# Co-Investment Model Model co-investor capital, preferred returns, and distributions with full waterfall transparency, per-investor IRR attribution, and clawback / catch-up scenarios. - Canonical: https://finamodel.com/templates/co-investment-model - Excel download: https://finamodel.com/templates/co-investment.xlsx - Category: Private Equity - Model type: Fund / Waterfall - Difficulty: Intermediate - Audiences: Fund managers, Investors & analysts, GPs, Deal sponsors, Limited partners - Tags: Fund ops, Waterfall, IRR, Capital calls ## Overview This co-investment model evaluates the return potential for a limited partner investing alongside a private equity or venture capital sponsor in a specific portfolio company. It models the target company's revenue, EBITDA, and free cash flow across a 5-year hold period; finances it with senior debt, subordinated debt (if any), and equity; and calculates the net proceeds and net IRR to co-investors after transaction fees, carry, and hurdle returns. The model separates sponsor returns from co-investor returns, showing how preferred returns and carry split between the two groups. The model includes an LBO sources-and-uses statement showing how the deal is structured (equity percentage, debt-to-EBITDA leverage); a three-statement operating model for the target with revenue growth, margin expansion, and working capital assumptions; a debt schedule with mandatory and optional amortisation; and a waterfall distributing exit proceeds according to the subscription agreement terms (preferred return, catch-up, pro-rata residual). A returns sheet calculates gross and net IRR, MOIC, and cash-on-cash returns, along with sensitivity tables on entry multiple, exit multiple, and margin expansion. This model serves co-investors evaluating sponsor integrity and deal economics before commitment; advisors building fairness opinions on transfer prices; and sponsors modelling LP returns to support fundraising. It is essential for secondary market investors and LPs assessing whether a co-investment opportunity offers superior risk-adjusted returns compared to a blind pool fund commitment. ## What's included - Co-investor subscription and capital call schedule - Preferred return accrual and waterfall mechanics - Interim and exit distributions by investor - IRR and MOIC calculations per co-investor - Clawback and catch-up scenarios ## Co-Investment Model: A Guide to the Co-Investment Model for Private Equity Deals This page explains the co-investment model, a financial tool for evaluating a direct investment alongside a lead sponsor. It details how deal terms, leverage, and exit assumptions affect risk-adjusted returns. The model focuses on key outputs like MOIC and IRR for the co-investor, providing transparency on the distribution waterfall and fee impact. Rates and financial results described here reflect illustrative model settings, not industry benchmarks. ### Operating Drivers of the Target Company 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. ### Calculation Flow: From Deal Structure to Returns 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. ### Outputs: MOIC, IRR, and Waterfall Transparency 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. ### Practical Use: Evaluating Co-Investment Opportunities 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. ## Built for direct deal economics Use this model when an LP is investing alongside a sponsor and the waterfall, fees, and exit timing decide net IRR. ## Waterfall engine A useful co-investment model handles preferred returns, catch-up, clawback, and promote allocations rather than approximating with simple splits. ## Per-investor analytics This shows each investor’s capital deployed, distributions received, and projected IRR in one place. ## Built for direct deal economics Use this model when an LP is investing alongside a sponsor and the waterfall, fees, and exit timing decide net IRR. ## Waterfall engine A useful co-investment model handles preferred returns, catch-up, clawback, and promote allocations rather than approximating with simple splits. ## Per-investor analytics This shows each investor’s capital deployed, distributions received, and projected IRR in one place. ## Features - **Waterfall engine:** Build complex preferred return structures with catch-up, clawback, and promoted interest allocations. - **Per-investor analytics:** See each investor's capital deployed, distributions received, and projected IRR in real time. - **Distribution planning:** Stress-test different exit prices and timing to see how proceeds flow to each investor tranche. ## Use cases - **Capital call planning:** Schedule capital calls to match investment pace and manage cash timing across multiple co-investors. - **Fundraising and LPA documentation:** Use the model to illustrate waterfall mechanics to prospective LPs and embed logic into term sheets. - **Fund accounting and reporting:** Generate quarterly position statements, IRR reports, and distribution summaries for each investor. ## Frequently asked questions ### What is a co-investment model? It is a model that projects sponsor and co-investor returns on a single portfolio company through capital calls, waterfall distributions, and an exit. ### How do preferred returns work in a co-investment? Co-investors typically receive a preferred return (e.g., 8% IRR) before general partners share in upside. The model stacks and calculates this automatically. ### Can I model multiple fund structures? Yes. Build separate waterfalls for different tranches, seniorities, or deal types within a single model. ### Does it handle follow-on commitments? Yes. Track original commitment, follow-on commitments, and adjustments alongside capital actually called. ### Is this useful for LP underwriting? Yes. Co-investors use it to assess sponsor integrity, deal economics, and whether the opportunity beats a blind-pool fund commitment. ## Related templates - [Exit Waterfall Model](https://finamodel.com/templates/exit-waterfall-model) - [Private Equity Fund Model](https://finamodel.com/templates/pe-fund-model) - [Mezzanine Debt Funding Model](https://finamodel.com/templates/mezzanine-debt-model)