in your communication. 

“Present the deal as an opportunity, not a sales pitch. If you’re excited about a deal but can only fill part of your allocation because of your fund size and mandate, give investors an opportunity to increase their exposure as though it is a gift. There’s immediate alignment if you’re already putting in money from the fund, which can make it feel less transaction.”

- Zander Rafael, Founder and GP of Spring Tide Capital, who has deployed over $100M through 20 SPVs

If you are able to fill your allocation through co-investment, how do you manage the risk of coming up short?

  • One of the biggest challenges of syndicating capital is managing founder expectations. Underpromise and overdeliver.

  • Know your LPs. The better you know them, the easier it will be to estimate how much you can raise in early conversations with the founder. 

  • Build a process to gauge interest from investors and calibrate it over time.

  • Founders will have more patience for your process when markets are slow vs. hot. 

“It’s much better if you try to come back and ask for a bit more than to have to go back to the founder and tell them you couldn't fill it. You want to start to get a window that you can share with the founder, which should be a conservative estimate. The more you do it, the more opportunity you’ll have to calibrate and refine your process.”

-Rob Lusk, Head of Partnerships at Sydecar

Want to dive in further? Listen to the full recording of the office hours session here: https://youtu.be/Tx5uYat7uBE.

Co-investment strategies have gained popularity over the past several years. Co-investing allows LPs to back individual deals alongside fund managers rather than (or in addition to) committing to a blind pool fund. Emerging managers often use co-investments as a way to build relationships with and create value for prospective fund LPs. High-net-worth individuals and family offices, who often back emerging managers as LPs, are particularly drawn towards co-investment opportunities given that they tend to prioritize customized and relationship-based investing more than institutional investments. Co-investment strategies are particularly attractive to investors during periods of macroeconomic volatility because it allows them to deploy capital more slowly and with more control. 

We recently hosted an office hours session with Coolwater Capital to discuss the value a co-investment strategy can play for emerging fund managers. The conversation was full of rich insights and tactical takeaways, so we’re sharing an overview along with the full recording with our community. If you’re an emerging manager or syndicate lead who’s looking to expand your investor base and strengthen relationships with LPs, this is for you.

Coolwater Capital is an educational community and fund-of-funds for emerging managers. Since launching in 2021, they have:

  • $1.5B raised across cohort funds

  • 298 LP-led themed modules

  • 924 1:1 value-added intros made

  • 41 in-person events hosted since 2022

  • 62% funds with diverse GPs across 159 funds

  • 3600+ portfolio companies across funds pre-cohort

  • 2500+ portfolio companies targeted across funds by 2025

  • 83 NPS score rated by GPs

Sydecar and Coolwater have partnered to provide emerging fund managers with the full-stack resources they need to launch and manage their investment business while setting the foundation for an enduring firm past Fund I. 

Co-Investing as a Competitive Advantage

Key takeaways:

  • Co-investment has distinct benefits for managers, LPs, and founders

  • Managers can deploy more (and increase their upside) into deals they love

  • Managers can split economics with other funds or syndicates to align incentives

  • Potential LPs can get deal-by-deal access before committing to the fund

  • LPs who are already in the fund can increase their exposure to exciting deals

  • Managers can increase their value-add to founders and win more deals if they can deploy larger checks through a co-investment network 

  • Co-investments can give founders access to additional value-add angels that may not be able to meet fund minimums 

Should co-investment opportunities only be offered to fund LPs?

  • Up to the manager to decide how to leverage the opportunity.

  • Can be used as a way to build trust with potential future LPs.

  • Can also be used as an exclusive benefit of being in the fund.

  • A hybrid solution is to offer different terms for different participants. For example, LPs in the fund could pay 10% carry while potential future LPs could pay 20%.

How can managers avoid making one-off SPV investments feel transactional?

  • Be intentional with your outreach and positioning. Approach LPs with investments that you believe will be especially valuable and relevant to their strategy.

  • If you’re investing out of your fund and using a co-investment SPV to top off allocation, the conviction is clear.

  • If you’re not also investing out of a fund, be active and transparent in your communication. 

“Present the deal as an opportunity, not a sales pitch. If you’re excited about a deal but can only fill part of your allocation because of your fund size and mandate, give investors an opportunity to increase their exposure as though it is a gift. There’s immediate alignment if you’re already putting in money from the fund, which can make it feel less transaction.”

- Zander Rafael, Founder and GP of Spring Tide Capital, who has deployed over $100M through 20 SPVs

If you are able to fill your allocation through co-investment, how do you manage the risk of coming up short?

  • One of the biggest challenges of syndicating capital is managing founder expectations. Underpromise and overdeliver.

