Private equity co-investing has evolved into a distinct investment strategy. In a co-investment transaction, the co-investor invests in a particular security on a side-by-side basis with an established private equity fund, in which the co-investor is often a limited partner. Although dub investments, in which private equity funds have taken minority positions in deals led by other private equity funds, have existed for some time, private equity co-investment transactions now allow more traditionally passive investors, such as insurance companies, pension funds, and investment managers, to leverage their own deal skills and abilities in order to enhance the returns of their private equity fund portfolios. Previously, these passive investors could add private equity assets to their portfolios only by making investments in private equity funds.
The utility of co-investment transactions to fund sponsors is also evolving. Originally, co-investments and club deals were ways for fund sponsors to spread risk or raise additional capital, if fund size or maturity prevented the sponsor from providing all the equity capital required for a given transaction. Using co-investment as a means to raise additional capital for specific deals continues today. Increasingly however, fund sponsors see co-investment as a marketing tool to build the loyalty of existing fund investors and to attract prospective investors for future funds. As fundraising becomes more competitive, particularly for newer and less well-established funds, co-investment programs are becoming an increasingly important device to attract investment and build limited partner loyalty.
The more active posture of traditionally passive investors in co-investment transactions has led to some uncertainty as to the proper relationship between fund sponsors and co-investors and as to the market terms for co-investment transactions. Although standard market terms continue to evolve, they will be driven, at least in part, by the investment strategies and expectations of both co-investors and fund sponsors. Three basic forms of co-investment structures have evolved to accommodate those expectations. They are: passive co-investment, active co-investment, and club investments.

BASIC CO-INVESTMENT STRUCTURES
Passive co-investment describes the approach of most co-investors and fund sponsors in current co-investment transactions. In a passive co-investment structure, the co-investor has minimal involvement in the underlying private equity transaction. Co-investors invest through a special purpose vehicle wholly controlled by the fund sponsor. The objective of the investment structure is that the terms of the special purpose co-investment vehicle duplicate, as nearly as possible, the rights and responsibilities of the general partner, and the rights and lack of control of the limited partners, that exist in the sponsors fund. The principal differences between the terms of the co-investment special purpose vehicle and those of the sponsor's fund will be the limited purpose of the co-investment vehicle and, generally, the absence of or a substantial reduction in the sponsors fees and carried interest.
Passive co-investment structures are attractive to co-investors, who see co-investment simply as a way to concentrate investment in assets within an existing portfolio that the co-investor believes are likely to generate returns that are greater than the average return for all assets in the portfolio. The co-investor is generally not interested in actively managing its co-investment after the investment is made and is concerned only that its economic interests and those of the equity fund sponsor in the underlying transaction are fully and completely aligned. Equity fund sponsors also appreciate Passive co-investment structures for the minimal interference they impose on the sponsors discretion to manage the underlying investment.
Co-investors desiring somewhat greater discretion over their investment in the underlying transaction may prefer the Active co-investment model as a structure for their co-investments. Active co-investment structures closely resemble passive co-investment structures in that they generally involve a special purpose co-investment vehicle controlled by the fund sponsor. Unlike passive co-investment deals, however, active co-investment structures presume that the co-investors have some limited discretion over the ultimate disposition of their investment (e.g., exercise of pre-emptive rights, registration rights, or transfer rights) independent of, and that may be different from, the decisions made by the fund sponsor with respect to its own investment in the underlying securities.
In active co-investment structures, therefore, traditional stockholders' rights issues become much more important in the negotiation of transaction terms. Co-investors must ensure not only that minority investors have strong legal rights with respect to the underlying investment, but also that those rights are effectively passed through to the investors in the special purpose co-investment vehicle and can be exercised effectively by the co-investor. Adequate information, audit rights, and reporting rights are also of concern, as investors in active co-investment structures need to have sufficient information about the underlying investment to exercise intelligently their rights.
The third basic form of co-investment is the traditional club investments structure, where one investor takes a leading role in the transaction but the other co-investors maintain considerable discretion and influence over the investment. Club structures often are seen where the lead investor is a fundless sponsor or the co-investors are otherwise investing the majority of the equity capital in a transaction. Club deals are also seen where the co-investors are themselves fund sponsors and wish to maintain some control over the direction of the underlying investment.
In club structures, co-investors generally invest directly in the underlying securities rather than hold them through a special purpose vehicle. Traditional stockholders' right issues are of paramount importance, with the co-investors often retaining the right to remove the lead investor and to drag it along, if necessary, on an exit. Club co-investors often require board seats, robust information rights, and rights of independent transfer, often qualified by first offer or first refusal obligations in favor of the other investors.
The type of co-investment structure used in a transaction depends upon the preferences of both the co-investors and the fund sponsor. Co-investors that have the back office capacity to manage their co-investments actively, and believe they can add value by doing so, may gravitate to more active structures. More traditional investment managers may, on the other hand, see little additional value in actively managing a co-investment beyond their initial decision to make the investment itself. The fund sponsors, who provide the co-investment opportunities, usually have the greatest say with respect to structure. More established and better-capitalized funds may be unwilling to offer more active structures. In some situations, fund sponsors introduce pre-negotiated co-investment special purpose vehicles to limited partners at the time of their initial fund investment in order to illustrate exactly what co-investment opportunities will look like from a structural perspective and to minimize co-investors' expectations with respect to their control and discretion in any co-investment transaction.

