A private affair

For individuals and groups looking for an investment they can"t get through the mainstream, private fund structures are providing a viable alternative, as Dave Waller discovers

Investors come in all shapes and sizes, from ultra-high-net-worth individuals and pension funds to actual pensioners seeking an alternative to a cash-stuffed mattress. For any of the former group looking for a cost-effective and unregulated structure, the private fund structures being domiciled in the Channel Islands have proven highly popular.

Because of who these funds are targeting and how they are put together, they"re able to exist beyond the scope of regulation - and thus deliver a whole heap of benefits to more seasoned pros.

“People are generally "tapped up" for a private fund in a very institutional space,” says Ben Morgan, a Partner in the Corporate and Finance Group at Carey Olsen, discussing the type of private fund typical of Guernsey. “They don"t put ads in papers or pound pavements knocking on grannies" doors. It"s something where very big investment banks or private equity houses reach out to mega-wealthy individuals, institutions and pension funds and say: "We"re doing this, and we"re only interested in lumps of £5 million to £10 million. Are you interested in getting involved?"”

The term "private fund" may be applied to a range of vehicles, but these will typically be created with a specific project in mind, and target a group of investors who quite often know each other going in. The fund will then be structured in a way that best suits everyone involved. The asset and investors come first, and the form follows.

Private funds vary in form. While Guernsey doesn"t offer a formalised version, Jersey has established its Very Private Fund, a versatile vehicle subject to only minimal regulatory supervision. The strict constraints are that it must have no more than 15 investors, with a minimum investment of £250,000 each, making a minimum total of £3.75 million. The logic is that if you"re the type to invest with only a handful of other investors, and with that kind of money, you"ll be able to look after yourself.

“We get a lot of enquiries about Very Private Funds,” says Graham Paton, Head of Funds at Minerva in Jersey. “They"re cost-effective, flexible and easy to set up, but they"re for appropriate, sophisticated professional investors only. They"ll be closed-ended funds, and typically with a five- to seven-year life.”

Unburdened by regulation

The technicalities may differ between the islands, but the private funds in both are fuelled by the same logic. They"re generally used to access institutional money for a range
of complicated, esoteric or illiquid assets - think property, private equity, infrastructure and cleantech. And they"ll usually be aimed at a sole specific investment: buying, say, one business to turn it around, or a single piece of real estate to develop. Paton recently encountered a fund for investing in a wind farm, for example, and another in a luxury safari lodge in Masai Mara, Africa.

“A single asset doesn"t count as a fund in the eyes of the regulator as there"s no spread of risk,” explains Sam Shires, Group Partner at AO Hall. “These private fund structures are closed, and so resemble private equity or real estate structures more than hedge funds, where you can put in a request to get your money out every quarter. Hence it"s usually private equity managers and real estate managers we see using them.”

Similar vehicles are available in Luxembourg, Dublin or any sophisticated financial centre that"s keen to deliver the enticing benefits of private structures. Primarily that"s the cost saving in set-up and operation you get from avoiding regulation. Meanwhile they are still administered by a regulated body - in the Channel Islands a JFSC or GFSC licensee - thus providing a degree of protection and a level of comfort to investors as to the integrity of the vehicle.

And that sense of security runs both ways. “By privately placing, a manager can control the environment for the fund, because they"ll have a sense of the investors they"ve let in,” says Morgan. “You"ve probably got a bunch of people who, even if the fund doesn"t end up doing what it says on tin, have gone in with their eyes open. They know the deal - that they could get their investment back with interest, or get nothing.”

All for one

As for who"s using them, it tends to be institutional or pension fund money, or super wealthy individuals who know each other, as indicated earlier. This could be an investment club or a family where there are potential inheritance issues.

“A portfolio of land or art is difficult to divide evenly,” says Wayne Atkinson, Senior Associate at Collas Crill. “If you put it all in as assets of a fund then each family member winds up with, for example, a third of the fund, rather than the rather more fiddly third of a painting. While managers in a larger private equity fund will take money from anywhere to put into a "blind" pool, these investors like to have a closer, more direct relationship with the fund manager, and thus more influence over the investment.”

In terms of how popular they are, Paton explains that levels of enquiry are generally much higher than other funds, while Shires says that Guernsey"s equivalent vehicles are gaining popularity all the time - especially for one-off real estate and private equity investments.

Private funds are also proving a popular vehicle for start-up managers wanting to build a track record (see box), while larger fund managers may use an unregulated private vehicle as a sidecar fund alongside the main fund. Under the traditional private equity model, the fund manager would go out and raise pool and then find investments for it. But the standard now is to offer certain key investors parallel investments alongside the main fund on special terms.

“We"ll be seeing more of private funds,” says Atkinson. “We"ll see more friends and family structures. But we"ll also see some existing private funds growing into something more substantial too - if the current private group of investors comes out happy, the next structure they launch will be larger and no longer private.”

As long as it remains hard to raise funds, as it has now for several years, private structures should remain popular. Anything that"s quick and easy to set up, with lower costs, and which gives a greater voice to investors is likely to succeed.