How to manage a sidecar investment vehicle

Understand what a sidecar investment vehicle is, how to use one to pursue high-conviction deals, and what it takes to manage its lifecycle, economics, and compliance.

What is a sidecar investment vehicle?

A sidecar investment vehicle is a specialized fund structure that allows a fund’s existing investors to participate in a specific investment deal alongside the main fund. This structure is typically a special purpose vehicle (SPV) that is managed by the fund's general partner (GP). The GP uses the sidecar to pool capital from their limited partners (LP) for a single, targeted investment.

How sidecars differ from funds and SPVs

While a sidecar is a type of SPV, its purpose and investor base make it distinct. The key distinction is the sidecar's direct relationship with a main fund and its existing LPs.


Structure	Purpose	Typical investor base
Main fund	Invests in a portfolio of multiple companies according to a broad investment thesis.	A diverse group of LPs, including institutional investors, high-net-worth individuals, and the occasional angel investor.
Sidecar vehicle	Invests in a single, specific company alongside the main fund.	Primarily existing LPs from the main fund.
Standard SPV	Invests in a single, specific company.	Can be any group of accredited investors, not necessarily tied to a main fund.

Why GPs use sidecar vehicles

GPs use sidecar vehicles for several strategic purposes, such as exceeding fund concentration limits or making off-thesis investments. One of the most common drivers is the need to execute follow-on investments to support existing portfolio companies.

GPs typically use sidecar vehicles in a few common scenarios:

To exceed concentration limits: The governing fund documents often include rules that restrict how much capital can be put into a single company.
To make off-thesis investments: A GP finds a compelling sidecar opportunity that falls outside of the fund’s investment thesis.
To execute follow-on investments: A sidecar allows LPs who are excited about a company's progress to double down on a winner and provide the needed startup funding for its next stage of growth.

Common sidecar structures: Overage, annex, and top-up funds

Sidecars can be structured in several ways depending on their specific purpose:

Overage funds: Used to invest the amount of a deal that is "over" the main fund's concentration limit.
Annex funds: Raised after the main fund's official investment period has ended to provide follow-on capital to existing portfolio companies.
Top-up funds: Raised during the main fund's investment period to invest alongside the main fund in new deals.

How to manage the sidecar vehicle lifecycle

The lifecycle of a sidecar can be broken down into three main stages, from initial setup to ongoing administration:

Step 1: Forming the legal entity

The first step in the SPV formation process for a sidecar is creating a new legal entity. This typically involves drafting operating agreements and managing regulatory filings.

Step 2: Onboarding investors and closing capital

The next challenge is bringing LPs into the sidecar and collecting their capital commitments through a capital call.

Step 3: Administering the investment and reporting to LPs

After the investment is made, ongoing management responsibilities begin, including tracking investment performance and preparing financial reports.

How are sidecar economics structured?

Sidecar investments typically offer more favorable terms, as it's common for GPs to reduce or waive management fees and carried interest. Understand these structures to evaluate an opportunity.

How to manage conflicts and compliance

To uphold fiduciary duty and manage risk, it's important to ensure fairness between the LPs of the main fund and those participating in the sidecar.

The “cherry-picking” risk and regulatory exemptions

To prevent cherry-picking, GPs should maintain robust allocation policies and utilize exemptions to navigate regulations.

Best practices for fairness

Offer opportunities on a pro-rata basis: Ensures fairness when offering opportunities to LPs.
Maintain clear allocation policies: Prevents accusations of cherry-picking.
Disclose all terms transparently: Clear communication about fees and economic structures protects against misunderstandings.

Integrating sidecars into your fund strategy

Sidecars can become a strategic component of a modern fund manager's approach to agile capital deployment and enhanced LP relations. By using sidecars, you can seize unique opportunities, express high conviction in your best ideas, and strengthen LP relationships.