TERMS OF CO-INVESTMENT TRANSACTIONS
The terms of a co-investment transaction depend in large part on what type of co-investment structure the fund sponsor and the co-investors desire for the transaction: passive co-investment, active co-investment, or a club investment. The degree to which the co-investor expects to rely on the sponsors' skills in managing the underlying investment determines to a large extent the issues to be negotiated at the time the co-investment is made and the nature of the legal documentation.

STRUCTURE OF CO-INVESTMENT VEHICLE
As previously mentioned, passive co-investment and active co-investment structures are noted for their use of a special purpose co-investment vehicle entity through which co-investors make their investment. As a general rule, the co-investment vehicles are structured as Delaware limited liability companies, because of the pass-through tax characteristics and contractual flexibility of those entities. An affiliate of the fund sponsor generally acts as sole manager of the special purpose co-investment vehicle.
Co-investors want to ensure that limitations on the powers of, and imposition of responsibilities on, the manager of the co-investment vehicle are no less favorable to the co-investors than those placed on the general partner by the partnership agreement that governs the sponsor's fund. To the extent that the limited partners in the fund have the right to limit certain actions of the general partner or receive certain information about performance of underlying investments, a co-investor generally wants similar rights and limitations in the co-investment vehicle.
One common issue in co-investment vehicles is whether the co-investment vehicle manager will serve as a fiduciary of the co-investors. Most private equity funds are organized as partnerships and, under partnership law, the general partner is bound by fiduciary duties of care and loyalty to the limited partner investors that cannot be disclaimed by contract. In Delaware limited liability companies, however, no fiduciary obligations are imposed on managers in favor of members as a matter of law. The existence or non-existence of fiduciary duties is entirely a matter of contract. Co-investors therefore may desire that the limited liability company agreement of the co-investment vehicle impose the same level of fiduciary duty on the vehicle's manager as the sponsor's fund imposes on the sponsor.
The contractual imposition of fiduciary duty on the manager of the co-investment vehicle is often a sensitive issue. Fund sponsors generally resist accepting any fiduciary obligations because of the potential for liability. To co-investors, however, particularly those committed to passive co-investment structures in which the sponsor has substantially complete discretion and responsibility for managing the underlying investment, the sponsor's assumption of the same responsibilities to the members of the co-investment vehicle as to the limited partners of the sponsor's fund may seem important and unite reasonable.
Another important issue for co-investors is making sure that the co-investment vehicle is structured as a true closed-end fund and cannot be used by the manager to invest in other securities or to admit new members at the co-investment vehicle level, who will dilute the co-investor's interest in the securities owned by the co-investment vehicle. Co-investors want the limited liability company agreement of the co-investment vehicle to reflect strict limits on the vehicle's activities and on the manager's ability to admit new members and issue new interests.

