One widely held belief of institutional investors is that co-investment from a manager serves to align the interests of the manager and the investor. This article presents some challenges to this belief.

While requiring manager co-investment in institutional real estate ventures may sometimes serve to align manager and investor interests, there are cases where it has negligible impact as well as cases in which its impact is counterproductive. From an institutional investor’s perspective, the challenge is to distinguish the cases where co-investment is a benefit from those where it is merely “alignment-candy” — or worse. It also means that LPs need to examine co-investment on a case-by-case basis and should not rely on simple quantitative or qualitative formulations such as “X percent of capital” or “meaningful co-investment.”

Unfortunately, there is little empirical evidence with respect to this issue. The few studies from other disciplines tend to be i