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GlobalMap Oct2018
Promotions 2018

Walkers' Promotions Highlight Growth of Global Firm

We are pleased to announce that 8 attorneys across our 10 global offices have been invited to join the partnership. In addition, 18 associates have been promoted to senior counsel, or local equivalent.

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Walkers Fundamentals Private Equity Trends - Part 3

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 and two 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.

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.

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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.

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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.

FUND STRATEGIES

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.

Fund Strategy.png

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.

Walkers Fundamentals Hedge Fund Trends - Part 2

HEDGE FUNDS - PART 2  

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 and two 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.


LOCKED UP FOR LONGER
 
Although the percentage of funds using a lock-up is broadly consistent with our prior surveys (about one third of funds surveyed use a lock-up of some sort), the way funds used lock-ups in 2018 has evolved. Funds are now locking up their investors for longer: over half the funds that were using lock-ups are now locking their investors up for eighteen months or more (compared with 39% in 2017).

The nature of the lock-up has changed this year too. In prior surveys, the split between funds employing ‘hard’ lock-ups (where the lock-up prohibits redemption during its term) has been broadly in-line with those employing ‘soft’ lock-ups (where early redemptions are permitted, but subject to an early redemption fee for the benefit of the fund). This year, however, hard lock-ups were more than twice as common as soft lock-ups.

As industry data shows, the average hedge fund investor, measured by dollars invested, becomes more institutional each year. A classic side letter trade of recent years has involved an incoming investor agreeing to be locked up (sometimes even where the fund’s base terms do not provide for a lock-up) in return for lower fees. As most initial investors in a fund, particularly the larger anchor institutional investors, plan on committing for several years, and most managers in the early years require stability of the capital base while they build a track record, this has been a mutually beneficial arrangement.

In a similar vein, we have seen a small uptick (25%, up from 20%) in the percentage of funds employing a gate to provide a mechanism to smooth the impact of significant redemption activity. While too early to observe any meaningful trend, as a proxy for managers’ expectations of future redemptions, it is a statistic we will keep under review.

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GOVERNANCE AND CONTROLS

 

Last year, one of the departures from the established trend was a small but notable decline in the number of funds, including one or more independent directors on their board. At the time, we cautioned against reading too much into a single year’s data, and promised to revisit the question this year. While independent representation on boards has risen slightly (76%, up from 67% last year), this still represents a smaller percentage than we saw in our pre-2017 surveys. For funds using independent boards, majority independence remains dominant (nearly 90%), and most funds (over 70%) select independent directors from different providers. These remain broadly consistent with prior years’ results, and reflect the institutional consensus regarding appropriate governance.

These statistics reflect the significant task facing many of our clients in selecting an appropriate governance framework for their fund, and then finding appropriate individuals to fill the roles. We work with virtually all of the professional directors, and are well placed to help clients work through these issues.

We have also seen a significant increase in the number of funds employing administrators that are based in the Cayman Islands (43%, up from 27% last year). To a degree, this may simply reflect administrators’ own internal preferences in running Cayman funds from their Cayman offices. It may also reflect clients’ preferences for administrators who are most familiar with the Cayman Islands anti-money laundering regime, which was updated in 2018, and who are able to offer the required anti-money laundering officers. We shall keep this under review in future surveys.

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WHAT TO LOOK FOR IN 2019

As so much in the industry flows from performance, whether or not the last two years’ positive returns can be extended remains the key question. It has been a busy year for new fund launches in 2018, both for start-ups and institutions alike. Beyond the new registrations captured by our surveys, Walkers has advised on a wide range of restructurings of existing funds in anticipation of renewed activity and investor demand.

That activity may in part come from the growth of crypto-related funds and the development of artificial intelligence, machine learning and big data to analyse and invest in markets. We expect to see more in the crypto custody space, with progress being made towards a regulated solution to the custody of crypto assets. This is expected to ease a key constraint to institutional participation in crypto funds. Another area to watch with interest is the growing trade tensions between the US and China. With both sides expected to increase the number of tariffs and other protectionist measures in the near term, any resulting market volatility may lead to opportunities for investors and managers alike.

Investors continue to look at positive societal outcomes when analysing investment opportunities. Institutional managers now routinely incorporate environmental, social and governance (ESG) principles into their investment policies. We expect this trend to continue.

Finally, there is a growing consensus among industry commentary that the last decade of relative market stability (in the principal equity markets at least) and low interest rates, may become increasingly vulnerable to economic and political risks. If so, and volatility increases, hedge funds should be well placed to put into practice the strategies that have often been frustrated by strong and stable equity markets and low interest rates. To a degree, some of the trends and themes observed in this year’s data may already reflect forward planning by managers in contemplation of these possibilities.

Walkers' Strengthens Aviation Finance Practice

Walkers is pleased to announce the arrival of Sarah Humpleby and Richard Williams who both join the Cayman Islands office as senior counsel in the Finance & Corporate Group. Both Sarah and Richard bring to the firm significant expertise in the aviation finance sector.

In addition, Walkers is pleased to announce that Aaron Bennett has joined Walkers Dubai as a vice president at Walkers Fiduciary Limited. Aaron's arrival in Dubai enables Walkers to offer a truly global fiduciary service. Walkers Fiduciary now offers incorporation, fiduciary, regulatory compliance and corporate administration capabilities to clients using Cayman SPV, Dubai SPC and ADGM SPV's in this jurisdiction.

"I am delighted that Sarah, Richard and Aaron have agreed to join Walkers. These new appointments demonstrate Walkers' commitment to asset finance as an integral pillar of our Finance & Corporate Group. Our aviation finance team is unparalleled in the Cayman Islands and now, with Sarah and Richard's onshore aviation experience, Walkers has strengthened our position further. The speed of growth that this practice has enjoyed will be greatly buoyed by the arrival of these talented practitioners," commented Ken Rush, Global Head of Asset Finance.

