Feeder fund
A vehicle that pools investors and puts their money into a main fund.
Feeders are used to suit different tax or legal needs, for example for non-US investors or investors in certain jurisdictions. They invest in the master fund on the same terms as everyone else.
A common US structure pairs a Delaware fund with an offshore feeder or a parallel fund so non-US investors and US tax-exempt investors can avoid certain US tax filings or income that is taxable for them. Feeders are also used to aggregate many small investors from a private bank or wealth platform into one LP.
Feeders add legal, administration and audit costs, and those costs are usually borne by the investors in that feeder. They also add timing: each vehicle needs its own documents, KYC process and sometimes local regulatory filings.
Worked example
A US manager raising $120M expects $30M from European family offices and a US university endowment. Its lawyers set up an offshore feeder for those investors, which invests in the main fund on identical economic terms. The feeder adds about $80,000 a year in costs, charged to the feeder's investors.
Common questions about feeder fund
What is the difference between a feeder fund and a parallel fund?
A feeder invests into the main fund, which holds the investments. A parallel fund invests directly in the same deals alongside the main fund, in proportion to their sizes, rather than through it.
Do I need a feeder fund for non-US investors?
Not always. It depends on the investors' tax situation, the fund's strategy and where they are based. Fund counsel and tax advisers decide based on the expected investor mix.