It’s a complex topic.

Here’s the #1 issue with LP’s co-investing: most of them are way, way too slow.

The point of co-investing really is to co-invest in the hotter start-ups in the portfolio (top 25%). Even if there is “extra” pro-rata for an LP or two (or some other room) … hot rounds are almost always full before they even start, or close to it.

But you can’t take 6–8 weeks and do a ton of new diligence to participate in a hot deal.

LPs that can truly move quickly — i.e., in a week — have a great strategic opportunity here. Folks like Industry Ventures have made big infrastructure investments to be able to do this. But most LPs haven’t.

Second, who do you share it with, if many of your LPs want to co-invest? In the end, you may need to assemble SPVs just to accommodate them if multiple LPs want to coinvest in one deal. This sounds great, but it can be like herding cats. If 4 LPs want 6–8 weeks and each want to do their own new diligence … it’s like 16x more complicated than one LP. Even the top, best VC funds struggle to assemble multi-LP SPVs quickly.

Third, there are lots of adverse selection concerns. If the hot rounds are all full, does that mean you are only showing the LPs the so-so deals? Maybe. Even if the answer is No, they may be worried that’s the case. Even if they’ve followed the investment since inception.

Fourth, with bigger funds and many more select & opportunity funds, there are fewer opportunities. They are still there, but things have changed. Most smaller and mid-sized funds can do more of their pro-ratas than 4–5 years ago.

So it’s a great idea and especially if you have a smaller fund, you should try. But it’s harder to do in reality than in theory.

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