Cayman Islands: Changing Horizons: New Geographic Horizons To Seek Out Best Returns

Last Updated: 1 February 2016
Article by Melissa Lim and Tamsin West

Most Read Contributor in Cayman Islands, September 2018

Post-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.

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.

Previously published in The American Lawyer | October 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions