walkersglobal.com changing horizons€¦ · hold on to high growth assets over the longer-term...
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The American Lawyer | October 2015 57SS56SS October 2015 | The American Lawyer
Change is certainly afoot and, as Cayman Islands counsel
to the offshore funds promoted by many of the world’s
leading private equity fund managers and as fund
formation activity continues to steadily increase year-on-
year in the Cayman Islands, we are in a unique position
to identify the trends occurring in the offshore private
equity funds space and in the wider private equity market.
2015 is shaping up to be an interesting year and here we
give our thoughts on two of the most interesting trends
coming out of this year’s vintage of funds.
IT IS ALL ABOUT THE LONGER-TERM HORIZONS…
Whereas traditionally investors in private equity expected
to see their money locked-up for 10 years, subject to
extensions (at the discretion of the general partner, by
a vote of limited partners or the advisory committee),
rarely for more than three one year periods, with a fairly
standardised fee-structure, it looks like the horizon might
just be changing.
THE TERM OF SOME NEW FUNDS
JUST GOT LONGER…
With a number of key players, from the middle-market to
the biggest buy-out firms, coming to market with new
funds with longer-term investment horizons, with some
proposing fund terms even as long as 20 years, investing
in slower-growing, less risky assets, with less leverage and
a more investor-friendly fee structure.
So, why is longer better? In the current macroeconomic
climate of less leverage and more competition, players
on both sides have had to reassess their expectations of
returns and fund managers are now looking to diversify
their offerings accordingly. By increasing the terms
of these new funds, fund managers are able to make
investments that don’t fit within their existing buy-out
fund mandates, for example, long-term infrastructure
projects or assets which are better suited to more
permanent capital, for example, insurance companies.
In fact, in recent years many of the biggest names
in private equity have turned their attentions to the
insurance sector and have spent billions of dollars on
insurance assets and, in some cases, have even raised
funds specifically focussed on financial institutions and
insurance companies. By investing in these types of
assets over the longer-term, fund managers are able to
collect a steady, more predictable stream of income,
significantly increasing their AUM (as they in turn manage
the investment of the capital of the portfolio insurance
company as well), enhancing their values in such a way
that is particularly attractive for the publicly traded fund
managers out there.
How long is too long? Longer fund terms are attractive
to investors looking for a reliable yield in this period
of historically low interest rates with less frequent
deployment of capital and to those that would prefer to
hold on to high growth assets over the longer-term rather
than divesting prematurely simply because the term of
the fund is coming to an end at the typical 10 year point.
But, for some investors it may be difficult to commit to
a longer term strategy. Ultimately whether this trend
continues will be determined by whether the lower but
more predictable returns and lower fees make this a more
attractive prospect for investors versus investing in the
public markets. Only time will tell.
WHILE THE SUN IS SETTING ON OTHER FUNDS…
Given the huge volume of private equity funds raised in
the 2005-2008 period and, assuming that a significant
chunk of those funds were established with the traditional
10 year (plus extensions) model in mind, it is clear that we
are entering a period where a huge number of funds are
reaching the wind-up stage of their life-cycle.
But, are these funds ready for the sun to set? You
would expect that these funds would be in the final
stages of liquidating their assets but some commentators
are suggesting that due to decreased levels of capital
deployment during the economic crisis many of these
funds still in fact have sizeable unrealized
value, requiring the fund manager’s time
and resources to continue to manage and
eventually realize. What does this mean for
investors? This will somewhat depend on the
specific circumstances, for example, are term
extensions permitted in the fund documents
and if so, for how long and whose consent is
required? If the consent of investors is required,
it is paramount that the fund manager is
able to convey a clear strategy for liquidation
within a time frame that is acceptable to
investors. However, there may be diverging
objectives among the investors with some
open to an extension of the fund’s term in
order to maximise long-term value versus other
investors in need of immediate liquidity.
Money talks…In recent years we have seen a
steady increase in the number of funds going
out to market with significantly more flexible
and potentially longer periods of extension to
their terms, even up to 15 years in some cases
and an uptick in the ability of GPs to unilaterally
extend the term. It would appear that fund
managers have learnt the lessons of the past
and are now looking to make their documents
as flexible as possible to avoid headaches in
the future. But if you are an investor focused
on immediate liquidity, you could find yourself
trapped in a fund for longer than you would
like. This could be from the GP having a right
to unilaterally extend the term, the fund’s
larger investors wanting to extend the term to
maximise value, or because you are a minority
investor in a fund that requires a limited partner
vote to extend the term.
