2017 will see Bermuda host America’s Cup for the first time. Not only will it attract the best sailors, the fastest boats and superyachts, it will also attract some of the world’s wealthiest individuals. Where do these ultra high net worth individuals (UHNWIs) look to invest and what do they need to know before making such investments?
A Growing Appetite For Co-Investing Investments
UHNWIs have a growing appetite for co-investing in private equity (PE). The 2017 Preqin Global Private Equity & Venture Capital Report highlighted the strong fundraising year seen in the PE industry in 2016, and predicted that 2016 would witness the greatest amount of capital raised since the global financial crisis, $369bn was raised by 895 private equity funds in 2016. North America continues to attract the most investment in the PE industry. However, there has been a noticeable surge in Europe-focused funds. Uncertainty from the U.S. presidential election and the impact of Brexit has not seemed to prevent the industry attracting capital from investors seeking diversification and superior returns.
A properly structured co-investment vehicle offers both the fund and its co-investors the ability to effectively manage, deliver and return economic benefit from identified investment opportunities.
Exempted limited partnerships are the typical vehicle used for the formation of private equity funds in the offshore world. Investors are naturally keen to ensure that they have a trusted relationship with their chosen sponsor and will focus on control mechanisms in the fund documentation. Offshore centres such as Bermuda, Cayman, Isle of Man, Jersey and Guernsey offer robust legal and governance frameworks, together with experienced and knowledgeable professional service providers to facilitate the creation of flexible and economically viable co-investment vehicles within a stable and business friendly jurisdiction.
Attraction Of A Co-Investment
The attraction of a co-investment is to gain more exposure to attractive assets with more control and potentially lower fees. A report by Preqin tells us that 52 percent of family offices already co-invest in real estate vehicles and 19 percent are considering seeking co-investment rights when committing to funds.
Co-investment rights give an investor the ability to make a minority investment, directly or indirectly, in a portfolio company. Rather than making a capital commitment to the fund an investor is given the opportunity to invest on the same terms as the fund. A fund offering a co-investment opportunity may negotiate and complete the investment in the portfolio on its own and then subsequently offer the co-investment opportunity to third party investors. Alternatively a co-investment opportunity might arise where the investment is too large for a single fund and therefore partnering with co-investors allows the fund to take advantage of the opportunity whilst still maintaining primary control of the transaction.
Private equity funds are established for a fixed duration, traditionally 4-6 years for credit funds and longer for real estate funds, but this landscape seems to be changing with funds increasingly offering the ability to extend the duration for successive one-year periods. This may fit in with an investment horizon of a limited partner looking to find a long-term commitment for their capital.
The Right Legal And Government Framework
Selecting the right legal and governance framework for the co-investment vehicle is one of the key considerations in implementing a successful co-investment structure, even more important in the current regulatory climate. The optimal structure will depend on a number of factors including where and to whom the co-investment opportunity is to be marketed, the nature of the potential co-investor base and the identified portfolio investment assets. Tax, compliance and regulatory issues will of course also be important in determining the structure.
Utilising a newly formed partnership is often preferred where there are multiple co-investors. This structure sees the fund and the co-investors invest on a side-by-side basis into a newly formed legal entity, which will hold the portfolio investment.
What Does Co-Investments Mean For Fund Administration?
More and more PE funds are moving towards outsourcing their fund administrative tasks to third parties, this now extends beyond the traditional accounting and investor services function to compliance and regulatory reporting. The reason for this shift is attributable to funds seeking more transparency and efficiencies.
Fund administrators provide segregation of certain key controls from the fund manager, as well as offering sophisticated accounting and investor services systems and increasingly technical professionals upon whom the manager can call. The fund administrator is also well positioned to efficiently facilitate the communications of the fund stakeholders and legal counsel through the formation and launch of the fund, including timely setup of banking services leveraging existing relationships. The ever-increasing compliance and tax transparency requirements add to the elements of a fund’s operations which can more efficiently be placed with an independent administrator, allowing the manager to focus on the key management and portfolio functions.
Sarah Demerling is a client director and senior manager at Estera Services (Bermuda) Limited.