What it means
Private equity and venture funds often meet deals that need more money than the fund is allowed to commit. Rather than lose the deal, the fund manager can raise a separate vehicle, called a sidecar, which invests next to the main fund.
The two invest at the same price and on the same terms, and exit at the same time. Investors in a sidecar are often the fund's existing backers who want extra exposure to a particular deal.
They may be large pension funds, family offices or wealthy individuals who prefer to pay lower fees in exchange for taking a larger, concentrated position. The manager benefits by being able to close bigger deals and by deepening ties with key investors.
Sidecars differ from co-investments, though the two words are often used loosely. A co-investment is usually offered to named investors for a single deal, while a sidecar vehicle may be set up as a fund-like structure that can invest across several deals.
Both sit outside the main fund's limits on size. There are risks to manage.
Allocation between the main fund and the sidecar must be fair, since the manager is on both sides and may be tempted to favour one. Investors should check the fee terms, the decision rights and how conflicts of interest are handled in the legal documents.
The term is also used in insurance, where a sidecar is a separate vehicle that takes on some of an insurer's risk in return for a share of the premiums. That use shares the same idea: capital that sits alongside the main business for a specific purpose.
The context tells you which meaning is intended.
In practice
Real-world examples.
Example
A venture capital firm leads a $20,000,000 funding round in a software company but is limited to $12,000,000 by its fund rules. It sets up a sidecar for $8,000,000 raised from three existing investors. All of them buy shares at the same price.
Example
A pension fund is a long-standing investor in a real estate manager's main fund. When the manager finds a large office building, the pension fund puts an extra $25,000,000 into a sidecar with lower fees. It gains more exposure to the building without paying the full fund fees.
Example
A reinsurer sets up a sidecar vehicle that takes a share of the property catastrophe risk it writes, funded by outside investors. The investors receive part of the premiums, and they also bear a share of the losses if a major storm hits. The reinsurer can write more business without raising its own capital.
Formula
Calculation
Sidecar share of the deal = sidecar investment / total investment in the deal
Suppose a private equity fund finds a $50,000,000 deal but its limits allow it to invest only $30,000,000. A sidecar raises the remaining $20,000,000. The sidecar's share is 20,000,000 / 50,000,000 = 0.40, which is 40%, and the main fund's share is 30,000,000 / 50,000,000 = 60%. If the investment is later sold for $75,000,000, the sidecar receives 40% of the proceeds, which is 0.40 x 75,000,000 = $30,000,000, before any fees or carried interest.Case study
Seen in the real world.
Larkspur Partners is an illustrative, fictional private equity firm with a $200,000,000 fund and a rule that no single deal may exceed 15% of the fund, or $30,000,000. It found a healthcare services business that needed $55,000,000 of equity.
The partners created a sidecar and invited four of their largest investors to put in $25,000,000 on the same terms as the main fund, with a reduced management fee. The deal closed on time, and Larkspur kept its place as lead investor.
Three years later the business was sold and both vehicles received the same percentage return. The illustrative lesson is that a sidecar can help win big deals without breaking fund limits, as long as investors in both vehicles are treated fairly.
Watch out
Common mistakes.
- Assuming a sidecar always has lower fees, when the terms depend on negotiation and the manager.
- Ignoring conflicts of interest, since the manager decides how much of each deal goes to the main fund and the sidecar.
- Treating a sidecar as a separate strategy, when it normally copies the main fund's deals and cannot be judged on its own.
Questions
People also ask.
Who invests in sidecars?
Large existing investors such as pension funds, endowments and family offices usually do, since they want more exposure to selected deals.
Is a sidecar the same as a co-investment?
They are similar, but a co-investment is usually a single-deal offer, while a sidecar can be a standing vehicle for several deals.
Why would a manager create one?
It allows the manager to close deals bigger than the main fund can handle, and it strengthens relationships with key investors.
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