Preferred Annex Fund
A fund may be fully invested and still face an unforeseen need for follow-on capital to support one or more portfolio companies. The lack of follow on would otherwise result in dilution or loss of value in the investments.
Although there are many different ways of raising follow-on capital, Preferred Annex Fund seems to be the path of least resistance, which in many cases will not require and in-depth due diligence on individual portfolio companies.
The Preferred Annex Fund is a side fund that provides the follow on investments needed by the main fund. In return, the Preferred Annex Fund will receive a preferred distribution on liquidity events of the assets. The preferred distribution resembles liquidation preferences that VCs apply when investing in new rounds. A Preferred Annex Fund brings in new capital, but dilutes the value of existing LPs.