Lesson 4 of 6 · All lessons in this module
- What makes an investment alternative
- Private capital and hedge funds
- Real assets: real estate, infrastructure, natural resources and more
- Three ways in: fund investing, co-investing and direct investingVideo lesson
- Ownership structures: limited partnerships and beyond
- Compensation: fees, hurdles, catch-ups, clawbacks and waterfallsVideo lesson
Lesson 4 of 6 · 14 min
Three ways in: fund investing, co-investing and direct investing
Investors move along a path from fund investing (outsource everything, pay the highest fees) through co-investing (invest alongside the fund at lower fees) to direct investing (full control, lowest fees, but full responsibility for skills and oversight).
In short
- Fund investing: the investor commits capital to a fund and the manager selects and manages investments; fees are a management fee plus a performance fee. Least control, least skill needed.
- Fund investors' only decision is whether to invest in the fund; they cannot affect the underlying holdings.
- Co-investing: the investor holds the fund and has co-investment rights to invest directly in the same deals, at lower fees (often reduced or no fee and no carry).
- Managers offer co-investments to close deals too big for the fund, widen the range of deals and diversify the fund's existing pool.
- Direct investing: buying assets without an intermediary; maximum control over choice, financing and timing, lowest fees, but needs in-house expertise. Reserved for the largest, most sophisticated investors.
- Alternative funds differ from mutual funds: capital committed in advance and locked up, higher and more complex fees, less frequent transparency.
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