Fund formation and first-time fund managers
What is a side car fund and when is it used?
Short answer
A side car fund is a separate vehicle that invests next to a main fund, usually in a single deal. Some managers consider one when a deal is large relative to the main fund, when investors want extra exposure, or when a deal calls for different terms. I have not covered side cars by name on video, but the same co-investing logic comes up often. Many sponsors talk to a securities attorney about how to structure this.
How a side car sits next to the main fund
A side car fund is a second pool of capital that goes into the same deal as the main fund, but through its own entity. The main fund keeps investing the way its documents say. The side car lets certain investors add money to one deal without changing the main fund's terms.
I want to be upfront. I have not made a video that covers side cars by name. What I can do is give you the general idea and point you to clips where the same logic shows up. The details of any real structure are something many sponsors work out with a securities attorney, not from me.
When a manager reaches for one
These are the situations where a side car is commonly considered:
- The deal is larger than the main fund may be set up to hold.
- An investor wants more exposure to one deal than the fund allows.
- The deal needs different terms, such as fees or timing, than the main fund offers.
- One investor wants a vehicle built around a specific need.
In each case the main fund stays intact and the extra capital gets its own home. Questions about permissions and disclosure are ones many managers raise with a securities attorney before talking to investors about it.
The same pattern in a family office setting
A reinsurance executive explains how their family invests alongside the insurance company when an overage opportunity appears.
Summary and key takeaways from this video
That interview shows why side by side capital exists. In the setup described, the insurance company takes its maximum allocation first, and the family comes in on what is left over. It is a co-investment, and it may not be a formal side car, but the logic is the same. One deal, and a second pocket of capital for the overflow.
A vehicle built around one investor's request
Chris describes building a fund after one family office principal saw what his private equity would sell for on the secondary market.
Summary and key takeaways from this video
Chris told the story of a principal who wanted to buy a professional sports franchise. His portfolio was all private equity. When they showed him what his holdings would fetch on the secondary market, he said he wanted to be the other side of that trade. So they took some of his capital and created a fund to buy small pieces of private equity funds. The first fund bought at an average of 61 cents on the dollar.
I would not call that a side car. It does show what drives these structures. A real investor has a specific need, and a vehicle gets shaped around it.
Do not treat the fund as the whole plan
"I would just encourage those who do start a fund to also do direct investments or allow co-investments, just so you're not hamstrung by thinking that the fund is the holy grail."
I say this because I see managers get stuck on the fund idea. I know people who manage $500 million and tried to launch a $10 million fund that never got off the ground. Many family offices like to go into real deals directly. If you can only offer one pooled product, you may lose some of your best investors.
A side car, a co-investment or a deal by deal structure can keep you flexible. Some investors care more about that flexibility than about a polished fund name.
From the Family Office Club stage
One thing I say often is that a fund with no side letters and no direct deals may limit the investors you can attract. Any single fund structure, even with two or three share classes, may not appeal to the biggest family or the best investor you could have closed. Some managers also reward people who go straight into the fund with slightly better terms, such as a lower management fee or a higher preferred return, and then let some investors do both. The same flexibility is what a side car is meant to give you.
"So one takeaway from this whole presentation is that a normal fund model where you're not allowed to do a side letter and you can't do direct deals, you're really limiting the pool of investors because any one fund structure, even with two or three share classes in there, might not appeal to a really big family or the best investor you could have closed a deal with."
"And then you just incentivize them by having slightly better deal terms on the fund side. And people could go straight to the fund and just make it more alluring, more performance based, lower management fee, somehow more aligned, maybe a higher hurdle, higher preferred return, perhaps. And then do both."
Facts and figures
- Chris's first fund bought small pieces of private equity funds at an average price of 61 cents on the dollar.
- In one family office setup, the insurance company takes its maximum allocation first and the family co-invests in the overage.
- Richard knows managers of $500 million who tried to launch a $10 million fund that never got off the ground.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Niche Investment Strategies Explained by Top Family Office Investors (Panel Intro), Re-Insurance Company Institutional Investor Mandate Interview, How to Maximize ROI at Investor Events | Tips from Family Office Club CEO Richard C. Wilson. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around side car structures, fund disclosure requirements and investor allocation conflicts. Do not use AI to write your own legal agreements.
Your next steps
- Write down which deal or investor need would call for extra capital outside the main fund.
- Review your fund documents with your advisors to see how they treat deal size, concentration and allocation.
- Many managers talk to a securities attorney about whether a side car or a co-investment fits and how to describe it to investors.
- Many managers aim to share the same facts with every investor about how the extra vehicle works.
- Keep direct and co-investment options open so the fund is not your only offer.
Follow-up questions
Is a side car fund the same as a co-investment?
They are close cousins. Both put extra capital into a deal next to a main investor or fund. A side car is often a separate entity set up by the manager. Many sponsors talk to a securities attorney about the exact form.
Do small managers need a side car fund?
Not always. Many managers do fine with a single fund plus direct or co-investment options. I would only add a side car when a real deal or investor need calls for it.
Who should I talk to before setting one up?
Many managers talk to a securities attorney. Side cars can raise disclosure, allocation and conflict questions that I cannot answer for your situation.
Related questions
- Why should the management company be separate from the fund?The two do different jobs, so many managers think about keeping them in different entities.
- What management fee and carry should a new fund charge?There is no single right number.
- Do I need a fund administrator for a small fund?Often not on day one, but plan on it early.
- How do I start my first private equity fund?Start by learning who will fund it.
Work through it with the how much to raise calculator. See all fund formation and first-time fund managers resources.