How co-investment works in lower middle market acquisitions. Deal access, timeline, diligence requirements, expected structure, and what co-investors should know before committing.
Co-investment in the lower middle market is not passive investing. It is more like buying into a working ranch. You are not expected to ride the fence line every day. But you need to understand what you own, trust who is running it, and be able to move when it is time to move.
I have seen an investor who "needed more time to review" on a deal that closed without him. Sixty days later he heard the first update. The business was performing ahead of plan. He asked me what the current entry valuation would look like. I told him it would not be the same number. He was quiet for a moment. A year after that, when the next deal came around, he moved in ten days.
That is the education this market provides. Here is the same education, delivered more efficiently.
In an independent sponsor deal, co-investment means contributing equity alongside the lead sponsor to fund the acquisition. The lead sponsor sources the deal, manages due diligence, structures the transaction, and operates the business post-close.
Co-investors provide equity capital in exchange for a proportional economic interest in the deal. Co-investors do not manage the business. They do have visibility into operations, typically through periodic reporting and direct sponsor access. This is not a hands-off commitment to a black box. It is a specific business you understand, run by a specific operator you have evaluated.
Lower middle market co-investment deals with Berkman Woods typically range from $3M to $30M in total enterprise value. Equity checks from co-investors range from $250K to $3M per deal, depending on the capital structure and the deal size.
Debt, whether SBA, senior, or mezz, typically represents 50 to 70% of the capital stack. Co-investor equity sits alongside the sponsor's equity, on the same terms and at the same entry valuation. You are not getting a different class of ownership. You are sitting at the same table.
Independent sponsor deals move faster than traditional PE processes. From signed LOI to close is typically 60 to 90 days for SBA-financed transactions and 90 to 120 days for deals using private capital structures.
Co-investors are typically brought in during the diligence phase, after the deal has been underwritten by the lead sponsor and key risks have been identified. Co-investors receive a diligence summary, financial model, and investment memo and are expected to complete their own review within 2 to 3 weeks.
The pace is real. A co-investor who wanted to conduct "full independent diligence" on a 60-day SBA deal would need to start that process before the LOI was signed, which is a different kind of relationship than co-investment. Bless their heart, but that is a different product. Know which one you are doing.
Co-investors in LMM deals receive: a detailed financial model with operating assumptions, historical financials at minimum three years, a quality of earnings summary, key customer and employee summaries, and an investment thesis from the lead sponsor. Site visits are common for co-investors who want them, and the sponsor should welcome them.
Most co-investors at this level rely primarily on the lead sponsor's diligence depth and supplement it with specific areas of interest to their own thesis. Investors who want to conduct full independent diligence should communicate that expectation early and understand it affects the timeline and the deal dynamics. There is no wrong answer, but there is a mismatch if everyone is not aligned on what the process looks like.
LMM co-investments typically target 2.5x to 4.0x MOIC over a 4 to 7 year hold period, with significant variation based on business performance, entry multiple, and exit conditions. Base cases assume stable EBITDA growth and a strategic sale or recapitalization exit.
Downside cases are modeled against business-specific risks. Returns are not guaranteed. LMM investing carries real risk at the individual deal level. That risk is the source of the return premium. Size your co-investor capital relative to total portfolio accordingly.
LMM co-investment is right for accredited investors and family offices who want direct exposure to operating businesses, are comfortable with illiquidity over 4 to 7 year hold periods, can move decisively when deals are presented, and have enough trust in the lead sponsor's operational capabilities to participate without needing to approve every decision.
It is not right for investors who need quarterly liquidity, who want to manage the business alongside the sponsor, or who are investing their first private equity dollars. Know what you are in before you start. The working ranch runs better when everyone understands their role before they arrive.
Related: Co-Investors · Family Offices