PASS-THROUGH OF STOCKHOLDERS' AGREEMENT RIGHTS
In a typical co-investment transaction, the special purpose co-investment vehicle holds securities of a holding company (or perhaps the securities of the underlying operating company), which represents the underlying private equity investment. The sponsor's fund also holds the same securities of the holding company, as may members of management and, perhaps, other co-investors, whose relationship to the transaction is different from that of the co-investors investing through the special purpose co-investment vehicle. The co-investment vehicle, the sponsor's fund, the management stockholders, and the other co-investors are all parties to a stockholders' agreement, which typically contains provisions governing such issues as tag-along rights, drag-along obligations, information rights, pre-emptive rights, registration rights, and supermajority consent rights among the various investors in the holding company.
The extent to which co-investors are concerned with typical stockholder rights issues depends, in large part, upon the structure of the co-investment transaction. In a passive co-investment structure, the stockholders' rights issues are relatively unimportant to the co-investor, as the sponsor is obligated to treat the co-investor's investment exactly as it treats its own. Co-investors negotiate for negative covenants in the co-investment vehicle's limited liability company agreement that prohibit the sponsor from permitting or suffering its fund or affiliates from registering or disposing of its stock in the holding company without exercising equivalent rights on behalf of the co-investment vehicle.
Passive co-investment investors must be aware, how-ever, that strict side-by-side structures can lead to complexities. A sponsor's potential exercise of preemptive rights on behalf of its fund, for example, presents a difficult dilemma for passive co-investors, as such actions, if followed on a strict side-by-side basis by the special purpose co-investment vehicle, would commit the co-investor to make additional, future investments in the underlying transaction in amounts and on terms that cannot precisely be predicted at the time of the initial investment. Co-investors therefore generally do not agree to give the co-investment vehicle's manager the right to require co-investors to make additional capital contributions to the special purpose co-investment vehicle in order to fund a proportionate exercise of the vehicle's preemptive rights. On the other hand, reserving to individual co-investors the discretion to make additional capital contributions in order to fund a discretionary exercise of preemptive rights, or not, is often distasteful to co-investors and to fund sponsors alike, who envision the co-investor as acting in an entirely passive capacity. As a consequence, many co-investment vehicles give their members neither the right to participate purchases of new securities issued by the holding company nor the right to restrict the sponsor's fund from exercising such rights when the co-investment vehicle does not. The potential risk to co-investors of not being able to participate in a future issuance by the holding company that is economically dilutive to the original investors is self-evident. This risk underlines the importance of obtaining the fund sponsor's agreement to act as a fiduciary for the co-investors in passive co-investment structures.
For active co-investment and club investors, however, stockholders' rights issues are considerably more important. Because a active co-investment investor may want the ability to exercise a pre-emptive right with respect to an issuance of new securities by the holding company, even if the sponsor's fund does not, it is important to make sure the stockholders' agreement contains an adequate pre-emptive rights provision. Just as important is making sure the limited liability company agreement of the co-investment vehicle contains adequate provision for passing through to the co-investor the rights granted to the co-investment vehicle by the stockholders' agreement. This can be somewhat complicated. The pass through of a pre-emptive right, for example, must provide for adequate notice to the co-investor of the potential opportunity, the right to compel the manager's exercise of the co-investment vehicle's rights under the stockholders' agreement in part, the ability of the co-investor to make an additional contribution of capital to the co-investment vehicle in order to fund the new investment, and an equitable adjustment of. the co-investor's capital account in order to ensure that, upon liquidation of the co-investment vehicle, the co-investor receives the economic benefit of the new securities purchased pursuant to the vehicle's exercise of its pre-emptive right.
Effectively insuring the pass through of stockholders' rights in a co-investment vehicle requires attention to three details. First, the co-investor must make sure it is entitled to receive from the manager (and that the manager is entitled, under the stockholders' agreement, to receive from the holding company) on a timely basis all information necessary for the co-investor to make the relevant investment decision regarding an exercise of pre-emptive rights, tag-along rights, registration rights, and the like. Second, the co-investor must have the right to require the manager to exercise the co-investment vehicle's applicable rights under the stockholders' agreement in proportionate part. Finally, the limited liability company agreement of the co-investment vehicle must contain appropriate mechanisms to facilitate disproportionate additional investments (in the case of an exercise of preemptive or first refusal rights) and liquidations (in the case of an exercise of tag-along rights or permitted dispositions following registration) by members who might not all act in concert with respect to then beneficial interests in the underlying investment.

