Outline the ways an investor can gain access to alternative investments
The idea
Exposure can be obtained three ways. A fund investment commits capital to a manager who selects and runs the assets, paying full fees for full delegation. A co-investment places additional capital alongside the fund into a specific deal, usually at reduced or zero fees, and gives the investor a look at the underlying asset — but requires the staff to evaluate it quickly. Direct investment means buying the asset outright, which removes fees entirely and demands the most internal capability. Cost falls and required expertise rises across the three.
A practice question
What is a co-investment?
- A commitment to two funds run by the same managerWhy not: Two fund commitments, which doubles the fee drag rather than reducing it.
- Capital invested alongside a fund into a specific underlying deal — correct
- A secondary purchase of another investor's fund stakeWhy not: A secondary buys an existing position in a fund, not a stake in one underlying deal.
The investor participates directly in one asset the fund is acquiring, usually on reduced fee terms, while remaining a limited partner in the fund itself.
A harder one
Why does direct investment demand the greatest internal capability?
- Because regulators require a minimum staffing levelWhy not: No such requirement exists; the demand comes from the work itself.
- Because direct investments are always largerWhy not: Size varies, and a small direct deal still needs sourcing, diligence and oversight.
- Because the investor does the manager's work — correct
Sourcing, diligence and ongoing asset management all fall to the investor. Removing the fee also removes the service it paid for, and an organisation without deal and asset-management expertise cannot replicate that simply by saving the fee.
The hardest tier
An investor with modest staff seeks to reduce the fee drag on its private equity programme. Which approach best fits?
- Co-investment alongside existing managers — correct
- A full transition to direct investmentWhy not: Saves the most in fees and demands the capability this investor has just been described as lacking.
- Increasing the number of fund commitmentsWhy not: More commitments means more fees, which moves in the wrong direction entirely.
Co-investment uses the manager's diligence as a starting point, lowering the blended fee without requiring the investor to source deals from nothing. It still needs the capacity to assess a specific asset on a short deadline.
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