# 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](/content/sg/en/learn/private-funds/structures/index.html) 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)](/content/sg/en/learn/private-funds/structures/spv/index.html) that is managed by the fund's [general partner (GP)](/content/sg/en/learn/private-funds/structures/general-partner/index.html). The GP uses the sidecar to pool capital from their [limited partners (LP)](/content/sg/en/learn/private-funds/structures/limited-partner/index.html) for a single, targeted investment.

Think of it like a motorcycle with a sidecar attached. The GP is the driver, navigating the investment landscape based on the expertise required to [manage a private equity (PE) fund](/content/sg/en/learn/private-funds/management/index.html) successfully. The LPs in the main fund are passengers on the motorcycle, and the sidecar offers a select group of those LPs a chance to ride alongside the GP for a specific, targeted journey—a single investment opportunity.

The GP first identifies a compelling deal—often formalizing the valuation, due diligence, and rationale in an [investment memo](/content/sg/en/learn/private-funds/management/portfolio-management/investment-memo/index.html)—and then creates the sidecar to gather the necessary capital to fund it. This allows the GP to make a larger investment in the target company than they could with the main fund alone. At the same time, it gives interested LPs more exposure to a deal that the GP has high conviction in.

### How sidecars differ from funds and SPVs

While a sidecar is a type of SPV, its purpose and investor base make it distinct. To fully grasp the concept, it's helpful to see how a sidecar compares to other common investment structures. 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](/content/sg/en/learn/private-funds/structures/institutional-investors/index.html), high-net-worth individuals, and the occasional [angel investor](/content/sg/en/learn/startups/fundraising/investors/angel-investors/index.html). |
| **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](/content/sg/en/learn/private-funds/management/portfolio-management/follow-on-investment/index.html) to support existing portfolio companies.

GPs typically use sidecar vehicles in a few common scenarios:

- **To exceed concentration limits**: The governing fund documents, like the [limited partnership agreement](/content/sg/en/learn/private-funds/structures/limited-partner/lpa/index.html), often include rules that restrict how much capital can be put into a single company.

- **To make off-thesis investments**: Sometimes a GP finds a compelling sidecar opportunity, like an early-stage company, that falls outside of the fund’s investment thesis.

- **To execute follow-on investments**: When a fund is near the end of its life or has deployed most of its capital, it may lack the reserves, or [dry powder](/content/sg/en/learn/private-funds/management/portfolio-management/dry-powder/index.html), for these follow-on rounds.

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

Here are a few common types of sidecar funds:

- **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.

- **Top-up funds**: Raised during the main fund's investment period to take advantage of new market opportunities.

## How to manage the sidecar vehicle lifecycle

The lifecycle of a sidecar can be broken down into three main stages:

### Step 1: Forming the legal entity

The first step in the SPV formation process for a sidecar is creating a new legal entity. This is typically a Delaware LLC or limited partnership.

### Step 2: Onboarding investors and closing capital

Once the entity is formed, the next operational 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, the ongoing management responsibilities begin, including tracking the [investment fund performance](/content/sg/en/learn/private-funds/management/fund-performance/index.html), preparing quarterly financial reports, and managing communications with LPs.

## How are sidecar economics structured?

Sidecar investments typically offer more favorable terms, as it's common for GPs to reduce or even waive [management fees](/content/sg/en/learn/private-funds/management/management-fees/index.html) and [carried interest](/content/sg/en/learn/private-funds/management/carried-interest/index.html).

- **Management fees**: LPs pay the GP to cover the fund's operational costs.
- **Carried interest**: The GP's share of the profits from an investment.

## How to manage conflicts and compliance

For any fund CFO, GP, or those making investment decisions, upholding your fiduciary duty and managing risk are paramount.

### The “cherry-picking” risk and regulatory exemptions

To prevent unfairness, the Investment Company Act of 1940 generally prohibits affiliated funds from engaging in joint transactions.

### Best practices for fairness

- **Offer opportunities on a pro-rata basis**: Ensure fairness as opportunities are typically offered to existing LPs on a pro rata basis.
- **Maintain clear allocation policies**: Written policies prevent accusations of cherry-picking the best deals.
- **Disclose all terms transparently**: Ensure all parties involved know exactly what they are agreeing to.

## Integrating sidecars into your fund strategy

Sidecars are a strategic component of a modern fund manager's approach to agile capital deployment. By using sidecars, you can seize unique opportunities and enhance LP relations.

## Frequently asked questions about sidecar investments

### What is the difference between a sidecar and co-investment?

A sidecar is structured and managed by the GP for the fund's LPs, while co-investment is a broader term that can refer to an LP investing directly in a company alongside the fund.

### What are the tax implications of a sidecar investment?

When structured as a pass-through entity like an LLC or LP, the sidecar itself is not taxed. Investors are responsible for reporting their share of any income or gains on their personal tax returns.

### Can a sidecar vehicle invest in more than one company?

While most sidecars are created for a single deal, structures like overage or top-up funds can be designed to invest in multiple opportunities.