A parallel vehicle exists for the investor the main fund cannot take, and it is co-ordinated or it is two funds.

A fund is formed in a centre under a tier and a form, and some investors the manager wants cannot hold it: a holder whose tax position needs a vehicle that is transparent where the main fund is opaque, or resident where the main fund is not; a holder whose regulator permits it to hold a vehicle of one form and not another; a holder whose own sanctions regime forbids it from being in a vehicle with certain other holders; a holder whose currency justifies a vehicle of its own. The manager forms a parallel vehicle for them: a second fund, in the form and place the holder needs, that invests alongside the main fund in every position pro rata to the two vehicles' commitments, on the same terms, at the same time. Two vehicles, one strategy. Whether they stay one strategy depends on the co-ordination agreement between them, which fixes the allocation, the timing, the terms, the exit and the governance across the two. Without it, the two vehicles are two funds with the same manager, and the manager allocates between them under a policy that the parallel's holders did not subscribe to and the main fund's holders read as a conflict.

This note sets out why a holder cannot hold the main fund, the parallel's form and place, the co-ordination agreement and what it fixes, the pro rata rule and its exceptions, the timing and the drawdowns, the terms that must match and the ones that may differ, the exit together, the governance across two, the manager's economics across two, the feeder as the alternative, the lender's reading, the onshore interface, a comparison, a worked parallel as a type, cases, what each party holds, the sequence, questions, terms and what to read.

Why a holder cannot hold the main fund

Tax: a holder that is tax-exempt in its own jurisdiction needs a vehicle its jurisdiction treats as transparent so that its exemption reaches the positions, and a main fund formed as a company is opaque; or a holder needs a vehicle resident in a treaty jurisdiction the main fund is not in. Regulation: a holder's regulator permits it to hold partnerships and not companies, or funds authorised in a named list of jurisdictions, or vehicles with a depositary, and the main fund fails the condition. Sanctions: a holder's regime forbids it from co-investing in a vehicle with holders from certain jurisdictions, and the main fund has them. Currency: a holder's size in a currency other than the main fund's justifies a vehicle in its own. Each is a reason the main fund cannot be changed for one holder without affecting the rest, and a reason the parallel is formed.

The parallel's form and place

The parallel is formed where and as the holder needs: a partnership in the centre for the transparent-vehicle holder, a company in a treaty jurisdiction for the treaty holder, a vehicle in the holder's own jurisdiction for the regulated holder, a vehicle in another currency for the currency holder. It has its own constitution, its own regulator, its own administrator, which is usually the main fund's under a separate engagement, and its own register of one or several holders. It is a fund, with everything a fund needs, formed for a purpose the main fund could not serve.

Why two vehicles drift apart

Two vehicles with one manager and one strategy drift apart through ordinary events. A position one vehicle cannot hold is taken by the other alone, and the exposures diverge. A holder in one vehicle defaults on a drawdown, and that vehicle's share of the next position is short. One vehicle's regulator approves slowly, and the other proceeds. One vehicle's holders want to sell a position and the other's want to hold. An amendment is passed in one and fails in the other. Each event is small, each is foreseeable, and each is a provision in the co-ordination agreement or a divergence the registers read as the manager's choice. The agreement is long because the events are many, and a short agreement is a list of divergences waiting to happen.

The parallel's constitution

The parallel's constitution is drafted from the main fund's, with the matching terms copied and the differing terms written for the parallel's reason. The drafting discipline is a schedule in the agreement listing each provision of each constitution as matching or differing, so that an amendment to a matching provision is made in both by the agreement's procedure, and a provision that differs is known to both registers. A parallel drafted from scratch by the holder's counsel to the holder's template has terms that differ the manager did not intend and the main fund's holders will find.

The single-holder parallel and the side letter

A parallel with one holder is a vehicle whose constitution is that holder's side letter in corporate form, and the main fund's holders read it that way. The terms the holder negotiated into its parallel's constitution are terms granted to a holder in the strategy, and the main fund's most-favoured-nation clauses reach them unless the exclusions name the parallel's holder-specific terms as tied to the parallel's reason. The exclusions are drafted at the main fund's first close with the possibility of parallels in view, and a main fund whose exclusions did not foresee a parallel has clauses that reach every term the parallel's holder negotiated.

The co-ordination agreement

The agreement between the main fund and the parallel, with the manager as party to both, fixes: the allocation of every position between them in proportion to their commitments, with the exceptions listed; the timing, so that both invest in each position at the same time on the same terms; the drawdowns, called from both registers in proportion; the terms of the two constitutions that must match and the procedure for amending both together; the exit, so that both sell each position together at the same price; the governance, so that decisions reserved to the main fund's committee are taken for both or by a joint committee; the expenses, shared in proportion; and the resolution of a position one vehicle cannot hold. The agreement is the instrument that makes two vehicles one strategy, and it is signed before the parallel's first close.

