Parallel Funds and Sidecar Vehicles

Introduction and Context

Parallel funds and sidecar vehicles are niche structures within private market investing. From my perspective, they’re often the behind-the-scenes “supporting cast” to a main fund structure. You might have heard about them when an institutional investor wants a separate legal entity for a specific tax reason, or when a deal sponsor sets up smaller vehicles to handle special co-investment opportunities. These structures can appear a bit, well, daunting at first. But once you break them down, you’ll see they’re quite clever at handling the complexities of various investor needs.

This article focuses on parallel funds and sidecar vehicles—two structures that often roam in tandem with main private equity or investment funds. We’ll cover how they’re formed, why they exist, and how they affect fund governance, allocation policies, and investors. A good comparison is how a restaurant might have a main dining room for the general crowd and a private dining room (or two) for special reservations that require unique accommodations. In that sense, parallel funds and sidecars serve specialized needs while maintaining a cohesive overall strategy.

We’ll also study how regulatory constraints, such as ERISA for pension funds or specialized regimes for sovereign wealth funds (SWFs), affect the use of these structures—plus how organizations like the Institutional Limited Partners Association (ILPA) aim to ensure fair allocation. Along the way, we’ll touch on fees, pro-rata allocations, and the day-to-day considerations that both limited partners (LPs) and general partners (GPs) face when setting up or investing in these vehicles.

Understanding Parallel Funds

Parallel funds are set up to invest side by side with a main fund. So yes, they are truly “parallel.” They have virtually the same investment strategy and typically participate in the same deals at the same time, though they might exist as distinct legal entities. Why bother? Well, different investors have different tax, legal, or regulatory requirements. Think of a large pension plan subject to ERISA or an SWF with cross-border restrictions. A parallel fund can be configured to meet those constraints while still participating in the same deals as the main fund.

Rationale for Parallel Funds

• Regulatory Requirements: Some investors can only invest under certain legal frameworks or in certain jurisdictions. A parallel fund is a neat solution—create a structure that fits the investor’s constraints and run it alongside the main vehicle.
• Tax Efficiency: Tax laws can be complicated, especially on a cross-border basis. By using parallel funds, GPs can keep different categories of investors separated into distinct entities, potentially optimizing tax outcomes for each group.
• Governance Preferences: Some large institutions might demand a unique governance process or reporting requirements. A parallel fund can provide that, ensuring each investor’s needs are respected without major disruptions to the main fund operations.

How Parallel Funds Operate

Parallel funds co-invest in every deal that the main fund engages in, typically following the same style, the same strategies, and the same pace. However, each parallel fund can have its own capital call procedures, distribution rules, or fee structures—though these are usually aligned to ensure fairness. For instance, ILPA guidelines recommend that these deals be allocated on a pro-rata basis (proportional to each entity’s capital commitments) unless otherwise disclosed.

Diagrammatically, consider the following structure:

    flowchart LR
	    A["Main Fund"] -- invests alongside --> B["Parallel Fund"]
	    A -- invests in --> C["Portfolio Company 1"]
	    B -- invests in --> C
	    A -- invests in --> D["Portfolio Company 2"]
	    B -- invests in --> D

This simple depiction shows a main fund (A) and its parallel fund (B) both investing side by side in portfolio companies (C, D). Each circle in the diagram represents a potential investment into a portfolio company. The parallel fund is structured as a separate legal entity yet operates in lockstep with the main fund.

Fairness in Deal Allocation

One of the biggest concerns for LPs in parallel structures is whether the deals are allocated fairly among the vehicles. Imagine you’re an LP that invests in the parallel fund because of your special constraints—you want to ensure you’re not missing out on prime deals that the main fund gets first pick on. ILPA suggests a pro-rata policy to preserve fairness. This means that if the main fund invests 60% of the total capital in a venture, the parallel fund invests 40%—matching their relative capital commitments.

Fee Structures and Transparency

Now, about fees: parallel funds often charge management and performance fees in line with the main fund, but they might have additional administrative charges if they require extra structuring services. In my own practice, I’ve sometimes seen large institutional investors push hard for lower fees in a parallel vehicle, especially if that structure primarily benefits the manager who’s trying to attract their capital. It’s important that any incremental fees are well-justified (e.g., a separate administrator for cross-border filings) and adequately disclosed to all parties. Good governance demands that GPs explain clearly why these additional charges exist and how they’re calculated.

