Key Takeaways

  • Re-underwriting a general partner's direct deal burns institutional diligence resources without improving returns.
  • Tim McCusker, President of NEPC, oversees approximately $2 trillion in advisory assets and observes that LPs must decide on co-investments within days or weeks, not months.
  • Former CalSTRS CIO Chris Ailman found that stock-picking co-investments underperformed; systematic participation across all manager opportunities produced alpha purely through fee and carry savings.
  • Dragging out deal review into a slow hesitation damages GP relationships far more than an immediate rejection.
  • Allocators run high-velocity screening using the NEPC Co-Investment Strike Zone Analysis.

The NEPC Co-Investment Strike Zone Analysis

  • Sector Competence: Verify that the co-investment opportunity is in a core sector where the GP has demonstrated a clear historical edge and delivered top returns.
  • Deal Size Consistency: Confirm that the enterprise value and equity check size match the manager's historical sweet spot rather than an unproven, outsized target.
  • Structural Familiarity: Check that the investment instrument and capital structure resemble previous successful deals the GP has managed.
  • Rapid High-Level Underwriting: Execute a streamlined, high-level review rather than re-underwriting the entire company from scratch, returning a decision within weeks or days.
  • Decisive Communication: Deliver a fast yes or a quick no to the GP immediately; strictly avoid letting deals languish in a 'long maybe.'

When This Works (and When It Doesn't)

This framework operates cleanly when institutional allocators review co-investment opportunities alongside pre-vetted private equity or venture capital GPs under tight transaction deadlines. It assumes the limited partner has already completed extensive operational and operational-risk diligence on the sponsor during fund commitment cycles. If that baseline trust exists, running a fast filter beats rebuilding a financial model.

It breaks down when LPs attempt to perform weeks of bottom-up due diligence that duplicates the GP's work. It also fails when a sponsor steps outside their mandate, such as a growth equity manager pitching a distressed debt recapitalization or a middle-market buyout fund chasing a multi-billion-dollar enterprise asset. In those situations, standard filters will not protect an LP from manager drift, and the absence of deep direct underwriting leaves capital exposed.

Why It Matters

LP co-investment appetite is altering private equity balance sheets. Tim McCusker points directly at the operational flaw inside institutional investment teams: “The number one don't for us is don't try to replicate what the GP is doing. You've built this partnership with this private equity manager because you believe in their ability to source great investment ideas. It's not a productive use of anyone's time to completely re-underwrite the idea that they brought to you.” When LPs behave like direct deal leads, they miss syndicate allocations.

Speed dictates syndicate access. As McCusker notes, “This is not like the fundraising process where you have several months to underwrite them and get to know them and know their whole process. This is something measured in weeks, sometimes days, instead of months.” Institutional allocators who stall lose their seat at the table. McCusker stresses that “a long maybe is the worst outcome there for the GP.” A swift rejection preserves syndicate standing for the next transaction.

Underwriting individual asset winners is statistical noise for allocators. David Weisburd recalled how Chris Ailman deployed billions at CalSTRS: “He said they tried everything and the thing that worked was underwriting the manager and just diversifying into all of their co-investments. So, not picking winners and losers and surprise, surprise, after a couple decades, it ended up being that the alpha there was actually the fee savings.” The real mathematical edge in co-investment programs comes from compounding capital free of management fees and carried interest, not LP deal-selection skill.