FEES AND CARRIED INTERESTS
Fees and carried interests charged to co-investors by fund sponsors vary greatly depending upon the nature of the co-investment opportunity and the relationships among the parties. In true club investments, it is uncommon for the sponsor to take a carried interest in the profits of the co-investment vehicle. Generally, the sponsor will require only that the vehicle assume pro rata responsibility -- for transaction expenses. However, as co-investment opportunities increasingly become viewed as an accommodation to limited partners in private equity funds, and as increasing numbers of limited partners express an interest in pursuing co-investment opportunities, fund sponsors seem increasingly willing to charge a carried interest in co-investment vehicles, though often at some fraction of the general partner's carried interest in the underlying private equity fund.
The structures and fees associated with co-investment vehicles likely will continue to evolve as co-investment becomes seen as a distinct investment strategy within the private equity universe. As private equity co-investment vehicles move, probably to more standardized, pre-nego-tiated structures, fee and carried interest expectations are likely to become more consistent as co-investors and fund sponsors come to agree on what constitutes "market" terms in co-investment transactions.

LIQUIDATION AND DIVIDENDS IN KIND
A liquidation of the co-investment vehicle or its decision, for whatever reason, to distribute the securities it holds directly to its members in kind presents a number of issues for both active and passive co-investors. All co-investors must take care that no such distribution gives rise to an unfavorable right of first refusal in favor of another stockholder. More active co-investors additionally want to ensure that, following their receipt of the underlying securities, the co-investor enjoys all the contractual rights that a minority stockholder in the holding company would want to have. More passive co-investors want to make sure that as a result of a liquidation or distribution, they receive fair value for their underlying holdings in cash or easily marketable securities.
Active co-investment investors and club investors view the prospect of liquidation or a distribution in kind with some caution. Although such co-investors anticipate having some discretion with respect to their underlying investment, as a general rule they do expect to rely on the judgment and economic clout of the sponsor to protect the integrity of their investment. Following a liquidation or distribution in kind, however, the co-investor is on its own as a minority stockholder of the underlying holding company. This prospect causes active co-investment and club investors to negotiate the rights of the minority stockholders in stockholders agreement much more carefully and to take care that those rights will pass through to them in the event they become direct holders of the underlying holding company securities. The issues and concerns of minority investors in negotiating a stockholders agreement are complex and beyond the scope of this article.(FN1)
Passive co-investment investors find the prospect of a liquidation or dividend in kind by the co-investment vehicle to be even more distasteful. As a general rule, passive co-investment investors negotiate for a right to require the equity sponsor, in connection with any liquidation or distribution in kind, to liquidate the underlying holding company securities and distribute only cash to the co-investors. Passive co-investors investors may further insist that if the liquidation or dividend in kind was voluntary on the part of equity sponsor, the sponsor pay all costs and expenses of selling the underlying securities and obtaining a fair value opinion.

