Private equity co-investments have evolved from a niche institutional strategy to a core portfolio building block for many investors. While lower fees are an important part of the value proposition, co-investments can also offer direct exposure to individual companies, closer alignment with leading sponsors and the ability to build more targeted private equity exposure.

In this conversation, Ben Hur and Michael Chen, Co-Heads of Direct Equity at Future Standard, discuss why co-investments have become an increasingly important part of the private equity market, what separates successful co-investors from passive sources of capital, and why the middle market continues to offer compelling opportunities for investors with the scale, relationships and expertise to access them.

The opportunity in
private equity co‑investments

Ben Hur: At its core, a co-investment is a minority stake in a company alongside a private equity sponsor. The sponsor is responsible for sourcing the opportunity, leading the investment and driving the value creation strategy, while the co‑investor participates directly alongside them under the same economic terms.

For limited partners (LPs), one of the biggest attractions of co-investments is the potential fee benefit. Because investors gain exposure directly to an individual company alongside the sponsor, rather than through a traditional fund structure, they can often invest with little or no additional management fees or carried interest.

However, the appeal of co-investments goes well beyond lower fees. Investors are increasingly looking for direct exposure to a sponsor’s highest-conviction opportunities and greater visibility into how value is created at the company level.

For general partners (GPs), higher interest rates and a slower deal environment have reshaped deal economics. In response, GPs are structuring transactions with larger equity contributions, expanding the need for co-investment capital.

Ultimately, we think co-investments combine the best of both worlds for investors: The sourcing, underwriting and operational expertise of leading private equity sponsors with the ability to build targeted exposure to individual companies, sectors and sponsors within a broader private equity portfolio. That value proposition has resonated with investors, helping drive growth in co-investment assets under management from approximately $22 billion in 2015 to over $350 billion today.¹

What defines a strong
co-investment platform

Ben Hur: Relationships are critical. Co-investments are not won through a single transaction. In our experience, access and trust are earned through years of successful execution and partnership. As a firm, we’ve spent more than 30 years building relationships with private equity sponsors. Our primaries business forms the foundation of our sponsor network, which has historically committed over $2 billion per year to both established and emerging managers.² These primary relationships provide a gateway to access deal flow across our strategies, including our co-investment team.

These long-standing relationships give sponsors insight into how we operate across market cycles. In many cases, it’s how we work through challenging periods—not just favorable markets—that builds lasting trust. When sponsors are looking for co-investment partners, those established relationships can make us a natural first call.

Successful co-investing often depends on relationships that extend beyond the senior ranks. In the lower middle market especially, co-investment opportunities are frequently sourced and allocated by individual deal leads. Building trusted relationships with these investment professionals over time can be critical to gaining access to attractive opportunities.

Michael Chen: But access alone isn’t enough. What ultimately differentiates a co investment platform like Future Standard’s is the ability to act quickly and be a constructive partner to sponsors when opportunities arise. The best sponsors want investors who can evaluate deals efficiently, provide timely feedback and move with conviction when transaction timelines are compressed.

That sounds simple, but it can be difficult to do consistently. A sponsor may spend months pursuing an acquisition and then need a co-investment commitment very quickly. In those moments, speed, judgment and credibility matter as much as capital.

Over time, the best sponsors tend to gravitate toward partners who make their lives easier. That means conducting focused diligence, understanding where the risks are, communicating clearly and avoiding unnecessary process friction. Sometimes the most valuable thing a co-investor can do is provide a fast answer, even when the answer is no.

We want sponsors to view us as a trusted partner rather than just another checkbook. We believe that reputation has helped drive a consistent flow of opportunities. Since the team’s inception in 2008, we have reviewed over 1,500 co-investment opportunities— about 200 annually—while investing in approximately 10–20 each year.³

The value of an experienced
co-investment partner

Michael Chen: Some investors look at co-investments and assume they can build a program internally. For some large institutions with substantial resources that can absolutely make sense. However, even some of the largest institutions seek to complement their existing co-investment program by partnering with experienced co-investment managers that can provide access to additional sponsor relationships, specialized market segments and a broader pipeline of opportunities.

