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Q&A With Joanne Huckle: Innovation In Private Equity Structuring – Fund Management/ REITs

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In this Q&A, investment funds partner Joanne Huckle, who was
recently a guest speaker at GAIM Ops 2022 in the Cayman Islands,
discusses different structuring models for private equity firms,
plus how they are adapting their strategies and planning for the
future.

What are you seeing in terms of structuring in the
private equity market?

Historically, fund structure has been something that managers
have not wanted to use to showcase innovation or uniqueness. There
is a tried and tested formula as to how to structure private equity
funds and whilst managers want to show how their strategy is
different or how they have developed a proprietary deal flow, the
fund’s structure isn’t typically something managers want
to differentiate. In fact, an unusual structure could unnecessarily
prolong investor due diligence. Investors are very familiar with
the exempted limited partnership for Cayman PE funds, so why
reinvent the wheel and introduce the need to explain the
differences – for example, between a share, an LP interest and a
unit in a unit trust?

However, we have over the past few years started to see more
innovative structuring, which is, in no small part, connected to
the blurring of the once clear distinction between hedge funds and
private equity funds and those two previously quite separate
industries.

How and why are the private equity and hedge fund
industries blending?

This is a trend that has been driven both by managers and by
investors; we have seen hedge fund managers looking to more
illiquid asset classes for alpha generation and we have seen
investors willing (eager even) to lock up capital to get better
returns.

The result is that some of the structuring tools used in one
industry are now being used in the other. For example,
master-feeder structures (originally a hedge fund construct) are
now being used for some PE structures. Similarly, we continue to
see the increasing popularity of side letters (originally used more
in private funds). There has been an increase in the use of
platforms to create maximum flexibility around strategies and
portfolios and even to afford investor opt in/opt out mechanics.
This is more typically through the use of Cayman SPCs, but recently
I have seen an uptick in using partnerships with separate SPVs
underneath to house different investment opportunities.

Perhaps the biggest convergence of all is the use of
“hybrid” vehicles. These can be very bespoke and allow
some creativity in the structuring; they usually look, in part,
like a closed ended vehicle and, in part, like an open ended
vehicle.   

What else are you seeing as early stage
trends?

The other trends in structuring that we are seeing are really
driven by regulation. For example, some of our larger managers are
using Luxembourg parallel funds, alongside their Cayman funds, to
raise capital in Europe. These parallel funds typically invest and
divest at the same time as each other in a common portfolio of
assets. Sponsors like the ability these structures provide to
customize fund offerings for large investors.

There also seems to be a shift in terms of what both GPs and LPs
are looking for in a GP-LP relationship. In many instances, it is
not just cash that LPs are looking to (or able to) contribute.
Broader and more involved relationships are being sought and the
negotiation of co-investment rights will often consider this wider
GP-LP relationship (for example, we have seen LPs offering valuable
ESG related support to the GP).

What are you are seeing in terms of independence and
governance trends? 

This really comes back to the coming together of the private
equity and the hedge fund industries. Hedge fund investors have for
a long time expected to see independence on the board of the funds
they invest in, but this hasn’t been a requirement in private
equity funds. As more hedge investors move to investing in closed
ended funds we are (albeit slowly) seeing requests for independent
representation in private funds, this can be via a management
committee baked into the LPA or through independent managers or
directors at the GP level.

As private funds have become regulated funds in Cayman, with new
and evolving CIMA rules – as well as other regulatory regimes such
as AML, economic substances, FATCA/CRS – it can be useful to have a
director on the ground in Cayman to help oversee compliance,
although this is not a statutory requirement.

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