WHILE SOME ARE LOOKING OUT AT THE
STUNNING AFRICAN HORIZON…
So, while some fund managers are turning
the traditional norms of private equity fund
terms on their head, other fund managers
are changing their geographic focus to make
their mark, putting aside concerns over the
short-term challenges for the stunning longer-
term horizons that investment in Africa, and in
particular Sub-Saharan Africa, can offer.
MORE, MORE, MORE…
With stagnant European economic growth, the
current Chinese uncertainty contagion and a
congested U.S. domestic market, the private
equity industry is putting aside concerns over
falling commodity prices, political uncertainties
and fears over the scale of the Ebola crisis to
focus on the stunning promise of Sub-Saharan
Africa with almost US$4 billion raised by private
equity in 2014 for this region alone, according
to the Emerging Markets Private Equity
Association. Such is the interest in the region
that we are now seeing key U.S. players raising
funds specifically focussed on the region and
all indications are that this is a trend that will
continue judging by the significant uptick in
the number of 2015 vintage offshore funds
that we have seen coming to market with this
geographic focus. According to the African
Private Equity and Venture Capital Association,
2014 saw record levels of investment with
private equity funds investing US$8.1 billion
in African companies. Traditionally, the focus
for private equity investment in Africa was the
region’s abundance of natural resources but
increasingly, investors and fund managers alike
have changed their focus and are looking at
the African consumer market for returns, for
example, infrastructure, healthcare, education,
telecoms and financial services, brought
about by demographic shifts in the region’s
increasingly urbanised population with more
disposable income.
AGAIN IT IS ALL ABOUT THE LONG-TERM
HORIZONS…
This is certainly a region not without its
challenges but it has good long-term
fundamentals and provided that all players
focus on the longer-term potential rather than
the short-term challenges, we believe that
Africa will continue to emerge as an exciting
opportunity for private equity.
In recent years the macro economy has thrown
a few curve-balls at the private equity industry,
forcing all players to reassess expectations,
re-evaluate industry norms and focus on new
horizons. Whether the trends we are seeing
turn out to be anything more than ephemeral,
only time will tell, but so far the private equity
industry has proved itself to be a pretty
adaptable beast.
ABOUT THE AUTHORS
Melissa Lim
Partner
T +1 345 814 4512
Melissa Lim is based in Walkers’ Cayman Islands
office where she is a partner in the Global
Investment Funds Group. She has extensive
experience in a broad range of investment
fund structures including private equity funds,
hedge funds and unit trusts.
Melissa regularly acts for leading investment
banks, investment managers, private equity
houses and corporate trustees, advising
on the structuring and formation of funds,
their downstream transactions and exit
mechanisms. An integral part of her practice
involves advising in relation to mergers and
acquisitions, joint ventures, preference share
issues, corporate restructurings and other
corporate transactions. She also has significant
expertise in advising on finance transactions
(in particular, capital commitment subscription
financing and LBO financing) and related issues
of security creation and perfection.
Tamsin West
Associate
T +1 345 814 4575
Tamsin West is an associate based in Walkers’
Cayman Islands office and is a member of
the firm’s Global Investment Funds Group.
She advises on all aspects of funds work and
has experience in a broad range of funds
transactions. Tamsin advises private equity
houses, asset managers and their onshore
counsel in relation to Cayman Islands corporate
and partnership structures.
CHANGING HORIZONSPost-economic crisis the industry standard terms for private equity are being re-evaluated by all parties and many are looking to new geographic horizons to seek out the best returns.
walkersglobal.com
TAMSIN WEST ASSOCIATE WALKERS
MELISSA LIM PARTNER WALKERS
SPECIAL SPONSORED SECTION
“Longer fund terms are attractive to
investors looking for a reliable yield in this
period of historically low interest rates.”
“According to the African Private
Equity and Venture Capital
Association, 2014 saw record
levels of investment with private
equity funds investing US$8.1
billion in African companies.”