Private Equity Co-Investments Reach $198 Billion as Institutions Challenge Fund Fees

Institutional investors are expanding their direct participation in private equity transactions, with global co-investment activity reaching a reported $198.19 billion in the first half of 2026, as pension funds, sovereign wealth funds and other large asset owners seek greater control over investment decisions and lower management costs.

The figure exceeds the full-year co-investment totals recorded in five of the preceding six years. It also approaches the $253.01 billion recorded for all of 2025, signaling substantial demand for deal-level exposure outside conventional private equity fund commitments.

The shift creates a challenge for general partners, which have historically relied on management fees and carried interest from closed-end funds. Yet it also creates opportunities for managers able to offer institutional clients access to individual transactions while retaining responsibility for sourcing, underwriting and portfolio management.

The development comes as private equity investors contend with extended holding periods, slower distributions and growing pressure to demonstrate returns after fees.

Co-investment activity accelerates in 2026

Co-investments allow institutional investors to acquire direct stakes in portfolio companies alongside private equity sponsors, often through separate investment vehicles.

Unlike a traditional fund commitment, which gives a general partner discretion to allocate capital across multiple transactions, co-investment structures allow limited partners to assess individual opportunities before committing additional capital.

The economic terms are frequently more favorable than those of flagship funds, with reduced or waived management fees and carried interest. Actual arrangements vary by manager and transaction.

According to S&P Global Market Intelligence’s July 2026 co-investment analysis, co-investment activity reached $198.19 billion between January and June.

The total was heavily influenced by large technology transactions, including financing rounds involving artificial intelligence companies.

That concentration is important when interpreting the figures.

The increase in aggregate transaction value does not necessarily mean that the number of conventional buyout co-investments has risen at the same rate. A small number of exceptionally large technology financings can materially influence reported deal value.

Nevertheless, the scale of activity demonstrates institutional willingness to participate directly in large private-market transactions.

Why pension funds and sovereign investors want greater control

For institutional asset owners, co-investments offer three principal advantages: lower investment costs, greater portfolio control and more targeted capital deployment.

Management fees and carried interest can significantly affect net returns over a private equity fund’s life.

By negotiating reduced fees on co-investments, large investors can improve potential net performance without necessarily changing their exposure to the underlying companies.

Direct participation also allows investors to influence portfolio construction.

A pension fund seeking greater exposure to healthcare, for example, can selectively participate in qualifying healthcare transactions rather than increasing commitments to a diversified buyout fund.

Similarly, sovereign wealth funds can direct capital toward sectors or geographies aligned with their investment mandates.

Boston Consulting Group’s 2026 research identifies this change as part of a broader transformation in institutional investment management. Its Global Principal Investors Report 2026 estimates that sovereign wealth funds and public pension funds collectively managed approximately $43 trillion in assets in 2025, up from $21 trillion in 2015.

The report also documents growing interest in direct investments, co-investments and institutionally owned investment platforms.

As these investors expand their internal capabilities, some are becoming more active transaction participants rather than relying exclusively on external managers.

Direct investing does not eliminate the need for private equity firms

The distinction between co-investing and investing independently is critical.

In a conventional co-investment, a private equity manager generally continues to originate the transaction, negotiate the acquisition, conduct due diligence and oversee the portfolio company.

The institutional investor supplies additional capital, typically alongside the manager’s flagship fund.

A fully independent direct investment requires the asset owner to assume substantially more responsibility for sourcing, underwriting, governance and eventual exit execution.

These activities demand experienced investment professionals, legal resources, sector expertise and operational infrastructure. Consequently, the growth of co-investments does not automatically imply that institutional investors are abandoning private equity managers.

Instead, it changes how the economic benefits and responsibilities of transactions are shared. For large general partners, offering co-investment rights can strengthen relationships with major limited partners and increase the capital available for larger acquisitions.

The trade-off is that some capital may generate less fee revenue than a conventional fund commitment.

Fee pressure adds to private equity fundraising challenges

The changing relationship between limited partners and general partners comes during a difficult period for traditional private equity fundraising.