Sarah Humpleby joins from Pillsbury Winthrop Shaw Pittman in London where she was counsel in the Asset Finance practice and Richard Williams joins Walkers from Dentons in London where he was counsel in the Banking & Finance practice. Both Sarah and Richard advise clients across the aviation industry including financial institutions, issuers, rating agencies, leasing companies, operators, airlines and manufacturers on a variety of financings and leasing transactions including syndicated financings, structured financings, warehouse financings, asset-backed securitisations, private placements, EETCs, portfolio sales, mergers and acquisitions, pre-delivery payment facilities and operating and finance leasing.

Aaron Bennett joins from another leading fiduciary services provider in Dubai, where he worked for five years. Aaron has extensive experience with respect to the administration of companies which engage in a wide range of structured and asset finance transactions. Aaron's experience spans Sharia compliant Islamic finance transactions, conventional finance structures and asset finance transactions. His experience also includes incorporation, fiduciary, regulatory compliance and corporate administration for DIFC SPVs and ADGM SPVs.

Cayman Islands Managing Partner Tim Buckley stated: "I am pleased to welcome Sarah, Richard and Aaron to Walkers. Our aviation finance and fiduciary services are of vital importance to the Cayman Islands and the firm globally and the abilities these three new joiners hold will greatly enhance our service offering".

Walkers Fundamentals Hedge Fund Trends - Part 1

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 and two 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.

HEDGE FUNDS - PART 1 

In our last trends survey in November 2017, our story was one of cautious optimism. Buoyed by a year of positive returns following the market rally in early 2017, hedge fund managers started 2018 with improved expectations of their own performance and prospects for fund raising.

According to the latest figures available from Preqin (Preqin Hedge Fund Performance Update: September 2018), hedge funds as a whole have continued to post positive returns in the first half of 2018, though not at the same pace seen in 2017. Event driven strategies and credit strategies have performed strongest on a year-to-date basis. While the overall asset flows reported by Preqin show a net outflow from the industry, the aggregate data obscures a stark regional distribution: North American managers saw net inflows in the first half of 2018 of $37.3 billion, with managers in Europe, Asia Pacific and the rest of the world experiencing a combined net outflow of $21.6 billion.

EQUITY AND CREDIT LAUNCHES CONTINUE TO DOMINATE

We registered more hedge funds pursuing an equity or credit strategy last year than all other strategies combined. This reflects a strong run of returns in 2017 relative to other strategies, and with increased volatility in equity markets in 2018, there would appear to be better opportunities in this sector than there have been in the last decade of broad growth across equity indices. In the case of credit fund launches, investors’ continued appetite to participate in these funds’ disruption of traditional credit markets has driven another year of launch activity.

A new asset class added to our survey this year covers funds formed to pursue opportunities in cryptocurrencies, initial coin offerings and other digital assets, and the growth in launches this year has been significant on a relative basis.

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A HINT OF RELIEF IN FEE PRESSURES?

In prior surveys, we have found a slow but steady trend towards sub-2% management fees, and a gradual erosion of the traditional 20% performance fee. This year, our statistics are broadly consistent with these long-term trends, though slightly more funds than last year launched with a headline management fee of 2%. With performance fees, there was a modest uptick in the number of funds launching with a 20% performance fee (54%, up from 49%).

While these numbers might make for encouraging reading, and may to a degree represent a restoration of confidence among managers to at least include the traditional ‘two and twenty’ fee structure as the headline rates in their offering documents, they do not necessarily represent the full picture. Managers continue to make full use of side letters, founder share classes, reduced-fee classes with a longer lock-up period and other innovative approaches to fees in order to attract or retain investors.

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Peter Dunlop Joins Walkers Bermuda as Partner

Walkers Bermuda* is pleased to announce that Peter Dunlop has joined the firm as Partner in the Insolvency & Dispute Resolution practice.

Peter adds significant re/insurance law expertise and litigation/arbitration experience to Walkers' bench having developed significant practices in Bermuda and London. Peter has over 20 years of legal experience, having practiced in London at Lovells (now Hogan Lovells) and in Bermuda at another leading Bermuda law firm. Peter is an experienced advocate and specialises in the arbitration of complex international re/insurance disputes across a broad range of industries, as well as non-contentious advice in the areas of contract drafting and new products underwriting support to the world's leading (re)insurers and ILS funds. Peter also has extensive experience in the litigation of corporate/commercial disputes, fraud cases and insolvency-related matters, advising directors, shareholders, Bermuda companies, private equity and hedge funds, and insolvency practitioners and other advisors.

Peter is also a Chartered Property & Casualty Underwriter having spent nearly five years at XL Catlin, Bermuda creating a pioneering portfolio of re/insurance business in the areas of transactional liability, litigation risk containment, contingency, structured credit and regulatory capital arbitrage, tax and alternative risk transfer. Peter also has significant regulatory experience and spent six months on secondment at General Re UK Ltd in London working on the global regulatory investigations in to finite reinsurance practices.

Given Peter's experience in-house and his background as an underwriter, he has a truly unique, on-the-ground insight in to structuring 'pathfinder' re/insurance solutions, which complements his contentious expertise in the re/insurance space.

Managing Partner and Head of Walkers Bermuda's Insolvency & Dispute Resolution group, Kevin Taylor, commented, "Peter brings with him a wealth of experience and we are very pleased that he has agreed to join our team. His expertise and experience will enhance our already strong contentious practice in Bermuda."

*Walkers works in exclusive association with Kevin Taylor, trading as 'Walkers Bermuda', a full service commercial law firm providing advice on all aspects of Bermuda law.

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