The Investment Funds guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated: February 27, 2019
Introduction to the Guide
Investment funds come in all shapes and sizes. They target a wide range of strategies and target businesses across all sectors, make direct and indirect investments in real estate and real assets, and engage in direct lending activities. They are set up in jurisdictions all over the world to suit their investment strategy and their investor base. The investors are pretty diversified too – individuals, family offices, fund of funds, financial and insurance institutions, sovereign wealth funds, pension funds and endowments for example.
Setting up investment funds is a diversified and global endeavour. It requires practitioners not only to become experts in the local technicalities and requirements of individual jurisdictions but also to understand and embrace the global market.
This guide is intended to help with that. Our aim has been to present you with an integrated product, an overview of the main legal, regulatory and tax aspects of investment funds in the various jurisdictions covered. The authors – lawyers from some of the pre-eminent investment funds firms in their jurisdictions – have provided a framework for understanding the funds market in their jurisdictions, summarising the key issues and trends relevant to anyone looking to set up a fund or market to investors in their jurisdiction. The chapters are necessarily brief but we hope you find them insightful.
The need to understand the global funds market becomes greater year-on-year as the investment funds landscape becomes ever more international. The key fund jurisdictions that most readers will be familiar with are covered but so too are a large number of fund jurisdictions that are perhaps less renowned but becoming progressively utilised. With sponsors seeking to navigate an increasingly complex web of regulatory and tax issues, and seeking capital from investors located further and further afield, the creativity required from practitioners in envisaging fund structures becomes ever more important. Alas, this guide does not hold all the answers, but hopefully it will give readers a head start!
This guide is not intended to be specific to any strategy. Again, although the authors have had to keep their summaries brief, they have sought to consider, and give readers relevant insights into, the fund types and strategies they tend to see most frequently in their jurisdictions.
As the investment funds market continues to develop and becomes more accessible to investors globally, sponsors are seeking capital from all corners of the earth. We have therefore asked the authors not only to look at this from a sponsor perspective but also to give detail on their local investor markets and needs.
We hope you enjoy reading the guide and find it useful. As fundraising continues strongly into 2019, we wanted to share with you a few global themes that will continue to play out this year.
Internationalisation of Fund Structures
The key funds markets remain the key funds markets and will continue to be so for the foreseeable future. However, fund structures are becoming increasingly international, frequently spanning multiple jurisdictions.
Regulatory considerations often necessitate this approach – for example, it has become common for sponsors raising capital in Europe and globally to establish parallel funds for EEA/non-EEA investors.
As sponsors continue to broaden the investment strategy and geographic reach of their funds, while at the same time seeking a broader investor base, the tax implications of their structuring become increasingly complex. Funds will often have US taxable and tax-exempt investors, sovereign wealth funds, fund of funds and other investors who all have differing tax and structuring needs. Such needs may also differ in respect of US and non-US investments being made by the fund, or investments in business which hold significant real estate, for example. To deal with this complexity and to allow for flexibility at the outset, we are seeing an increased use of feeder vehicles and AIVs, and we expect this trend to continue.
These dynamics are causing sponsors and their advisers to explore different structures and jurisdictions for their fund and manager structures, increasingly resulting in the overall structure being multi-jurisdictional.
Impact of the Secondaries Market on Fund Structuring
The secondaries market has grown exponentially over the last couple of years. Global transaction values hovered generally in the USD20-30 billion per year range from 2013 – 2016 (2014 being significantly higher), but then increased sharply in 2017 to around USD45 billion and current estimations for 2018 are around USD66-72 billion. It is as yet unclear what the normalised annual volume will be, but it is also hard to see it reducing back down to pre-2017 levels. Although a lot of the recent increase has been fuelled by significant GP-led processes and portfolio sales, the market has become far more accessible to investors generally.
We think this has changed the way investors view fund investments. We see a greater feeling of liquidity and an ability to rebalance portfolios over time. This gives investors more confidence that they will be able to get liquidity before the end of the fund's life if need be.
In 2019, this coincides with an increasing focus on patient capital. Sponsors have greater flexibility to look at fund structures and terms which do not necessarily fit the standard model.
Longer-life closed-ended vehicles are becoming increasingly common, reflecting the reality of life for most sponsors over recent years and often fitting better with their investment strategy. Some of these funds (particularly where the term stretches beyond, say, 15 years) have liquidity windows which may contemplate the GP accessing the secondaries market to provide the liquidity. However, even without such windows we see investors being more willing to entertain longer terms in the belief that they can get liquidity if they need to.
Fund Terms – GP or LP Friendly? A question of Leverage
GPs of oversubscribed funds have successfully pushed terms in their favour in the past year and are likely to continue to push for better terms in 2019. This is frequently seen (as an example) in relation to distribution waterfalls which have become somewhat more bespoke, with some GPs pushing for deal-by-deal elements, lower preferred returns and super carry rates, for example. GPs in this position have been successful in creating both momentum and scarcity to drive terms in their favour. The so-called "flight to quality" has continued with investors tending to focus on fewer GP relationships and chasing hard after the best performing GPs.
That is not, however, a fair reflection of the market as a whole. Most GPs are having to work hard to raise capital and must negotiate with their LPs. The difference in leverage between the two positions is stark. While we are not necessarily seeing a strong shift towards LP-friendly terms in this situation, we are not seeing a move towards GP-friendly terms either.