Cross-References in This Book

• Chapter 3 on due diligence addresses deeper aspects of selecting the right manager and evaluating the fund structure.
• Chapter 12 covers how fundraising cycles and capital flows work, shedding light on how GPs design these parallel structures to secure large institutional commitments.

Understanding Sidecar Vehicles

Sidecar vehicles—affectionately called “sidecars”—are often single-deal or limited-purpose funds that sit alongside a main fund. They allow existing (or new) investors an opportunity to deploy more capital into a specific deal or a narrower strategy that the main fund might not fully pursue on its own. Sidecars can be used for co-investment, where certain LPs are invited to put in extra capital beyond what is drawn from the main fund’s commingled pot.

Rationale for Sidecar Vehicles

• Single Purpose Mandates: Suppose a big investor spots a unique opportunity or wants to double down on a certain sector. A sidecar can be launched to pool additional capital for that single investment, still under the manager’s umbrella.
• Co-Investment: Co-investment allocations often go through sidecars so direct co-investors can bypass the standard management fee and carried interest structure of the main fund. Sidecars facilitate these arrangements neatly.
• Strategic Partnerships: Some GPs form a sidecar with strategic partners—such as a corporate investor or a family office—that wants exposure to a specialty project.

In day-to-day reality, sidecar vehicles can be quite small or as large as the main fund, depending on how big that particular deal is. If you’ve ever been in a situation where you’re offered the chance to put additional capital to work in a “hot” deal, that’s exactly sidecar territory.

Operational Mechanics of Sidecars

Compared to parallel funds, sidecars may have:

• Different or no Management Fees: Some sidecars have zero management fees because they represent co-investment deals.
• Unique Governance: Since they’re often single-purpose, the corporate documents might revolve around that deal’s life cycle.
• Limited LP Base: The participants can be a handful of existing LPs that want extra exposure.

A possible structure might look like this:

    flowchart LR
	    A["Main Fund"] -- invests in --> C["Deal A"]
	    B["Sidecar Vehicle"] -- invests in --> C
	    A -- invests in --> D["Deal B"]
	    B[ ]:::ghost

Notice that the sidecar (B) invests only in Deal A for instance. (We’ve intentionally left “Deal B” unsubscribed by the sidecar—just to illustrate that sidecars can be quite targeted.)

Aligning Interests

If sidecars are established, GPs need to ensure that the investors in the main fund who don’t participate in the sidecar aren’t harmed by any perceived conflict of interest or cherry-picking of deals. Many limited partnership agreements detail how co-investment opportunities are shared. A fair, transparent approach fosters trust. Some GPs follow a “pro-rata first refusal” approach, giving main fund LPs the option to join the sidecar up to their relative ownership stake.

Regulatory and Tax Considerations

A critical driving force behind these structures is regulation. For instance, under ERISA, pension funds face unique compliance obligations about how their capital is managed and the level of control they can have in a private equity fund. By carving out a parallel or sidecar vehicle, the GP can structure governance and operational rules that keep the investment’s status as a “plan asset” or avoid triggering certain regulatory thresholds.

Sovereign wealth funds (SWFs) might also prefer a parallel fund approach for tax reasons or confidentiality concerns. And, in some jurisdictions, the presence of certain SWFs in a main fund can require complex disclosures or tax treatments that might not apply if the SWF invests through a different legal structure.

Cost and Fee Implications

In real-life fund documentation, the cost structure is an area that can create tension between GPs and LPs. Additional legal, administrative, and compliance tasks can add cost. For example, if a parallel fund needs a distinct set of financial statements or separate auditors, that can drive up overhead. GPs must be transparent with these incremental charges, and LPs need to evaluate whether the incremental benefits outweigh the costs. As covered in Chapter 2 (Alternative Investment Performance and Returns), the net-of-fee returns matter most for investors, so vigilance in fee negotiations is crucial.

