Co-Investment Model

The model centers on the target company's financial performance, as the co-investor's returns ultimately depend on the company's value.

• Revenue is projected using a multi-segment build, with growth rates varying by industry maturity—often 5–15% for established firms and 15–40% for high-growth targets.
• Key drivers include unit sales and average selling price, or customers and ARPU, depending on the business model.
• Cost of goods sold and operating expenses are modeled with typical margin profiles: gross margins of 40–65% and EBITDA margins of 15–30% at entry, with potential margin expansion of 200–500 basis points over the hold period as a standard value creation lever.

The model starts with the deal structure: the enterprise value is based on entry EBITDA and multiple, and the total equity is the EV plus transaction fees minus total debt. The lead sponsor and co-investors split this equity—typically 60–80% for the sponsor and 20–40% for co-investors.

• Debt is sized as a multiple of EBITDA, with senior and subordinated tranches, each with its own interest rate and amortization. The operating model projects revenue, EBITDA, and cash flows, feeding into the debt schedule to compute interest and debt paydown.
• Cash flows are then used to determine net debt at exit, and exit equity is calculated from exit EV minus net debt. Finally, the co-investor's share of exit equity yields gross proceeds, from which any carry or fees are deducted to arrive at net proceeds.

The model generates key return metrics for the co-investor: multiple on invested capital (MOIC) and internal rate of return (IRR). MOIC is calculated as net proceeds divided by initial equity, while IRR uses the cash flow stream—negative at investment, zero during the hold, and positive at exit.

• The model also provides transparency on the distribution waterfall, including any preferred return and catch-up provisions. Notably, co-investments often carry reduced or no management fees and carried interest, which can enhance net returns compared to blind pool funds.
• The returns sheet clearly distinguishes between gross and net proceeds, showing the impact of fees and carry on the co-investor's final return.

This model is designed to help investors answer a critical question: should I participate in this co-investment, and what returns can I expect? By inputting deal-specific terms, leverage, and exit assumptions, users can assess risk-adjusted returns under various scenarios.

• The model includes validation checks to ensure internal consistency, such as sources equaling uses, debt covenants being met, and cash balances never turning negative. It also highlights common pitfalls, like double-counting interest or misapplying the co-invest share to the wrong base.
• With its focus on the co-investor's perspective, the model provides a structured framework for making informed co-investment decisions, emphasizing the fee advantages and the concentrated nature of these deals.