Emerging Managers, Sidecars & SPVs

by Ross Andrews

Venture Capital has evolved rapidly over the last decade and as more and more fund managers emerge and deal velocity has rapidly increased both emerging fund managers and existing funds have found a need for new investment vehicle structures to help them move in a more agile fashion through the market. Today we wanted to take a look at how emerging managers are turning to SPVs to start and build a portfolio in the hopes of starting their own fund as well as existing managers using SPVs as sidecar vehicles with existing LPs who want to deploy capital outside of their fund's core thesis.

Emerging funds managers have seen a massive uptick in the last 2-3 years and have largely been made popular by the newer Rolling Fund structure that allows a GP to raise a fund with much smaller and shorter-term capital commitments from LPs. While rolling funds are an innovative new fund structure, many aren’t ready to fully form a formal fund yet but have access to interesting deal flow where they are able to secure allocation in capital rounds. Those “managers” are largely turning to SPVs (Special Purpose Vehicles) as the entity structure of choice to help offer an investment into those startups through their network. 

The SPV is essentially a single deal fund structure. The individual who is looking to raise capital to make an investment into a startup will form the SPV and share both the startup's details as well as the SPVs details through their network of LPs in the hopes that those individuals or institutions see growth potential in the target company and agree to invest capital through the SPV. Emerging managers will look to do this a handful of times in the hopes that over time, the LP base investing in these SPVs sees the ability of the manager and offer to invest in a more traditional fund to have them continue to deploy capital.

SPVs are a great vehicle for emerging managers looking to build a portfolio and their reputation in the industry but they are also increasingly being utilized by existing fund managers as well. Traditional venture capital funds are (usually) structured around a thesis that can involve investments into a specific sector (B2B, Space, Crypto, etc.) but often also include a focus on a particular stage and funding cycle of a startups life (Seed, Series A, Growth, and so on). The capital raised is usually sized to specifically meet those goals of a specific check size into a set number of companies over the life of the fund (example, $250k-$500k checks into 25 seed-stage companies over 4 years).

As the venture market has evolved and more and more capital and startups are coming into the market, both the pace of the deals and the valuations and capital raised by these startups have quickly risen and many funds fund themselves with either deal flow that they think is an interesting opportunity, but doesn’t fit into the main fund's thesis, or they are looking to exercise pro-rata rights in follow on rounds which have gotten so big that they cannot be accounted for with existing fund capital. For these fund managers, many of them have turned to sidecar SPVs which are organized and managed by the fund, and extended to their existing LP base to raise additional funds to then deploy into these opportunities. After all, if you have an interesting portfolio company growing rapidly and raising big rounds, follow-on participation is a great way to increase returns to LPs.

Whether it’s an emerging manager looking to build their portfolio and build a strong relationship with a potential LP base or an existing fund looking to capture an opportunity outside of the fund's scope. SPVs are becoming the go-to vehicle to help pool capital and execute investment opportunities by both parties. While we think the volume of these use cases will continue to increase over the next decade, we are also interested and excited to see what other use cases emerge for SPVs.

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