PE mechanics shifting
What happened
- Private equity firms are increasingly offering co‑investment opportunities to LPs to lower fee drag and expand deal access. - With borrowing costs near 8–9%, sponsors now model about 12% annual EBITDA growth to target 2.5x equity returns over five years. - That combination of more co‑invests and tougher return math reflects dry‑powder pressures and materially higher financing costs ( ).
Why it matters
Private equity firms are giving investors more sidecar deal slots, even as higher borrowing costs force tougher growth assumptions on every buyout. (bain.com) A co-investment lets a limited partner put money directly into a specific acquisition alongside the main fund, usually with lower or waived fees than a standard “2 and 20” structure. Preqin said in February 2024 that general partners were leaning harder on co-investments as tighter credit markets pushed them to fund more deals with equity. (preqin.com) Bain said in March 2026 that the average fund manager now offers 33 cents of free co-investment for every fee-paying dollar a limited partner commits to a fund. PitchBook reported in February 2026 that those giveaways are cutting into manager economics at the same time operating a private equity firm has become more expensive. (pitchbook.com) The return math has shifted just as sharply. Bain said that when debt was cheap in 2021, a typical buyout needed about 5% annual earnings growth to hit a 2.5x multiple of invested capital over five years; today, the same deal needs roughly 10% to 12% annual EBITDA growth. (bain.com) That change comes from the financing stack. Preqin said higher borrowing costs and tighter lending standards have raised equity requirements, while Bain said the 2025 rebound in dealmaking was concentrated in very large funds that could write bigger equity checks and bring in sovereign wealth funds or corporate partners. (preqin.com, bain.com) The pressure is building because private equity is still sitting on a huge backlog of money and assets. PitchBook said global private-market dry powder started expanding again in 2025 after its first annual decline in more than a decade in 2024, while Preqin said last month that US buyout firms are also carrying a $989 billion overhang of exit-ready portfolio companies. (pitchbook.com, preqin.com) Limited partners have their own reason to push for co-investments: lower fees and more control over where capital goes. Preqin said co-investments are often offered without the usual 1.5% to 2% management fee and 20% carried interest, and a Goldman Sachs survey cited by Preqin found 59% of limited partners planned to increase exposure. (preqin.com) Managers say the tradeoff can still be worth it if co-investments help them close bigger deals and keep core investors close. StepStone said its review of more than 1,700 buyout co-investments across 145 general partners and 420 funds showed the market has expanded tenfold since the early 2000s. (stepstonegroup.com) The result is a more technical buyout market than the one private equity enjoyed when leverage did more of the work. Firms can still hit old return targets, but they now need more equity, faster earnings growth, and investors willing to write extra checks beside the fund. (mckinsey.com, bain.com)
Key numbers
- With borrowing costs near 8–9%, sponsors now model about 12% annual EBITDA growth to target 2.5x equity returns over five years.
- (bain.com) A co-investment lets a limited partner put money directly into a specific acquisition alongside the main fund, usually with lower or waived fees than a standard “2 and 20” structure.
- Preqin said in February 2024 that general partners were leaning harder on co-investments as tighter credit markets pushed them to fund more deals with equity.
- (preqin.com) Bain said in March 2026 that the average fund manager now offers 33 cents of free co-investment for every fee-paying dollar a limited partner commits to a fund.
What happens next
- Firms can still hit old return targets, but they now need more equity, faster earnings growth, and investors willing to write extra checks beside the fund.
- (mckinsey.com, bain.com) - Private equity firms are increasingly offering co‑investment opportunities to LPs to lower fee drag and expand deal access.
- With borrowing costs near 8–9%, sponsors now model about 12% annual EBITDA growth to target 2.5x equity returns over five years.
Quick answers
What happened in PE mechanics shifting?
Private equity firms are increasingly offering co‑investment opportunities to LPs to lower fee drag and expand deal access. With borrowing costs near 8–9%, sponsors now model about 12% annual EBITDA growth to target 2.5x equity returns over five years. That combination of more co‑invests and tougher return math reflects dry‑powder pressures and materially higher financing costs ( ).
Why does PE mechanics shifting matter?
Private equity firms are giving investors more sidecar deal slots, even as higher borrowing costs force tougher growth assumptions on every buyout. (bain.com) A co-investment lets a limited partner put money directly into a specific acquisition alongside the main fund, usually with lower or waived fees than a standard “2 and 20” structure. Preqin said in February 2024 that general partners were leaning harder on co-investments as tighter credit markets pushed them to fund more deals with equity. (preqin.com) Bain said in March 2026 that the average fund manager now offers 33 cents of free co-investment for every fee-paying dollar a limited partner commits to a fund. PitchBook reported in February 2026 that those giveaways are cutting into manager economics at the same time operating a private equity firm has become more expensive. (pitchbook.com) The return math has shifted just as sharply. Bain said that when debt was cheap in 2021, a typical buyout needed about 5% annual earnings growth to hit a 2.5x multiple of invested capital over five years; today, the same deal needs roughly 10% to 12% annual EBITDA growth. (bain.com) That change comes from the financing stack. Preqin said higher borrowing costs and tighter lending standards have raised equity requirements, while Bain said the 2025 rebound in dealmaking was concentrated in very large funds that could write bigger equity checks and bring in sovereign wealth funds or corporate partners. (preqin.com, bain.com) The pressure is building because private equity is still sitting on a huge backlog of money and assets. PitchBook said global private-market dry powder started expanding again in 2025 after its first annual decline in more than a decade in 2024, while Preqin said last month that US buyout firms are also carrying a $989 billion overhang of exit-ready portfolio companies. (pitchbook.com, preqin.com) Limited partners have their own reason to push for co-investments: lower fees and more control over where capital goes. Preqin said co-investments are often offered without the usual 1.5% to 2% management fee and 20% carried interest, and a Goldman Sachs survey cited by Preqin found 59% of limited partners planned to increase exposure. (preqin.com) Managers say the tradeoff can still be worth it if co-investments help them close bigger deals and keep core investors close. StepStone said its review of more than 1,700 buyout co-investments across 145 general partners and 420 funds showed the market has expanded tenfold since the early 2000s. (stepstonegroup.com) The result is a more technical buyout market than the one private equity enjoyed when leverage did more of the work. Firms can still hit old return targets, but they now need more equity, faster earnings growth, and investors willing to write extra checks beside the fund. (mckinsey.com, bain.com)
