LP Sidecars – Not just a third wheel
Opportunities for co-investment are on the rise as limited partners (LP’s) are increasingly drawn to firms that provide direct access to deals for co-investment. These firms are reaping the benefits through additional revenue from sidecar management fees. Since there are benefits on both sides, this type of investment structure is seeing quite the uptick lately.
A sidecar is a co-investment opportunity that is made by an LP alongside a venture fund’s investment. This investment is typically organized and managed by the fund manager. All legal, accounting and due diligence are also performed by the sponsoring fund. Investors have control over which investments to make and how much they commit but without the work typically involved in making direct investments.
Benefits for LP’s
Opportunities for sidecar investments allow LP’s to take a more active role in their portfolio. They can increase their position in deals they view as more attractive and impact the balance in their portfolio in ways that differ from the fund itself. It also gives them the opportunity to be more involved without taking on the full burden of due diligence.
Benefits for Fund Managers
As new funds and investment opportunities pop up all the time, most fund managers are looking for ways to continue to add value to their services. LP Sidecars allow the fund manager to extend additional offerings to investors as they see fit. This could be a new investor, who has only committed a small portion of their capital, or a seasoned investor, who would be well served by the extra attention. The very act of shopping deals to LP’s allows for a more personalized level of interaction and attention.
This can also open up additional revenue sources. Each additional investment brings the opportunity for additional management fees and carried interest, and if done correctly, without any additional work. Hello, win/win!
So what’s holding back fund managers? It all comes down to the administration. The additional complexity quickly breaks their current workflow. Shopping deals through endless email threads is less than ideal. Capital calls now have an additional layer and that excel spreadsheet will need a whole new dimension to provide the right reporting to your LP’s. The additional workload threatens to wipe out any of the benefits.
At Venture360, we’ve been tracking this trend for some time. We built a feature set that allows you to have your own white-labeled LP Portal, where you manage your relationships from shopping deals to reporting metrics. The ease of setting up and managing sidecar investments is just one of the many ways we can simplify your administration duties so you can get out there making money. Want to know more? Visit our website or book a call today.