OTHER ISSUES
Information rights are often an important issue in co-investment transactions. Co-investors want to make sure the information rights in favor of the members of the special purpose co-investment vehicle are at least as favorable as those in favor of the limited partners in the sponsor's fund. Active co-investment investors, who reserve the right to make independent decisions with respect to their underlying investment, are likely to ask for information rights that go beyond those generally available to investors in private equity funds. Active co-investment investors want the right to receive current financial information about the holding company, prompt written notice of any material changes, a right to speak with management, and periodic audit rights. Board seats and board observer rights are common requests by club investors.
Restrictions on the ability of the co-investment vehicle manager to take certain actions without the consent of the co-investors also may be the subject of negotiation. As a general rule, such consent rights arc not a common feature of passive co-investment and active co-investment structures. Many equity sponsors, however, agree to restrictions on the ability of the sponsor and its affiliates to enter into transactions with the holding company on other than arm's length terms. In club deals, consent rights, such as those relating to the incurrence of material indebtedness or the issuance of new equity securities by the holding company and its affiliates, arc more common.
Co-investors also may want assurance that the terms of co-investment offered by the sponsor are no less favorable than those enjoyed by other co-investors. Obtaining "most favored nations" assurances can be important to a co-investor where other co-investors in the same transaction have larger limited partnership investments in the underlying private equity fund and it is prudent to verify the absence of hidden agendas of the equity sponsor. One trend is the use by equity sponsors of a side letter election form, whereby all co-investors get to choose from a limited list of side letter provisions. Through the use of such a form, equity sponsors pre-define the universe of side provisions they agree to and assure all co-investors that they have access to the same terms.
Indemnification provisions in favor of the co-investment fund manager also bear scrutiny, particularly where the manager refuses to accept fiduciary obligations in favor of the co-investor members. While indemnifying managers for liabilities they incur to third parties is usually uncontroversial, indemnity rights of the manager sometimes also include the right to demand reimbursement of legal fees and other expenses that the manager incurs in Connection with disputes with co-investor members. This may not be acceptable, or fair, in the view of many co-investors. In addition, co-investors will always wish to insure that their maximum liability for indemnification does not exceed the total of their investment in the co-investment vehicle plus the amount of any distributions received.
The ability to transfer membership interests in the co-investment vehicle to third parties also may be important to co-investors troubled by the lack of liquidity in a normal co-investment transaction. Fund sponsors are, as a rule, resistant to free transferability of co-investment vehicle interests. Many fund sponsors, however, are willing to accept transferability, and even to assume a limited best efforts undertaking to make a market for co-investment vehicle interests, where a co-investor desires to divest its interests -- particularly where that desire arises from regulatory or other legal requirements. Co-investors also usually can negotiate for free transferability to affiliates, provided that the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 are fulfilled.
Co-investors also are attentive to the timing of distributions to be made to co-investor members and the outside date of the co-investment vehicle's dissolution. There is usually little reason for the co-investment vehicle to hold cash for more than a few days before being required to make a distribution to its members. A more difficult question involves the co-investment vehicle's obligation with respect to registered, markerable securities acquired by the co-investment vehicle. Some co-investors believe private equity sponsors add little value in managing in vestments in public securities and require that any such securities acquired by the co-investment vehicle be distributed immediately to its members. Many private equity sponsors, of course, take a different view. In any event, co-investors should check the provisions of the sponsor's underlying fund and make sure the co-investment vehicle cannot continue to hold investments in securities after the time the fund might be required to distribute those securities to its limited partners.

CONCLUSION
Co-investment strategies are becoming an increasingly popular way for more traditionally passive investors to leverage better their own deal skills and to enhance the returns of their private equity fund portfolios. Potential co-investors must, however, carefully analyze their own abilities and appetite for participating in this somewhat more active approach to private equity portfolio management. They must also decide with which of the three basic strategies of co-investing they are most comfortable and tailor their private equity fund investment strategy to target funds that offer the co-investment opportunities they desire.
ADDED MATERIAL
JAMES J. GREENBERGER is a partner at Reed Smith LLP., a member of the American Bar Association and a former chair of the Commercial Finance & Transactions Committee of the Chicago Bar Association in Chicago, TL. jgreenberger@reedsmith.com
To order reprints of this article, please contact Dewey Palmieri at dpalmieri@ujouruah.com or 212-224-3675

FOOTNOTES
1 See, Greenberger, "Minority Investor Rights in Private Equity Transactions," The Journal of Private Equity, V(A. 47, No. 4 (Spring 2001).
楼主，这是第二篇，麻烦你自己整理了，那个杂志都是这个格式的。