Updated · Part of the CRE investment glossary
How sponsor co-invest works
In a syndication, the sponsor earns from three sources: fees for its work, a promote (carried interest) when the deal clears its hurdles, and returns on any equity it invests. Co-invest is the third. The sponsor contributes cash to the deal and receives the same return of capital, preferred return and share of profits as an LP with the same amount in the same class.
LPs care about it because it puts the sponsor’s own money on the same side of the table. Fees are paid whether or not the deal works; a promote rewards upside but costs nothing if the deal loses money. Co-invest is the part of the sponsor’s position that loses money when LPs do.
There is no legal minimum. The amount, and where the money comes from, is negotiated deal by deal and disclosed in the offering documents.
The formula
For a deal where the sponsor invests in the investor class on LP terms:
Co-invest % = sponsor equity ÷ total equity raised Sponsor’s share of investor-class distributions = co-invest % × distributions to the investor class
- Total equity raised: LP equity plus the sponsor’s co-invest.
- Investor-class distributions: return of capital, preferred return and the investors’ share of profits — everything except the promote.
- The promote is paid to the GP on top and is not part of co-invest.
Worked example: co-invest and promote side by side
A deal raises $10,000,000 of equity: $9,500,000 from LPs and $500,000 from the sponsor, a 5% co-invest. At sale, after paying the loan, it distributes $16,000,000: $10,000,000 returns capital, $2,000,000 pays the accrued preferred return, and the remaining $4,000,000 of profit splits 70% to the investor class and 30% to the GP as promote.
The sponsor’s co-invest receives 5% of every investor-class dollar: $500,000 of capital back, $100,000 of pref and $140,000 of the 70% split — $740,000, a 1.48x multiple, the same as the LPs’ $14,060,000 on $9,500,000. The $1,200,000 promote is separate. In total the sponsor receives $1,940,000, of which $1,200,000 is for performance and $740,000 is a return on its own money.
| Tier | Total | LPs ($9.5M in) | Sponsor co-invest ($0.5M in) | GP promote |
|---|---|---|---|---|
| Return of capital | $10,000,000 | $9,500,000 | $500,000 | $0 |
| Preferred return | $2,000,000 | $1,900,000 | $100,000 | $0 |
| Profit split, 70% investors / 30% GP | $4,000,000 | $2,660,000 | $140,000 | $1,200,000 |
| Total received | $16,000,000 | $14,060,000 | $740,000 | $1,200,000 |
| Equity multiple on cash invested | — | 1.48x | 1.48x | — |
What LPs ask about co-invest
Two deals can both say "the sponsor is investing" and mean very different things:
- Is it cash? Some sponsors fund co-invest by rolling an acquisition fee or other fee back into the deal. That is equity in the cap table, but it was paid for by the deal, not out of the sponsor’s pocket.
- Who is investing — the GP entity, the principals personally, or affiliates and friends of the sponsor counted toward the "sponsor" total?
- Is it in the same class, on the same terms, and does it pay the same fees? Agreements sometimes waive fees or promote on GP capital; the offering documents should say so.
- Can the sponsor sell or redeem its co-invest before LPs are paid?
- How does it compare with the fees? A sponsor taking a large acquisition fee and investing a small part of it back has less at risk than the headline suggests.
Co-invest with co-GPs
When several sponsors partner on a deal, each co-GP’s contribution to the GP’s co-invest, and its share of fees and promote, are set in a separate agreement among the GPs. The LPs see the total; the split among sponsors is a GP-side matter that should be written down before the raise, not reconstructed at sale.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.