The challenge for many LPs is that co-investing is often more demanding than it appears from the outside.

It’s not enough to evaluate a deal when it arrives. You need access to a consistent pipeline of opportunities, the resources to conduct company-level due diligence, the infrastructure to execute transactions efficiently and the discipline to remain selective when opportunities are scarce.

That’s especially relevant in the mid-market. While many large institutions have built strong co-investment capabilities of their own, the mid-market is a vast and highly fragmented segment. No investor has relationships with every sponsor, and each co-investment manager typically brings a unique network of sponsor relationships and sourcing channels. Partnering with a co-investment manager can therefore be an efficient way to access opportunities and parts of the market that may not otherwise be represented in an investor’s existing private equity portfolio.

Ben Hur: In our experience, one of the biggest challenges LPs face is maintaining enough deal flow to support portfolio construction. An investor working with a relatively small number of sponsors may only see a handful of opportunities each year. When their opportunity set is limited, it becomes harder to be selective. A slower pace of deal flow can make it more difficult to maintain the muscle memory that comes from consistently evaluating companies and conducting deal-level due diligence.

A dedicated platform helps solve these challenges by aggregating opportunities across a broader network of sponsor relationships. The goal is not simply to do more deals. The goal is to see enough opportunities that you can consistently identify the most compelling ones.

We often tell investors the value proposition isn’t just lower fees. It’s access, selectivity and specialization. The ability to evaluate hundreds of opportunities but invest in only a small percentage can be a meaningful advantage over time.

The middle market opportunity

Michael Chen: We believe the middle market is where some of the most compelling opportunities for differentiated co-investment returns continue to exist.

When you look at the large-cap end of the market, it’s very efficient. The same transactions tend to attract a lot of attention, and many investors are competing for the same opportunities.

The middle market is much more fragmented than the large-cap market. With roughly 200,000 companies, it’s simply a much broader and less efficient opportunity set. That can lead to more attractive entry valuations and less reliance on leverage to finance acquisitions, which is especially attractive in today’s higher interest rate environment. We also find that there are greater options for exits in the middle market. Middle market businesses are common acquisition targets for larger companies, so they are not as heavily reliant on the public markets for exits as the upper end of the market.

Ben Hur: From a sponsor coverage standpoint, there are well over 1,000 private equity sponsors operating in the middle market, and many are highly specialized in a particular sector, geography or strategy. That can make the market harder to cover, but it also creates opportunities for investors with the resources and relationships to navigate it effectively.

As we’ve said, relationships matter because many middle market sponsors aren’t looking to broadly syndicate their best opportunities. Instead, they tend to turn to a small group of trusted co-investment partners. And when deal sizes are naturally smaller and allocations are more constrained, access becomes an important differentiator.

That’s where our firm’s 30-year history investing in the lower and core middle market can create an advantage. Building relationships with hundreds of sponsors takes time. Evaluating opportunities across a highly fragmented market requires scale and experience. Building and maintaining expertise across industries and business models requires significant resources. Those challenges can create barriers to entry, but they are also what drive opportunities.

Future Standard’s
differentiated approach

Michael Chen: Our approach is built around a simple idea: Successful co-investing is a relationship business supported by disciplined underwriting and consistent execution.

We have spent years building relationships with leading mid-market sponsors and our platform allows us to engage with sponsors across multiple strategies rather than through a single interaction. We believe those relationships, combined with dedicated underwriting resources and a focused middle market orientation, help position us to access opportunities that might otherwise be difficult to source.

Just as importantly, we are highly selective. We evaluate far more opportunities than we pursue because we believe portfolio construction matters as much as sourcing. Seeing a large number of opportunities gives us the ability to focus on the transactions where we have the highest conviction.

As co-investments continue to become a larger part of the private equity market, we believe the distinction between simply participating and being a preferred partner will become increasingly important. Our goal is to be the partner sponsors want to call first when they need a trusted co-investment partner, and the platform investors rely on to help navigate an increasingly complex market.