When “no fee” means “yes fee”: the hidden costs of co-investing

 
Co-investment transactions, in which investors deploy capital alongside a sponsor’s primary fund in a specific transaction, have become a staple of today’s private equity landscape.

The primary appeal to investors is relatively straightforward: co-investments are frequently offered on a “no fee, no carry” basis, allowing limited partners to deploy additional capital without the customary management fee and carried interest charged in traditional fund structures.

However, the “no fee, no carry” label can obscure a more nuanced economic reality. Aside from organizational and operating expenses (which apply in both the traditional fund and co-invest contexts), a range of ancillary fees and expenses bearing many different names, shapes and sizes (think underwriting fees, exit fees, advisory fees, financing fees, M&A fees and more) may still apply to passive co-investors. These fees can also be “outside” or “in excess” of an LP’s commitment amount. LPs should be wary of this, including from an internal investment committee approval standpoint.

Common types of fees and where they are charged

Understanding where fees and expenses are charged is as important as knowing which fees exist. In a typical passive co-investment structure, sponsors can extract economics at two levels: the co-investment vehicle itself, where expenses are charged via capital calls and distribution offsets; and at the portfolio company, where fees are charged to the operating business.

At the portfolio company level, economics flowing to the sponsor are often less transparent to passive co-investors because they do not appear on capital account statements and may only be discoverable in a review of the underlying governance documents.

Critically, while fund investors frequently benefit from a management fee offset for fees charged at the portfolio company level, no such offset typically exists for co-investment vehicles, resulting in a real cost to co-investors and a break in alignment between themselves and fund investors.

Fees charged at the co-investment vehicle

Organizational and operating expenses. As mentioned above, virtually all passive co-investments feature organizational and operating expense charges to co-investors. While these can be ubiquitous and are expressed either as a fixed dollar amount or as a percentage of total commitment, co-investors should carefully review whether these expenses are capped, and whether they are inside or in addition to the commitment.

Administrative fees. While still relatively rare, some sponsors have taken to charging administrative fees directly to co-investment vehicles, purportedly to cover costs for legal and accounting services, reporting, and tax filings. Administrative fees, where charged, are often in addition to organizational and partnership expenses. These fees may be structured as flat annual charges (e.g., $50,000 to $150,000 per year) or as a percentage of committed or invested capital (e.g. 0.02% to 0.10%). In many ways, these fees are akin to a typical management fee.

Broken deal fees. When an investment fails to close, the associated broken deal fees and expenses must be allocated. When passive co-investors are committing equity prior to the closing of the transaction, they are sometimes required to bear their pro rata share of broken deal expenses. Sponsor practice is varied on this point—approximately 20% of transactions tracked by Torys have featured the ability to charge these fees to passive co-investors.

Fees charged at the portfolio company

Monitoring fees. Sponsors often charge monitoring fees to portfolio companies for ongoing advisory services, including board participation and operational support. These fees can reach several million dollars annually, or alternatively between 1% and 2% of a co-investor’s commitment.

Transaction fees. Sponsors also charge transaction fees at the time of acquisition for deal sourcing, due diligence coordination, transaction structuring, and closing activities. These fees typically range from 0.5% to 3% of enterprise value.

M&A/financing/exit fees. Sponsors may also choose to charge fees to the portfolio company for their role in: (i) advising on or arranging add-on acquisitions and divestitures; (ii) arranging or underwriting debt or equity financings; and (iii) realizing an investment, typically as a percentage of enterprise value or gross transaction proceeds at exit.

Negotiation of fees

While fees are a common feature of co-investment vehicles, they are not always fixed. The degree to which each fee is negotiable will depend on a number of factors, including the size of the co-investor’s commitment, the strength of its relationship with the sponsor, whether the co-investor has already invested in the main fund at the time of their co-investment, and—in some cases—timing (with early committers sometimes enjoying reduced economics). As a general matter, fees charged at the co-investment vehicle are easier to negotiate, whereas fees charged at the portfolio level typically reflect the sponsor’s standardized approach, making it harder for co-investors to move the needle for negotiation.

Regulatory landscape

Regulators have increasingly focused on fee transparency—notably with respect to break fees—in the private funds industry. The SEC has brought enforcement actions against sponsors for inadequately disclosing such fees, as well as portfolio company fees and accelerated monitoring fees. In 2023, the SEC adopted the Private Fund Adviser Rules¹, which include enhanced disclosure and reporting requirements around fees and expenses (although key provisions were subsequently vacated by the Fifth Circuit in June 2025).

While these regulatory developments have shaped disclosure practices around fees and expenses broadly, investors should take note that the allocation of broken deal expenses to co-investors remains a matter of negotiation rather than mandate: there is nothing that currently compels a sponsor to charge such costs to its co-investors. Nonetheless, sponsors are increasingly expected to provide detailed information about fee arrangements, potential conflicts of interest, and the allocation of costs across fund vehicles and co-investors. We anticipate that regulatory scrutiny will continue to shape industry practices.

Final thoughts

Headline economics may only tell part of the story in the passive co-investment context. Co-investors should have their eyes wide open to the array of economics charged in these kinds of deals, and at the very least fully understand what is charged, where it is charged, and what the resulting maximum exposure will be.

“No fee / no carry” whets many a co-investor’s appetite. But as everyone knows, there is no such thing as a free lunch.