Q&A with Joanne Huckle: Innovation in Private Equity Structuring – Fund Management/ REITs

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In this Q&A, Private Equity Partner Joanne Huckle, who was recently a guest speaker at GAIM Ops 2022 in the Cayman Islands, discusses the different structuring models for private equity firms, as well as how they adapt their strategies and plans for the future.

How do you see the structuring of the private equity market?

Historically, fund structure has been something that managers have not wanted to use to showcase innovation or uniqueness. There is a tried and tested formula for how to structure private equity funds and although managers want to show how their strategy is different or how they have developed a proprietary deal flow, the fund structure is generally not something managers want to differentiate. In fact, an unusual structure could unnecessarily prolong investors’ due diligence. Investors are very familiar with the exempt limited partnership for Cayman PE funds, so why reinvent the wheel and introduce the need to explain the differences – for example, between a stock, an LP stake and a unit trust share?

However, in recent years we have started to see more innovative structuring, which is, in large part, related to the blurring of the once clear distinction between hedge funds and private equity funds and these two industries previously distinct.

How and why are the private equity and hedge fund industries merging?

This is a trend driven by both managers and investors; we’ve seen hedge fund managers turn to more illiquid asset classes to generate alpha, and we’ve seen investors willing (even willing) to lock in capital for better returns.

The result is that some of the structuring tools used in one industry are now used in the other. For example, master-feeder structures (originally a hedge fund structure) are now used for some private equity structures. Likewise, we continue to see the growing popularity of cover letters (originally used more in private funds). There has been an increase in the use of platforms to create maximum flexibility around strategies and portfolios and even to offer investors opt-in/opt-out mechanisms. This is more generally through the use of Cayman SPCs, but I have recently seen an increase in the use of partnerships with separate SPVs below to host different investment opportunities.

Perhaps the greatest convergence of all is the use of “hybrid” vehicles. These can be very personalized and allow some creativity in the structuring; they generally resemble, in part, a closed vehicle and, in part, an open vehicle.

What else do you see as early stage trends?

The other structuring trends that we see are really driven by regulation. For example, some of our larger managers use Luxembourg shadow funds, alongside their Caymanian funds, to raise capital in Europe. These parallel funds generally invest and divest at the same time as the others in a common portfolio of assets. Sponsors appreciate the ability of these structures to customize fund offerings for large investors.

There also seems to be a shift in terms of what GPs and LPs are looking for in a GP-LP relationship. In many cases, it is not just cash that LPs seek (or can) contribute. Broader, more involved relationships are sought and the negotiation of co-investment rights will often consider this broader GP-LP relationship (for example, we have seen LPs provide valuable ESG-related support to the GP) .

What do you see in terms of independence and governance trends?

It really comes down to bringing the private equity and hedge fund industries together. Hedge fund investors have long expected to see independence from the board of directors of the funds they invest in, but this has not been a requirement in private equity funds. As more and more speculative investors invest in closed-end funds, we are seeing (albeit slowly) demands for independent representation in private funds, this can be through a management committee built into the APL or via independent managers or administrators at the GP level.

As private funds have become regulated funds in Cayman, with new evolving CIMA rules – as well as other regulatory regimes such as AML, economic substances, FATCA/CRS – it may be useful to have a field manager in Cayman to help oversee compliance, although this is not a legal requirement.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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