The pro rata rule and its exceptions

Every position is allocated between the vehicles in the ratio of their total commitments, so that each holder in each vehicle has the same exposure per unit of commitment as every holder in the other. The exceptions are the reasons the parallel exists: a position the parallel's holders cannot hold for the same tax, regulatory or sanctions reason, which the main fund takes alone with the parallel's share reallocated, or which is held through an alternative structure for the parallel. The exceptions are named in the agreement with the reason for each, and the allocation record shows them, because an exception not in the agreement is an allocation under the manager's discretion.

The timing and the drawdowns

Both vehicles invest in each position at the same time, under one acquisition agreement or two signed together, and the drawdowns are called from both registers on the same notice date in proportion. A parallel whose holder is slower to fund, or whose regulator's approval of each position takes time, is a parallel that delays the main fund or is left behind, and the agreement says which: the main fund proceeds and the parallel funds its share by equalisation on admission to the position, or both wait. The holder's conditions are read at the agreement, and a holder whose conditions would delay every position is a holder for whom a feeder rather than a parallel may be the answer.

The terms that must match

The investment policy, the restrictions, the term, the investment period, the charge's rate and base, the waterfall's unit, rate and hurdle, the key person clause and the removal provisions match across the two constitutions, because a difference in any of them is a difference in what the manager earns or in how the strategy runs, and the two registers would read the difference as favouring one. The terms that may differ are the ones the parallel exists for: its form, its jurisdiction, its tax elections, its currency, its depositary, its regulator's requirements, and the holder-specific provisions its constitution carries. The agreement lists both sets, and an amendment to a matching term in one constitution is made in both or in neither.

The exit together

Both vehicles sell each position together, at the same price, to the same buyer, under a drag between them so that neither can hold out. A continuation sale takes both vehicles' shares. A holder in the parallel that cannot participate in an exit, because the buyer is one its regime forbids, is a holder whose share is sold to the main fund or to a third party under the agreement's mechanism. The exit together is the hardest term to keep when the two vehicles' holders want different things, and the drag is what keeps it.

The governance across two

The main fund's committee and the parallel's, if it has one, decide the same reserved matters, and a related-party dealing approved by one and declined by the other is a dealing the manager cannot do for the strategy. The agreement provides a joint committee, or gives the main fund's committee the decision for both with the parallel's holders represented on it, or requires both to approve with a mechanism for disagreement. The parallel's holders are told at subscription which governance they have, because a parallel whose holders have no voice on the matters the main fund's committee decides is a parallel whose holders subscribed to the main fund's governance without sitting in it.

The manager's economics across two

The manager earns the charge and the carry on each vehicle separately, on each vehicle's own commitments and cash flows, and the two waterfalls run independently. The manager's incentive is the same across the two if the terms match; it differs if they do not, and a parallel with a better carry for the manager is a parallel the manager would allocate to if the agreement let it. The allocation policy between the two is the agreement's pro rata rule, the record shows it, and both committees read it. The manager's costs of running two vehicles are shared under the agreement in proportion, and the parallel's holders bear their vehicle's own formation and running costs beyond the shared ones.

The feeder as the alternative

A feeder holds units in the main fund and issues its own units to the holder, so that the holder holds the main fund through a vehicle of the form and place it needs. The feeder is cheaper than a parallel, needs no co-ordination agreement, and has no allocation question; it does not work where the holder's reason is a position the holder cannot hold through the main fund, because the feeder holds everything the main fund holds, or where the holder's regime looks through the feeder to the main fund's form. The choice between feeder and parallel is the holder's reason: a form or place reason is a feeder; a position or co-holder reason is a parallel.

The lender's reading

A capital-call lender lends to the main fund against its commitments and to the parallel against its own, under separate facilities or one facility with both as borrowers and cross-guarantees the two registers' counsel read. A lender to both reads the agreement for the pro rata rule and the exit together, because the two vehicles' shares of each position are the lender's security and a separate exit would split it. The parallel's holders' regime may forbid the cross-guarantee, and the facility is structured to the agreement's terms.

The onshore interface

Both vehicles hold each onshore position through the chain, as two shareholders of the holding company in proportion, or through one holding company the two vehicles own in proportion. The first puts both on the onshore registers, with two foreign shareholders for the foreign ownership rules and two sets of particulars for the registrar; the second keeps one name onshore and puts the proportion in the holding company's register in the treaty jurisdiction. The parallel's form may matter onshore: a partnership as an onshore shareholder is a form some onshore regimes do not recognise, and the holding company above the onshore layer is the answer.

