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.
All data, unless referenced, is taken from Walkers' in-house investment funds survey.
PART 3 - PRIVATE EQUITY
The appetite of investors for allocating capital to closed-ended funds across a wide spectrum of managers, asset classes and geographies has continued unabated in 2018. The heightened activity of 2017 has persisted, with the headline grabbing, billion dollar-plus fund launches complemented by a steady flow of smaller funds, often offering more esoteric strategies. Our data suggest a willingness of investors and managers to work together to maximise realisation value of fund investments, with performance allocations and fees also remaining a key topic of negotiation. All in all, the closed-ended market remains very active, diverse and keen to take advantage of the various upsides offered by structuring through Cayman.
FUND SIZES AND STRUCTURES
Activity has remained strong in the >$1 billion fund space, reflecting the continued ability of established managers to raise significant amounts and the attraction to investors of participating in funds with strong track records, often offering access to high profile underlying investments usually having billion dollar-plus price tags. Perhaps even more encouragingly, the market for sub-$500 million fund raises remains robust, with a significant number of managers successfully closing smaller products.
Twelve months remains the most common fund raising period, albeit we have seen general partners going out to their limited partners to seek consent to extend such periods to 18 or 24 months. There has been a slight increase in the percentage of funds willing to accept a hard cap on commitments, with some investors keen to ensure they remain significant players within the LP base. The majority of funds, however, provide target sizes but remain unfettered by any binding restrictions.
Managers are continuing to consider compliance with regulatory obligations, such as those pertaining to automatic exchange of information and anti-money laundering. The market has developed quickly to assist, with an ever increasing number of service providers now offering tailored, cost-effective solutions to, in particular, small and middle-market managers. The ability to efficiently outsource aspects of regulatory compliance allows managers to focus on raising capital and sourcing investments.
The vast majority of Cayman closed-ended funds remain structured as exempted limited partnerships ("ELPs"): we have seen a handful of closed-ended funds structured as exempted companies to satisfy specific investor or regulatory concerns, but ELPs clearly remain the vehicle of choice. General partner entities are most typically Cayman exempted companies, with a fairly even split of ELPs, foreign companies and foreign partnerships (typically Delaware LLCs and limited partnerships) thereafter. Cayman LLCs, newly launched in 2016, are also growing in popularity as general partner entities, with certain managers who had historically used Cayman exempted companies transitioning to Cayman LLCs for future structures and, on occasion, within existing structures.
The market for credit and direct-lending funds remains positive, with downstream demand for alternative lending solutions continuing to create an attractive investment narrative for such strategies. Buyout funds have also continued to be active in the capital-raising space as, despite a slight dip from prior years, have funds focussing on hard assets, such as infrastructure and real estate. Early signs are that energy is beginning to rally, with fund raising activity in this area having been relatively quiet. Within the energy sector some of the movement has been in the renewables space, a trend which we expect to continue to grow.
Given the increase in the number of tech funds launched this year, it is not a surprise that we are seeing increased interest in the establishment of funds focusing on the blockchain and digital assets space. Unlike the hedge funds established to invest in initial coin offerings and the trading of cryptocurrencies, these funds typically have a venture capital strategy focusing on blockchain projects and enterprise solutions with investments in start-ups and incubator programmes.
One of the consequences of the success of smaller fund launches has been certain, more focussed, strategies coming to market: we saw buyout funds with investment strategies concentrating on specialised fields such as media, food/agribusiness and sports entertainment/marketing successfully close. We have also seen funds with a significant social element, including the launch of a for-profit health impact investment fund with a primary purpose to promote a charitable cause, namely improving the lives of low-resource, underserved populations in developing countries (initially focusing on India and Sub-Saharan Africa), a project on which Walkers lawyers worked on a pro bono basis. Our team is also seeing more early stage interest in the establishment of other such social impact funds, including a clean energy fund structure involving multiple jurisdictions, and we hope to assist more managers to successful first closings over the coming months.
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