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Sidecar funds primer: What should I evaluate in my sidecar fund diligence?

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

Whenever you are investing, you should do your due diligence. We’ll skip here all the general diligence you should do every time – team, investment thesis, track records, criminal records, etc. – and focus again on the diligence checklist for evaluating sidecars. So you stay in the right kind of vehicle.

  • Investment decision making: who is making the investment decisions – both according to the legal documents and in practice?
  • Follow-on decisions: ditto. These are often different, but also where more potential for personal agendas, conflicts of interest, or simply emotional decision-making lies. How does the sidecar address them?
  • Fit of investment thesis and sidecar size: does the “lead vehicle” have activity level, scope, capability, and stability to make the investments must to deploy the sidecar? Can it get diversified enough in a reasonable time-frame?
  • Size: while we would all like to see more small funds focused on specific areas, the reality is the costs of setting up funds is not trivial. Is the fund large enough to cover these costs without unduly affecting net returns to investors?
  • Liquidity: what happens when a portfolio company is sold (generally you should get the proceeds immediately); and what happens when you want to exit your position (generally you cannot)?
  • Economics: what are the “economics” of the fund?  
    • Do those providing oversight have “skin in the game” (in the form of their own money)?
    • Does the annual management fee reasonable - enough to cover the costs of the fund but not hurt the net return to investors?
    • Does the carried interest fit market practice (usually 15-20%) and is the amount appropriate to the relative contribution to the success of the fund given by the “oversight” team relative to the passive investors?
    • Do the startup costs seem reasonable? It shouldn’t be that expensive to pay for fund documents, and is it appropriate to charge investors marketing costs for their own fund?
    • Do the fund documents allow for lots of extra ongoing costs to be put on investors (D&O insurance, tax prep costs, …) - and have the managers done that in the past?