By term · by treatment	Must match	May differ	Fixed by the agreement
Investment policy and restrictions	Yes		Amended together
Term and investment period	Yes		Amended together
Charge and waterfall	Yes		The manager's incentive is one
Form, jurisdiction, regulator		Yes	The parallel's reason
Tax elections, currency, depositary		Yes	The parallel's reason
Allocation of positions			Pro rata with listed exceptions
Timing and drawdowns			Together, with the mechanism for delay
Exit			Together, with a drag
Governance on reserved matters			Joint, or the main fund's with representation
Expenses			Shared in proportion, own costs to each

A parallel, as a type

A fund in a centre, formed as a company for professional investors, is raised from Gulf institutions and a tax-exempt foundation from a jurisdiction that treats companies as opaque and partnerships as transparent. The foundation's exemption needs transparency, and the manager forms a parallel partnership in the centre for it. The co-ordination agreement, signed before the parallel's first close, fixes pro rata allocation on total commitments with one exception: positions in a state whose regime does not recognise foreign partnerships, which the main fund takes alone with the parallel's share reallocated. Both constitutions carry matching policy, term, charge and waterfall, and the parallel's carries the partnership's tax provisions. The two vehicles invest together under one acquisition agreement per position, call drawdowns on the same dates, and hold each onshore position through one holding company in a treaty jurisdiction owned in proportion. The main fund's committee decides reserved matters for both with the foundation's representative sitting on it. The exit of each position is together under a drag. The administrator runs two registers and two waterfalls under one engagement. The foundation holds its exposure transparently and the Gulf institutions hold theirs through the company, and the strategy is one.

The structure paper's page

The structure paper carries a page on parallels: the reasons that may arise from the holders the manager expects, the feeder-or-parallel decision per reason, the parallel's form and place per reason, the agreement's form with its schedule of matching and differing terms, the exceptions foreseeable, the governance, the onshore chain for two, and the exclusions the main fund's clauses need. The page is written at the main fund's design because the exclusions and the constitution's permission are drafted then, and it is the page counsel drafts the agreement from when the holder arrives.

The parallel in another currency

A parallel formed for a currency reason has its own currency of account, its own hurdle in that currency and its own translation of its share of the positions, and the co-ordination agreement's pro rata rule is computed on commitments converted at a fixed rate or at each drawdown's rate, which the agreement says. Its holders bear the currency risk of the positions against their own currency, which is the reason they wanted a vehicle of their own, and the main fund's holders bear theirs. The two waterfalls run in two currencies on one set of positions, and the administrator's translation is the link between them.

The second fund's reading

A manager's second fund is raised from the holders of both vehicles, and the second fund's design is the first's with the parallels foreseen: the constitution permits them, the exclusions name them, the agreement's form is a schedule, and the reasons the first fund met are the second fund's expected holders' reasons. A manager whose first parallel ran as one strategy for a decade has a holder, the parallel's, that commits to the second on the same arrangement; one whose parallel drifted has a holder that asks for a feeder or goes elsewhere. The agreement's record is the manager's evidence that it can run two vehicles as one, which is the question every later parallel holder asks.

Four cases, as types

A manager forms a parallel for a sovereign whose regime forbids co-investment with certain other holders, and signs no agreement. The manager allocates the first three positions to the parallel because its carry is nearer, the main fund's committee reads the allocations, and the manager is asked under which policy.

A parallel's constitution carries a lower charge than the main fund's, negotiated by its single holder. The main fund's holders read the parallel's terms at the first annual report and elect the lower charge under their most-favoured-nation clauses, which reach terms granted to any holder of any vehicle in the strategy because the exclusions did not name the parallel.

A parallel's holder's regulator must approve each position, taking a quarter. The agreement is silent on delay. The main fund waits for the first position and loses it, then proceeds alone for the second, and the parallel's holder asks why its exposure differs from the main fund's.

A parallel is formed for a reason, the agreement is signed before its first close with the exceptions named, the terms match, the exit is together, the governance is joint, and the administrator runs both. Two vehicles held one strategy for a decade, and each register received the same exposure per unit of commitment.

What each party holds

The manager holds the reason for the parallel, the agreement and the allocation record.

The parallel's holder holds its reason, its vehicle's form and its voice on the governance.

The main fund's holders hold the matching terms, the pro rata rule and the exclusion of the parallel's terms from their clauses' reach.

