Sidecar investments have become an increasingly popular way for limited partners (LPs) to access private equity deals. In a sidecar investment, the LP invests directly alongside the general partner (GP) in a portfolio company, outside of the traditional fund structure. This allows LPs to gain more exposure and control over individual deals, often at lower fees than charged in a fund. While sidecars should complement an LP’s core fund investments, they require strong governance and appropriate deal selection to be successful. Executed prudently, sidecars can enhance returns for LPs and strengthen LP/GP alignment.
Sidecars Provide LPs Direct Access to Deals
Sidecar investments allow LPs to invest directly in companies, rather than through a commingled fund. This gives LPs more visibility and discretion over deal terms, governance rights, and exit timing. LPs can target specific companies or sectors of interest through sidecars.
Lower Fees than Traditional Fund Structures
Since sidecars are not subject to the same fees as a private equity fund, LPs can participate in deals at a lower cost through sidecars. Typical PE fund fees of 2% management fee and 20% carry are avoided in a sidecar structure.
Requires Strong Governance and LP Capabilities
While sidecars offer benefits, they also require governance and oversight by LPs. LPs must have the capabilities to properly source, diligence, and manage sidecar investments. Clear guidelines between LPs and GPs are needed.
Complements Main PE Program When Used Prudently
For most LPs, sidecars should complement a core PE program rather than replace traditional fund commitments. Sidecars can enhance returns when used opportunistically by sophisticated LPs, but are not a substitute for fund diversification.
When applied selectively by experienced LPs, sidecar investments can provide direct access to deals and enhanced returns. However, sidecars require strong capabilities and are not a wholesale replacement for fund investments. Used prudently, sidecars can strengthen the LP/GP relationship and LP returns.