🛠️ Investment Fund Key Terms, Part 29

🎉 Happy Friday, funds family!

Today, we have Part 29 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Pro Rata Co-Investment Rights.

Co-investments allow investors to participate directly in a portfolio company alongside the fund, rather than only through their interest in the fund itself. 🤝

Instead of all capital flowing through the main fund vehicle, the GP may open up additional capacity in a deal for select investors to invest at the deal level — often through an SPV and typically on the same (or better) economic terms as the fund.

➡️ What are pro rata co-investment rights?

Pro rata co-investment rights give an LP a contractual right to participate in co-invest opportunities in proportion to its ownership percentage in the fund.

Example: If an LP owns 10% of the fund, it may have the right to take 10% of any co-investment allocation made available.

These rights are most commonly negotiated by anchor or large institutional investors.

➡️ Why do LPs push for this?

• Increased exposure to high-conviction deals

• Ability to concentrate into "winners"

• Often better economics (frequently no management fee and reduced or zero carry)

• More direct visibility into portfolio companies

➡️ Where complexity creeps in

Even "pro rata" rights raise practical questions:

• Does the fund have to offer co-invest on every deal?

• What if the LP doesn't respond in time?

• Can the GP allocate co-invest to non-LPs?

• How is "pro rata" calculated — based on commitments or invested capital?

• What happens if multiple LPs have co-invest rights and the allocation is oversubscribed?

These details matter and should be clearly addressed in the side letter or LPA.

➡️ GP considerations

GPs should be cautious about granting too many co-investment rights. Overpromising co-invest can create:

• Allocation headaches

• Delays in closing deals

• Conflicts between LPs

• Administrative burden

Many GPs prefer to offer co-investment on a discretionary (not contractual) basis — preserving flexibility while still keeping LPs happy.

⏩ Next up in Part 30: Conflicts of Interest

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.