Parallel Funds in Private Equity

In the world of private equity, parallel funds function like independent investment satellites orbiting the central fund, targeting the same types of assets. Private equity firms establish these parallel funds to address specific needs—such as legal, tax, or regulatory requirements—allowing diverse investors to participate in investment opportunities. Parallel funds represent a sophisticated approach to fund structuring, offering inclusivity and flexibility in the private equity sector.

How do these parallel funds integrate into the overall framework? They are structured as independent limited partnerships or series under a broader master partnership. Regarding investing and divesting, parallel funds work harmoniously with the central fund, adhering to a proportional allocation that reflects each investor's capital contribution.

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Private equity parallel funds use both the 3(c)(1) and 3(c)(7) exemptions under the Investment Company Act to expand their investor pool while adhering to regulatory standards. The following explains the use of both 3(c)(1) and 3(c)(7) exemptions within parallel fund structures.

3(c)(1) Fund

This fund type is limited to beneficial ownership of 100 persons but can increase the limit to 250 when dealing with qualifying venture capital funds. Both accredited investors and qualified purchasers can participate.

3(c)(7) Fund

This fund type can have up to 2000 beneficial owners. All individuals or entities who invest in the fund must meet the qualified purchaser criteria, which entails having $5 million in individual investments or $25 million for entities.

Side-by-Side Operation

A fund manager establishes separate funds that jointly allocate capital to identical portfolios. This uniform investment strategy ensures all investors benefit from the same portfolio management and performance.

Regulatory Compliance:

The organizational setup enables fund managers to satisfy regulatory requirements for both exemptions while avoiding integration problems.

Flexibility: This structure allows investors with different objectives, risk tolerances, and varying regulatory demands to find suitable options.

Fund managers who use parallel funds with both 3(c)(1) and 3(c)(7) exemptions can grow their investor base while remaining compliant with the Investment Company Act. The method enables investment firms to serve individual high-net-worth investors who fall short of the qualified purchaser criteria alongside institutional investors who demand access to the 3(c)(7) structure.

Key Features of Parallel Funds

Separate Entities  

Each parallel fund operates as a separate legal entity, yet fund managers collaborate closely to ensure alignment in strategies and financial outcomes. The central and parallel funds invest in identical assets, adhering to a unified investment strategy.

Regulatory Compliance  

These structures facilitate adherence to various regulatory requirements, enabling participation from investors who may not qualify for the central fund and thus allowing for risk diversification across multiple asset classes.

Customization:  

Investors benefit from tailored investment solutions that match their tax situations and risk tolerances. Parallel funds must comply with investment limits outlined in regulations such as Section 3(c)(1) of the Investment Company Act of 1940.

Parallel funds in private equity effectively navigate the complexities of the investment landscape, offering innovative growth opportunities. These funds are a versatile structure created to accommodate diverse investor profiles while maintaining a consistent investment strategy across multiple funds. This method effectively navigates the complexities of the investment landscape, offering innovative growth opportunities.

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