Sovereign wealth funds and large pension funds have traditionally been important investors in PE funds, relying on the expertise of the PE house to select and manage investments. However, as their confidence and experience as sophisticated investors has grown, those institutions have begun making direct PE and other investments through their own vehicles. This development was discussed in the Economist, 1 November 2014, "In-house revolt".
Those institutions may invest alone or with others and the target investment may be a single venture or an entire portfolio (perhaps discarded by a bank focussing on core business). The acquisition wilPRl usually be made through a vehicle established for that purpose ("SPV"), often a limited partnership. An investment manager may be appointed to the SPV to conduct initial due diligence on the assets and to manage them following the acquisition.
The assets are often sold through an auction process and the ability to establish the SPV quickly is important if the investor is to secure the bid. In sophisticated finance centres such as London and Guernsey, forming vehicles quickly is not an issue – for example, Guernsey companies and limited partnerships can be formed in a day or less. However for UK alternative investment fund managers ("AIFM") appointed to an SPV, their ability to move quickly can be hampered by FCA regulation.
An SPV used to acquire a portfolio of investments is likely to constitute an alternative investment fund ("AIF") under the EU AIFM directive. Under SUP 15.3.27 of the FCA Handbook, a UK AIFM must give at least one month's notice to the FCA before it can be appointed as manager of another AIF. In a competitive tender process the one month delay caused by this notification process can make the difference between winning and losing the bid.
Using a Guernsey managed vehicle avoids this delay. If a Guernsey manager or general partner is appointed to the SPV no FCA approvals will be required and the SPV would still be able to benefit from the expertise of the UK AIFM through an advisory agreement. In addition, neither the general partner nor the SPV will be regulated in Guernsey because Guernsey does not seek to regulate:
- a vehicle with only a single investor - no matter how many assets it holds;
- a vehicle with only a single asset - no matter how many investors it has;
- joint ventures, where a number of sophisticated investors jointly determine to invest in a portfolio of assets through a common vehicle; or
- the managers or general partners of those vehicles.
Guernsey is already one of the world's leading jurisdictions for the establishment of traditional PE funds because it offers expertise, top quality service as well as fiscal neutrality. As PE investors become more sophisticated in their approach Guernsey remains a beneficial jurisdiction in which to establish the more bespoke vehicles they require. Carey Olsen advises more than half of all Guernsey investment funds, nearly two thirds of which are private equity funds.
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.