  • Know your LPs. The better you know them, the easier it will be to estimate how much you can raise in early conversations with the founder. 

  • Build a process to gauge interest from investors and calibrate it over time.

  • Founders will have more patience for your process when markets are slow vs. hot. 

“It’s much better if you try to come back and ask for a bit more than to have to go back to the founder and tell them you couldn't fill it. You want to start to get a window that you can share with the founder, which should be a conservative estimate. The more you do it, the more opportunity you’ll have to calibrate and refine your process.”

-Rob Lusk, Head of Partnerships at Sydecar

Want to dive in further? Listen to the full recording of the office hours session here: https://youtu.be/Tx5uYat7uBE.

Co-investment strategies have gained popularity over the past several years. Co-investing allows LPs to back individual deals alongside fund managers rather than (or in addition to) committing to a blind pool fund. Emerging managers often use co-investments as a way to build relationships with and create value for prospective fund LPs. High-net-worth individuals and family offices, who often back emerging managers as LPs, are particularly drawn towards co-investment opportunities given that they tend to prioritize customized and relationship-based investing more than institutional investments. Co-investment strategies are particularly attractive to investors during periods of macroeconomic volatility because it allows them to deploy capital more slowly and with more control. 

We recently hosted an office hours session with Coolwater Capital to discuss the value a co-investment strategy can play for emerging fund managers. The conversation was full of rich insights and tactical takeaways, so we’re sharing an overview along with the full recording with our community. If you’re an emerging manager or syndicate lead who’s looking to expand your investor base and strengthen relationships with LPs, this is for you.

Coolwater Capital is an educational community and fund-of-funds for emerging managers. Since launching in 2021, they have:

  • $1.5B raised across cohort funds

  • 298 LP-led themed modules

  • 924 1:1 value-added intros made

  • 41 in-person events hosted since 2022

  • 62% funds with diverse GPs across 159 funds

  • 3600+ portfolio companies across funds pre-cohort

  • 2500+ portfolio companies targeted across funds by 2025

  • 83 NPS score rated by GPs

Sydecar and Coolwater have partnered to provide emerging fund managers with the full-stack resources they need to launch and manage their investment business while setting the foundation for an enduring firm past Fund I. 

Co-Investing as a Competitive Advantage

Key takeaways:

  • Co-investment has distinct benefits for managers, LPs, and founders

  • Managers can deploy more (and increase their upside) into deals they love

  • Managers can split economics with other funds or syndicates to align incentives

  • Potential LPs can get deal-by-deal access before committing to the fund

  • LPs who are already in the fund can increase their exposure to exciting deals

  • Managers can increase their value-add to founders and win more deals if they can deploy larger checks through a co-investment network 

  • Co-investments can give founders access to additional value-add angels that may not be able to meet fund minimums 

Should co-investment opportunities only be offered to fund LPs?

  • Up to the manager to decide how to leverage the opportunity.

  • Can be used as a way to build trust with potential future LPs.

  • Can also be used as an exclusive benefit of being in the fund.

  • A hybrid solution is to offer different terms for different participants. For example, LPs in the fund could pay 10% carry while potential future LPs could pay 20%.

How can managers avoid making one-off SPV investments feel transactional?

  • Be intentional with your outreach and positioning. Approach LPs with investments that you believe will be especially valuable and relevant to their strategy.

  • If you’re investing out of your fund and using a co-investment SPV to top off allocation, the conviction is clear.

  • If you’re not also investing out of a fund, be active and transparent in your communication. 

“Present the deal as an opportunity, not a sales pitch. If you’re excited about a deal but can only fill part of your allocation because of your fund size and mandate, give investors an opportunity to increase their exposure as though it is a gift. There’s immediate alignment if you’re already putting in money from the fund, which can make it feel less transaction.”

- Zander Rafael, Founder and GP of Spring Tide Capital, who has deployed over $100M through 20 SPVs

If you are able to fill your allocation through co-investment, how do you manage the risk of coming up short?

  • One of the biggest challenges of syndicating capital is managing founder expectations. Underpromise and overdeliver.

  • Know your LPs. The better you know them, the easier it will be to estimate how much you can raise in early conversations with the founder. 

  • Build a process to gauge interest from investors and calibrate it over time.

  • Founders will have more patience for your process when markets are slow vs. hot. 

“It’s much better if you try to come back and ask for a bit more than to have to go back to the founder and tell them you couldn't fill it. You want to start to get a window that you can share with the founder, which should be a conservative estimate. The more you do it, the more opportunity you’ll have to calibrate and refine your process.”

-Rob Lusk, Head of Partnerships at Sydecar

Want to dive in further? Listen to the full recording of the office hours session here: https://youtu.be/Tx5uYat7uBE.