Originally published in The Lawyer, June 2007
The first permanent capital vehicle (PCV) was launched as a Guernsey limited partnership.
In 2006, KKR (KKR Private Equity Investors LP) launched the first PCV raising $5 billion in capital. KRR’s PCV was established as a Guernsey Limited Partnership and listed the limited partnership interests on Euronext Amsterdam – one of the few internationally recognised exchanges which permit the listing of limited partnership interests.
The KKR success was reflective of:
- the wider investor base that arises from having a listed investment due to the investment restrictions in many pension funds and regulated funds on the level of unlisted investments they may hold in their portfolios,
- the increased investor interest in obtaining private equity exposure without long term capital lock-ins provided by many historic private equity models i.e. the provision of liquidity in investments with alternative exposure,
- the limited partnership vehicle is the traditional vehicle of choice in the private equity industry due to the tax transparency and efficiency offered and also the more open environment of information disclosure to investors,
- the investment manager is provided with the ability to focus on their area of expertise – investment management – and not run a dual role of capital raising and management as well as investment management and enable more focused and the reduced need to maintain liquidity in the investment portfolio to met redemption requests in an open-ended environment,
- proceeds from investment realisations are available for re-investment rather than returned to investors as in previous private equity models.
Euronext has been attractive due to its less onerous rules for PCVs and its ability to list limited partnership interests. The LSE also does not currently permit, unlike Euronext, a listed entity to have legal or management control of investee companies or to invest more than 20% in a single investment which stops feeder funds becoming listed PCVs on the LSE.
A Guernsey investment vehicle has been used in these structures as:
- the Dutch Financial Market Authority (the body responsible for regulating Euronext) has recognised Guernsey as one of only limited number of jurisdictions having “adequate supervision”.
- their favourable tax environment enhances investor returns
- the existence of professional and experienced administration and service providers located in Guernsey but also the flexibility to outsource routine administration tasks.
KKR’s success in attracting such a significant amount of new capital has been a major talking point in the asset management and private equity industries and several players began the process of launching their own PCV. Apollo (AP Alternative Investments LP) successfully raised $1.5 billion in capital quickly after KKR but other names such as Doughty Hanson and Carlyle cancelled their plans to establish PCV as the attractiveness of the initial PCV model was questioned by investors due to:
- the additional complexities of the settlement of limited partnership transfers versus traditional equity securities,
- difficulties in compiling tax information for investors in limited partnerships vs. corporate forms in a more active change of investor environment,
- the length of time for the capital raised to be invested impacting negatively on performance,
- the continual discount of KKR limited partnership’s trading price relative to its net asset value
A new generation of permanent capital vehicles have since arisen which has addressed some of these concerns with:
- the replacement of the limited partnership form with a corporate form,
- capital being collected from investors over a period of time or called as the investment funding is required eliminating or reducing the trading discount.
We have also seen the shift of the PCV model from the private equity to the hedge fund industry with the successful launch of PCVs by Marshall Wace (MW Tops - $1.3 billion), Goldman Sachs (Goldman Sachs Dynamic Opportunities Fund - $0.5 billion) and Boussard & Gavaudan (Boussard & Gavaudan Holding Limited - $0.3 billion) and the increasing use of AIM and LSE listings.
It was partly as a result of the decision by the Dutch regulator that the UK’s Financial Services Authority (FSA) began considering amendments/changes in interpretations to the UK listing rules for offshore funds fearing a loss of business to Euronext. A recent development has been that the UKLA has advised that a secondary listing under Chapter 14 of the Listing Rules does not require a primary listing on another exchange. Brevan Howard (BH Macro Fund) has taken advantage of this regime raising $0.8 billion in capital in 2007 and several others are in the pipeline. Not surprisingly the UK investment management industry has reacted negatively to the ability of offshore companies to take advantage of the lighter secondary listing rules and avoiding the additional requirements of a full primary listing. As a result, the UKLA has decided that in the first quarter of 2008 they will remove the ability to do secondary listings on the LSE and are expected to issue lighter primary listing rules for investment entities. The new investment business rules were released on 31 May 2007 but there are several players currently looking at taking advantage of the known rule environment of the secondary listing environment. It is expected that the secondary listing rules will be grandfathered for companies listing under Chapter 14.
The new rules will be principles-based regulation, as opposed to the existing detailed prescriptive rules. Moving to a lighter Chapter 15 regime will enable the UK to compete more effectively against other exchanges, such as Euronext, in attracting listed investment vehicles and we can expect to see a continued flurry of activity in the market place going forward.
The latest development is a pipeline of listed Permanent Debt Vehicles by private equity houses which they are using to provide the leverage element of their private entity investments enabling investor access to the debt elements and returns of the private equity and hedge fund industries. The ability of Guernsey to pay interest gross (where information exchange is agreed with the investor) has made these attractive new vehicles to domicile in the Island.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com .
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