What Is a Sidecar Fund?

Are you wondering what a sidecar fund is? Well, you should know that many investment strategies exist. However, some of them, such as angel investing, may not be right for your financial needs.

It may be difficult to become an angel investor unless you are pretty wealthy. Such people or companies tend to identify, choose and financially support start-ups when few are willing to back them up. That is usually at the beginning stages of the business, or the point at which they need to expand.

In addition, they use their extensive professional experience to help manage the businesses they invest in to make them successful. In exchange for their financial investment, angel investors get to claim some of the company equity or convertible debt.

Because of the risk associated with investing in the unknown, you should avoid risking your monies unless you have plenty of funds available, but that doesn’t mean you should dismiss angel investing altogether. That is where taking part in a sidecar fund to provide sidecar financing for businesses comes in.

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A sidecar fund is a pool of financial resources gathered from multiple investors with different interests that are meant to be invested in a common goal.

Typically, many investors who contribute to the pool have neither the experience nor the confidence to choose and support the start-ups or investments most likely to be successful. So, they entrust their funds to the more experienced investor, who then makes financial investment decisions on behalf of everyone.

Sidecar investments can enable you indirectly to become an angel investor. However, they also take the form of professionally managed mutual funds and ETFs. Therefore, as long as investors with different interests pool together resources and allow a third-party investor to invest on their behalf, they have taken part in sidecar financing.

Sidecar funds have several characteristics worth noting:

• Sidecar funds tend to be structured as either limited companies or limited partnerships. That ensures the investors have limited liability protection while enjoying tax relief.
• The funds have a trigger that is used to determine when the next investment is made. That is usually a set amount of money usually provided by the angel investor.
• Some oversight is required when making decisions concerning sidecar investments.
• The funds have several investors, at least one of whom takes the lead in making investment decisions.
• The funds attract management fees that help defray the cost of managing them.

If you are interested in new investment opportunities, sidecar financing of businesses can benefit you in several ways. Below are some of them.

• Sidecar funding helps reduce the risks of investing in start-ups since you will pool resources with other investors.
• You don’t need much business experience to take part in sidecar investments. All you need to do is partner with more experienced portfolio managers or angel investors.
• Taking part in sidecar financing enables you to invest in high-growth companies you could never have invested in if you only relied on your own money. If your fund is large enough, as an investor, you also get to have a say in how the company is run.
• By becoming part of a sidecar fund, you can invest in multiple investment classes and reduce your risk exposure.

Having limited funds should not stop you from exploring new investment options. Suppose you can find a like-minded angel investor or portfolio manager and other people in your situation. In that case, you could pool your financial resources together and invest in start-ups with high-growth potential. The management fee you pay will be insignificant compared to the returns you could enjoy.

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