Walkers Fundamentals White Paper 2020 – Private Equity Part 1

Welcome to Walkers’ 2020 Fundamentals White Paper Series, in which we discuss certain trends identifiable among the hedge funds and private equity funds that we helped our clients launch over the last twelve months.

In last year’s White Paper, published in November 2019, managers and their funds appeared to be positioning themselves for market turbulence in the face of global uncertainties and a volatile economic and financial environment. One year on, with the benefit of hindsight, this was something of an understatement. 2020 has tested all aspects of managers’ businesses, from the boardroom to the back office, and in many parts of the world out of the office altogether. All of this, of course, is not to overlook the broader global context of the pandemic and the significant health, economic and political challenges that 2020 has brought and continues to present.

To visit the other parts of the series, please use the direct links below:

Private Equity Trends Part 1

Among the uncertainty and turmoil of 2020, closed-ended fund formation activity has continued at pace, as managers and their advisers have negotiated side letters, launched funds and continued downstream activity, largely operating in a virtual world. In the Cayman Islands, the enactment of the Private Funds Law has seen Cayman closed-ended funds subject to a registration regime for the first time, with existing and newly launched private funds required to provide certain registration information to the Cayman Islands Monetary Authority (“CIMA”). Private funds will also be required to comply with ongoing obligations with respect to operational matters such as audit, safekeeping of assets, valuations and cash monitoring, which obligations largely codify existing best practices familiar to most managers domiciling their funds in the Cayman Islands.

The new regime ensures that the Cayman Islands remains the offshore financial centre of choice for global fund managers launching closed-ended funds, and supports the Cayman Islands’ broader aim of adopting global standards in areas such as anti-money laundering and economic substance.

SPAC ATTACK

The last few months has seen a surge in the formation of special purpose acquisition companies (“SPACs”), also known as ‘blank cheque’ companies, with no commercial operations which go public with the intention of acquiring a target within a set time period (usually 24 months). While SPACs are not new creations, 2020 has seen a record number launched. It has also seen a number of established fund managers tapping the public markets for capital, with Oaktree, Apollo and Cerberus, among others, successfully bringing SPACs to market. SPACs provide another tool in the fund raising armoury of established managers, as well as showing the confidence investors have in their ability to source and execute high quality deals. Private equity managers whose funds are approaching the end of their terms will also be looking carefully at a new tranche of potential buyers who will be racing against the clock to complete a deal.

4 SPAC

SPACs are typically formed as Cayman Islands exempted companies or Delaware corporations, each offering a relatively simple and well-trodden path to market. The various legal issues arising in respect of the establishment of a Cayman Islands exempted company as a SPAC have been considered in detail by those practicing in the field. Factors such as the scope of fiduciary duties of directors of SPACs, issues around corporate opportunity and the availability of a robust merger regime have allowed the Cayman Islands to remain a jurisdiction of choice for fund managers and other sponsors to form and launch their SPACs.

FUND SIZES AND STRUCTURES

Cayman Islands exempted limited partnerships (“ELPs”) remain by far the most common choice of entity for Cayman Islands closed-ended funds, with the few funds structured as exempted companies or limited liability companies coming to market typically to accommodate specific investors. Cayman Islands exempted companies remain the most common general partner vehicle, although ELPs and foreign companies, typically Delaware LLCs, remain popular alternatives. Foreign partnerships, typically Delaware limited partnerships, are also used from time to time.

Cayman Islands exempted companies are particularly popular with Asian start-up managers, being their almost exclusive general partner vehicle of choice and reflecting a desire to keep the entire fund structure located in the Cayman Islands.

Following a spike in sub $500 million fund raises in previous years, this has been a year in which established managers raising successor funds have traded on their track records to raise larger funds, with particular growth in the $500 million to $3 billion range.

5 Target Fund Size

Hard caps on commitments remain unusual, most commonly imposed on managers raising smaller funds by anchor investors keen to prevent dilution.

Small funds have also been the most likely to avoid the requirement for a general partner commitment, with investors understanding of the financial pressures on new managers. Outside of the smaller funds however, investors continue to insist on managers or their affiliates having skin in the game, either on a percentage or absolute number basis. The numbers vary widely by reference to geography, fund size and reputation of the manager, with percentage amounts ranging from 1%-5%, most typically around the 2% mark, and dollar amounts dependent entirely on fund size.

Twelve months remains the most common fundraising period, although certain funds, particularly in the credit sector, often look to raise money more quickly.

FUND STRATEGIES

Cayman continues to see funds encompassing a broad range of strategies. Credit remains extremely active while the uptick in technology/venture funds from prior years remains broadly stable.

There has also been some recovery in the hard asset space, with both real estate and infrastructure funds proving relatively popular supported by particularly strong activity in the logistics/warehousing sectors, tracking the significant growth in online retailing. Impact and socially conscious investing has also remained of interest, with a fund focussing on green agribusiness successfully raising money for the first time.

6 Fund Strategies

The strength of Asian capital saw certain region-specific strategies come to market with China focussed funds continuing to be active, including a fund focussing specifically on Chinese cultural and leisure activities.

The onset of the pandemic saw a slew of dislocation funds come to market, with managers raising capital for funds with extremely broad parameters across investment strategies, including credit, technology and buyouts, established specifically to take advantage of any opportunities thrown up by the dislocation in the markets.

FUND GEOGRAPHIES

Global strategies remain popular, with North America and Asia remaining the most significant target regions for investments for funds limited by geographical region.

7 Fund Regions

Europe focussed Cayman funds remain quiet, with some activity in the more niche geographical markets such as Africa, Australia and Japan.