Counsel holds both constitutions, the agreement and the onshore chain for two shareholders.

The administrator holds two registers, two waterfalls and one allocation record.

The lender holds its facilities and its reading of the agreement.

Where it surfaces

It surfaces at the holder's diligence, when its counsel says the main fund's form does not work for it. It surfaces at the agreement's drafting, when the exceptions are listed and the main fund's committee reads them. It surfaces at the first position, when the drawdowns are called from two registers on one date. It surfaces at the first position the parallel cannot hold. It surfaces at the main fund's holders' first reading of the parallel's constitution. It surfaces at the first amendment, passed in one vehicle and not the other. It surfaces at the exit, when the parallel's holder's regime forbids the buyer. And it surfaces at the onshore register, when two foreign shareholders appear where the chain was designed for one.

The cost of getting it wrong

A parallel without an agreement costs the main fund's holders a conflict on every allocation, the parallel's holder an exposure that differs from the strategy's, the manager an allocation policy it must write afterward, and the regulator a conflict finding. A parallel whose terms differ costs the main fund's holders the elections under their clauses or the grievance of not having them. A parallel without a drag costs the strategy its exit. The cost of the agreement is counsel's drafting before the parallel's first close and the administrator's second register, which the parallel's holder bears as the price of a vehicle formed for it.

The committee's reading

The main fund's committee reads the agreement before the parallel's first close, because the parallel changes what the main fund holds: its share of every position is reduced by the parallel's, its governance is shared, and its exit is tied. It reads the exceptions for whether they are the parallel's reason or the manager's convenience. It reads the parallel's constitution for differing terms and the exclusions for whether they cover them. And it reads the allocation record at each quarter for the pro rata rule's application. A committee that learns of the parallel at the first annual report learns it as a conflict.

A timeline, as a type

At the main fund's first close its constitution permits parallels on matching terms under an agreement and its exclusions name parallel holders' reason-specific terms. In year one the foundation's reason is identified; a feeder is considered and rejected because the foundation's regime looks through it; the parallel partnership is formed and the agreement signed with one exception, and the main fund's committee reads both. The parallel's first close admits the foundation with equalisation into the two positions the main fund already holds. In year two both vehicles invest in each position under one acquisition agreement through one holding company. In year three a position in a state that does not recognise partnerships is taken by the main fund alone under the exception, recorded. In year five an amendment to the investment period is passed in both under the agreement's procedure. In year eight the continuation sale takes both vehicles' shares under the drag, and the foundation's representative sits on the committee that approves it.

The sequence

1. The holder's reason is identified and the feeder is considered first.
2. The parallel's form and place are chosen for the reason, and its constitution is drafted to match the main fund's on the terms that must match.
3. The co-ordination agreement is signed before the parallel's first close, with the exceptions, the timing mechanism, the drag and the governance.
4. The main fund's holders' most-favoured-nation exclusions name the parallel's holder-specific terms.
5. The onshore chain is designed for two shareholders or one holding company.
6. The administrator runs both under one engagement with one allocation record both committees read.

Questions a manager asks

How small can a parallel be. As small as one holder; its running cost is the holder's, and a feeder is cheaper if the reason allows.

Can the parallel be raised later. Yes, with equalisation into existing positions under the agreement, and the agreement is signed before the parallel's first close whenever that is.

What if the main fund's holders object to the parallel. They subscribed to a constitution that permits parallels on matching terms with an agreement, or they did not, and the constitution is read.

Does the parallel need its own committee. If its holders want a voice, a seat on the main fund's committee under the agreement; a separate committee that can disagree is two governances.

Who bears the parallel's formation cost. The parallel's holders, as the vehicle formed for their reason; the shared running costs are in proportion.

Can the two vehicles have different lenders. Yes, under separate facilities, with the agreement's exit together preserved in both.

Terms used

Parallel vehicle: a second fund investing alongside the main fund pro rata on matching terms, formed for holders the main fund cannot take.

Co-ordination agreement: the agreement between the vehicles and the manager fixing allocation, timing, terms, exit and governance across them.

Pro rata rule: allocation of every position in proportion to total commitments, with listed exceptions.

Exit together: the drag between the vehicles so that each position is sold by both at once.

Feeder: a vehicle holding units in the main fund, the alternative for form-and-place reasons.

Matching terms: the provisions of both constitutions that must be the same and amended together.

What to read

Both constitutions and the co-ordination agreement; the main fund's holders' most-favoured-nation clauses and their exclusions; the allocation record; the onshore chain's documents for two shareholders; the facilities' cross-guarantees. On this site, the parallel, master-feeder and co-investment rooms under Structures.