Co-Investment Through AIFs: Benefits, Risks and SEBI Framework Explained

Introduction

Imagine investing alongside an Alternative Investment Fund in the same company, on the same terms, rather than only through the pooled fund.

That's “Co-investment in AIFs.” 

And since SEBI formalised the Co-Investment Vehicle (CIV) framework in September 2025, it's become one of the most talked-about opportunities in India's private market ecosystem.

But co-investments aren't simply "extra access to good deals."

Stay with us as we briefly explain how co-investments in AIFs work in India, who's eligible under SEBI's current rules, why fund managers offer them, the genuine benefits and the genuine risks.

What is Co-Investment Through AIFs?

Co-investment (or CIV) through an AIF allows eligible investors to invest directly in a specific portfolio company alongside the Alternative Investment Fund.

These are usually on terms similar to those offered to the fund. 

Over here, AIF investors have exposure to a single private-market deal rather than the fund's entire diversified portfolio. Hence, the investment limit in Co-investment schemes is three times their AIF contribution. 

Here's the simplest way to understand the difference:

Understanding SEBI's Framework for Co-Investments

As per the SEBI 2nd AIF amendment, on September 8, 2025, a dedicated Co-Investment Vehicle (CIV) structure was introduced to provide regulatory clarity on who can co-invest, how co-investment schemes operate, and what disclosures fund managers must make.

Let us look at key provisions of the SEBI CIV framework:

• Who can Invest 

  Only accredited investors of Category I and Category II AIFs can participate in CIV schemes.

• Framework 

  CIV schemes operate alongside the main fund. It usually invests in the same unlisted company, on similar terms, as an affiliate scheme.

• PPM disclosure 

  Shelf PPM (Private Placement Memorandum) must be filed before any co-investment opportunity is offered.

• Distinction from PMS route 

  The CIV route doesn't replace the PMS co-investment route. SEBI's 2021 amendment allowed AIF managers to offer co-investments through the PMS (Concurrent Portfolio Management Service) structure.

• Recent amendment 

  SEBI's June 3, 2026 revised AIF Master Circular reaffirmed that co-investing is limited to accredited investors, with enhanced disclosure and governance requirements.

How Does Co-Investment in AIF Work?

In India, AIF co-investment works through a five-step process:

Step 1: AIF identifies an investment opportunity.

Step 2: The fund commits capital

Step 3: Eligible investors are offered the co-investment (where applicable to specific accredited investors)

Step 4: Investors may conduct independent due diligence.

Step 5: Capital is deployed directlyinto the portfolio company (via CIV structure)

Benefits and Risks of Co-Investment in AIFs

Co-investment offers five distinct benefits and likewise risks involved in CIV schemes as well. 

Benefits:

Direct access to private market opportunities that are typically accessible only through pooled funds.

Investing alongside experienced fund managers since they’re deep due diligence, negotiated terms, and structured the investment.

Greater portfolio customisation giving sector preferences, risk appetite, and existing portfolio composition. This level of deal-level selectivity doesn't exist in a pooled fund.

Some co-investment structures may carry reduced or nil management fee and carry.

Unlike a pooled fund, Co-investment AIFs give better visibility into individual investments.

Risks:

1. Concentration risk 

   Since AIF co-investment puts your capital into a single company, concentration risks stays.

2. Illiquidity risk 

   Private market investments have no secondary market. Your capital is locked until an exit route is available (usually via IPO, strategic sale, or buyback).

3. Deal-specific risk 

   Every company has unique business risks (such as market demand, competition, management, etc.).

4. Valuation risk 

   Private companies are valued using different valuations models, hence, the entry valuation may look reasonable at the time of investment but prove optimistic in hindsight.

Who Should Consider Co-Investments?

Co-investments are suitable for accredited investors with; 

• Meet the accredited investor threshold (net worth ≥₹7.5 crore or income ≥₹2 crore)
• Understand private markets and can evaluate company fundamentals, governance, and exit viability independently.
• Investors should know the possibility of total loss on the co-invested amount.

How to Evaluate AIF Co-Investment: Practical Framework

Before committing capital to a co-investment, run it through this four-factor framework:

D — Deal Quality 

Assess the strength of the business and the investment opportunity.

• Is the investment thesis compelling?
• Does the company have a competitive advantage, strong growth potential, and a clear path to profitability or exit?

E — Expertise

Evaluate the fund manager's experience and execution capability. 

• Why has the fund manager selected this opportunity?
• What is their track record in this sector, and how have similar investments performed?

A — Alignment

Ensure the interests of the fund manager and investors are aligned.

• Are both investing on the same terms?
• Does the manager have meaningful skin in the game?
• Are the fee structures transparent and fair?

L — Liquidity

Check whether the investment fits your liquidity needs and time horizon.

• Can you comfortably stay invested for 5–7 years?
• How will this investment impact your portfolio's overall liquidity?

Final Thoughts

Co-investments through AIFs can offer eligible investors access to select private market opportunities alongside experienced fund managers. However, they also require a higher level of due diligence, as each investment carries its own risks, liquidity considerations, and concentration exposure.

Rather than focusing solely on the potential upside, investors should understand the quality of the underlying CIV scheme and other fund details. 

Hence, making co-investment in AIF requires expertise or professional based in AIF provider.