From our vantage point as advisers to many of the world's top investment fund managers and financial institutions, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.
In this four-part series we look at the current themes we have noticed in the investment funds market. Parts one (here) and two (here) focus on Hedge Funds and parts three and four explore Private Equity.
All data, unless referenced, is taken from Walkers' in-house investment funds survey.
2019 has been another year of significant fundraising activity, with both established and emerging managers operating across multiple asset classes, strategies and geographies having gone to market and successfully closed funds of varying sizes. The big players have again been able to launch a number of multi-billion dollar funds, while smaller managers have still found opportunities to market and raise sub-billion dollar funds too. The amount of activity has meant opportunities for innovation, with managers and investors working together to create fund products with bespoke terms in respect of fund duration, investment periods and fee structures. 2019 therefore has been another year of intense activity in the closed-ended space, with Cayman funds dominating this market for non-US investors.
FUND SIZES AND STRUCTURES
Cayman Islands exempted limited partnerships ("ELPs") remain the vehicle of choice for Cayman closed-ended funds, with only a nominal number of funds structured as exempted companies or limited liability companies coming to market. Those non-ELP funds moreover have been structured almost exclusively to satisfy specific investor or regulatory requirements. Cayman exempted companies remain the most common general partner vehicle, although ELPs and foreign companies, typically Delaware LLCs, remain popular alternatives.
Cayman LLCs, newly launched in 2016, are used from time to time and after a few years in the market appear to have settled in as a relatively niche choice for general partner entities (albeit they continue to grow in popularity for use as downstream or joint venture entities).
Last year saw a spike in sub $500 million fund raises and, while there has continued to be significant activity in that space, this has been a year in which a material number of $1 billion plus funds have had successful, high profile launches.
Generally, managers have not been required to fetter their fundraising with hard caps on commitments. For those funds which have agreed to be so limited, the cap sizes have gone up to reflect the buoyancy of the market.
Higher cap sizes in turn have regularly been reached during the capital raise with, on occasion, general partners ("GPs") going back to initial investors to ask that the caps be raised.
Twelve months remains the most common fundraising period. The increased confidence in the market has seen this timeframe becoming even more prevalent, with the number of fundraising periods in excess of a year dipping from 33% in 2016 to 24% in 2019.
2019 therefore has been a year of large funds coming to market in a truncated time frame, relative to their size. There is still a huge amount of dry powder to be deployed; the private equity world is looking at the M&A market in anticipation of a correction which many managers feel is imminent, and it should be well placed to act if and when it occurs.
Technology focused funds have seen the most significant uptick in activity in 2019. There have been a small number of closed-ended funds which have launched with cryptocurrency based strategies; however it is the venture capital style funds which have been most active in the technology space, raising material amounts of capital to help in the hunt for the next batch of unicorns.
Credit funds and buyout funds remain popular, with middle-market corporate debt as an asset class becoming an area of particular interest. We have seen private equity funds launching with explicit focus on US or global middle-market companies, and credit funds specifically targeting such companies in a bid to provide more flexible lending solutions to borrowers than may be available from traditional banks. Of course while some funds are seeking value in the middle-market, the huge sums raised by the mega-buyout funds mean that some high-value household names will be being carefully watched over the next couple of years.
This year has also seen more private equity fund-of-funds come to market. As well as the more traditional fund-of-funds strategies we have also seen secondaries funds raise significant amounts of capital, as the fast maturing private equity secondary market continues to boom.
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.