"Parallel funds" refer to fund entities that are set up to invest side-by-side based on the same fund thesis.
Parallel funds are usually set up in order to comply with limits on the number of investors a fund can accept under Section 3c1 of the Investment Company Act.
Investor Structuring in Parallel Funds
Parallel funds are typically set up as two separate limited partnerships that invest pro-rata based on their capital commitments.
One limited partnership usually relies on the 3c1 exemption and the other limited partnership usually relies on the 3c7 exemption.
Qualified Purchasers generally invest in a "3c7" limited partnership that can only accept Qualified Purchasers.
Accredited Investors who are not qualified purchasers generally invest in the "3c1" limited partnership. A 3c1 fund can generally accept 99 investors or up to 249 if it satisfies the requirements of a qualifying venture capital fund.
The parallel fund structure is intended to ensure that investors receive the same economic exposure no matter which limited partnership they invest in.
Because the two limited partnerships need to achieve an equal interest in portfolio companies, they sometimes need to rebalance interests in portfolio company investments if the ratio of investor capital in each fund changes after the fund has started making investments into portfolio companies.
Effectuating this rebalancing typically requires working with portfolio companies to transfer some portion of a fund's investment from one of the fund's two parallel limited partnerships to the other.
Example | Parallel Funds
Fund Manager raises $10M total from 275 LP's.
• 75 LP's who account for $2.5M of the capital are accredited investors but are not Qualified Purchasers
• 200 LP's account for $7.5M of the capital and are Qualified Purchasers
In order to accommodate all 275 investors:
• The 75 accredited Non-QP LP's invest in FM Fund I, LP (a 3c1 limited partnership)
• The 200 Qualified Purchaser LP's invest in FM Fund I QP, LP (a 3c7 limited partnership)
Ignoring fees, the Funds then invest into each portfolio company as follows:
• 25% of the total amount invested in each portfolio company is invested by FM Fund I, LP
• 75% of the total amount invested in each portfolio company is invested by FM Fund I QP, LP