Fairness and ILPA Guidelines

We keep returning to fairness because it’s so darn important in private markets. ILPA’s best practices stress that any parallel or sidecar arrangement should:

• Allocate deals on a consistent, pro-rata basis.
• Disclose any side arrangements or preferential terms.
• Avoid layering additional fees unless they’re for legitimate incremental services.
• Maintain consistent governance oversight, so side funds or parallel funds don’t become a “shadow” structure with unmonitored risk.

Following these guidelines can help GPs maintain strong relationships with their LPs and reduce potential conflicts or accusations of favoritism.

Practical Example

Let’s consider an example to make this even clearer. Suppose the main fund, “Global Growth Fund I,” has USD 1 billion in committed capital. A large European institutional investor invests USD 200 million in a parallel fund that shares the same strategy but is set up as a Luxembourg-based vehicle for tax and regulatory reasons. Meanwhile, the rest of the capital is in a Cayman Islands structure. Both vehicles invest in the same deals, proportionally to their commitments: 80% from the main fund, 20% from the parallel.

Separately, a sidecar could be created for a single co-investment in a tech start-up. The GP identifies a USD 100 million opportunity. The main fund invests USD 50 million, but a few LPs want an additional USD 30 million of exposure (beyond what the fund can accommodate). So, the GP launches “Sidecar Tech Co-Invest SPV,” which invests that USD 30 million alongside the main fund. Another USD 20 million might come from the parallel fund if that investor also wants extra exposure. Everyone invests at the same valuation and terms, ensuring fairness.

Operational Challenges

Although parallel funds and sidecars can be powerful solutions, they complicate the back-office side of fund management. Fund accountants, administrators, and compliance teams typically handle multiple sets of capital calls, distribution notices, and investor communications. The GP might need dedicated staff to track and reconcile each vehicle’s share of portfolio companies.

Moreover, from a risk management angle (see Chapter 2 on measuring risk), the GP must ensure it aggregates and monitors exposures across all vehicles. A parallel fund might have the same strategy, but from a front office perspective, the GP must confirm that compliance checks aren’t being inadvertently circumvented by investing in multiple vehicles.

Best Practices

• Transparency: Provide all investors a clear breakdown of how deals and fees are allocated.
• Consistency: Abide by consistent pro-rata allocations, or fully disclose any departures.
• Governance: Ensure parallel or sidecar vehicles adhere to the same or comparable governance frameworks.
• Tracking and Reporting: Keep robust systems to track each vehicle’s performance and promptly distribute financials.
• Alignment of Interests: If sidecars are used for co-investments, clarify the terms so that the main fund’s LPs do not feel at a disadvantage.

Exam Tips and Takeaways

If you’re facing CFA® exam questions on parallel funds and sidecars, be ready to:

• Discuss how these structures address different regulatory or investor needs.
• Evaluate fairness in deal allocation—particularly focusing on ILPA’s pro-rata guidelines.
• Calculate net returns after fees, factoring in incremental charges that might arise from additional structures.
• Identify possible conflicts of interest between main fund and sidecar investors, and propose ways to mitigate them.
• Illustrate how tax or ERISA considerations might drive the creation of parallel funds.

From an exam perspective, a typical constructed response question might present a scenario with multiple investor types—some subject to U.S. pension regulations, others to foreign tax constraints—and ask you to suggest a suitable fund structure. Or, you might see an item set about a GP wanting to set up a co-investment vehicle with a sidecar for a specific transaction. In each instance, you’d show that you understand how parallel funds and sidecars are set up to solve real investor challenges, but also how you’d manage the potential conflicts.

References for Further Study

• Institutional Limited Partners Association (ILPA). “ILPA Principles.” (Extensive guidelines on alignment of interests and fund governance.)
• Private Equity International (PEI). Articles on multi-vehicle fund structures and best practices.
• CFA Institute (2025). CFA Program Curriculum, especially Volume 8: Alternative Investments.

Remember, parallel structures and sidecars are not just exotic legal tools—they’re practical solutions that let managers tailor the same strategy to diverse investors. Once you grasp the whys and hows, you’ll be better equipped to handle all the complexities that come with alternative investing in a global environment.

Parallel Funds and Sidecar Vehicles - Practice Questions