Investors have faced slower distributions as managers hold portfolio companies for longer, limiting the cash available for new commitments.

BCG’s 2026 research found that capital calls have exceeded distributions over an extended period, contributing to liquidity pressure among institutional investors.

The report also showed that fundraising has become increasingly concentrated among the largest managers.

Its analysis estimated that the five largest general partners accounted for approximately 41% of closed-end fundraising in 2024, while the top 10 represented about 59%.

This concentration has implications for smaller and midsize firms.

Large managers may be better positioned to provide institutional investors with diversified deal pipelines, dedicated co-investment teams and access to large transactions.

Smaller managers may face greater difficulty competing for commitments unless they offer differentiated sector expertise or investment opportunities.

For institutional investors, greater negotiating leverage can improve fee arrangements, but concentrating relationships among a limited number of managers can also increase portfolio overlap.

Direct investments introduce additional risks

Co-investments offer potential cost savings, but lower fees do not guarantee better returns.

Institutional investors may receive limited time to evaluate transactions, particularly when a private equity sponsor is completing an acquisition under a tight timetable.

They must also assess whether the opportunity fits their portfolio rather than simply accepting a transaction offered by an established manager.

A further consideration is adverse selection: the possibility that investors receive access to deals with less attractive risk-return characteristics.

There is no presumption that managers systematically allocate weaker transactions to co-investors, but the potential conflict requires appropriate governance and independent underwriting.

Concentration risk is another important distinction.

A traditional private equity fund typically spreads capital across multiple portfolio companies. A direct investment creates exposure to a specific business, making its performance more dependent on individual company outcomes.

For smaller pension funds, building the internal capabilities needed to evaluate these risks can offset some of the fee savings.

The most effective co-investment programs therefore require more than access to transactions. They need independent investment committees, specialist due diligence and clear limits on portfolio concentration.

Secondaries provide another route to investment flexibility

The institutional push for direct exposure is developing alongside growth in private equity secondaries.

Secondaries allow investors to acquire or sell existing fund interests and, increasingly, direct stakes in individual portfolio companies.

PE NEWSWIRE has examined how structured fund-stake transactions are providing liquidity to private equity investors as distributions from traditional buyout funds remain constrained.

Co-investments and secondaries serve different purposes, but both provide institutional investors with alternatives to making new commitments to conventional blind-pool funds.

The expansion of these markets is also creating opportunities for specialized managers.

In September, CVC raised $10 billion for its largest private equity secondaries fund, reflecting demand for strategies that can provide liquidity and more targeted private-market exposure.

The interaction between these markets is becoming increasingly important.

An institutional investor holding a direct co-investment may eventually seek liquidity through a secondary sale, while a secondary manager may acquire the position without requiring the original private equity sponsor to exit the underlying company.

That flexibility can help investors manage allocations, although secondary transactions remain dependent on buyer demand and pricing.

What the shift means for private equity managers

The rise of co-investments is changing the competitive dynamics of private equity without necessarily displacing traditional funds.

For general partners, the ability to provide attractive co-investment opportunities may become an increasingly important part of institutional fundraising.

Managers that consistently originate desirable transactions can use co-investment access to deepen relationships with large pension funds and sovereign investors.

At the same time, reduced fees on deal-level capital may place pressure on the economics of the traditional fund model.

For limited partners, the challenge is determining whether lower fees and greater investment discretion compensate for the additional underwriting, governance and concentration risks.

The distinction between institutions with substantial internal investment capabilities and those dependent on external managers is likely to become more consequential.

The $198.19 billion in first-half co-investment activity is evidence of changing capital deployment patterns, not proof that traditional private equity funds are becoming obsolete.

Instead, private equity is moving toward a more varied institutional model in which fund commitments, co-investments, direct holdings and secondary transactions coexist.

The managers best positioned in that environment will be those able to demonstrate investment performance while accommodating investors’ growing demand for transparency, flexibility and fee efficiency.