Chapter 3 - Fund Structures And Legal Vehicles Flashcards
Categories of investors as defined by capital markets?
Retail investors
Afforded highest level of investor protection, limited access to resources (such as professional advice and time to research investments) required to fully consider investment - investing in smaller amounts
Institutional investors
Generally a business investing large quantities on behalf of others (insurance cos, pensions) deemed to be more familiar with risks of investing and afforded less protection because of this
Sophisticated investors
Deemed to have significant experience - usually required to confirm this in writing before investing. Include HNW and those working in the industry
What factors impact fund structuring?
The structure of a fund is defined early one and is based on:
The specific transaction objectives to be achieved
The targeted investor base
Accounting consideration
Regulatory considerations
Commercial considerations
Who drives the creation of a fund?
The creation of a fund is driven by the fund manager who will seek to establish a fund based on an investment opportunity identified
Fund manager seeks to make a profit from the creation of the fund - payment of management fees and potentially performance fees as well
Overall objective of fund is to make profit for manager and investors - underlying specific objectives vary based on fund type
What are the main type of funds?
Mutual funds
Could be bond or equity as underlying asset - focus on specific market
Performance of fund directly linked to performance of underlying asset
Mutual bond fund tend to less risky than mutual equity fund
Available to all type of investors
Money market fund
Invest in securities that behave like cash - treasury bills and certificates of deposit
Available to all types of investors, relatively low risk, high liquidity and can provide reliable income
Private equity and venture capital funds
Intended for sophisticated all very wealthy investors and institutional investors
Focus on business opportunities to provide very high returns (such as buyouts, acquisitions of privately owned companies, restructurings mergers, distressed assets)
provides high returns but tend to be illiquid and very high risk
Real estate funds
Invest in existing assets for income or development properties for capital growth or a combination of both (synthetic real estate)
tend to be available to all types of investors not very liquid
less scope for diversification .
but good addition to about already diversified portfolio
Infrastructure funds
Funds set up by governments to access private funding
aim to fund large-scale infrastructure projects which they can Pinot fund themselves
available to all types of investors
government funded so tends to be less risky and provides regular income
Esoteric and hedge funds
Intended for sophisticated and very wealthy investors as they tend to be less conventional and arguably riskier
Set up to provide a higher return than market - high alpha driven
What are a fund’s distinguishing characteristics?
Pooling is assets
A number of investors contribute to a pool of assets to be invested
Profession advice and expertise
Fund will be managed by an experienced manager and team - some investors may not otherwise have access to to level of expertise
Economies of scale
Achieve through pooling of assets and sharing of costs - ultimately each investor only pays a relatively small amount
Fund structures what impacts on the selection of a fund structure
Fund is created if an opportunity is identified by the manager and if sufficient demand exists in the market
A number of factors impact on the selection of the legal structure of a fund - the jurisdiction of choice and their rules will also impact - pick jurisdiction with favourable legislation
Tax
Consider most tax efficient manner of structuring the fund - jurisdictions with low/ nil tax and double tax treaties in order to minimise tax liability for investors
Return
Nature of the return expected by investors could be capital/ income or a combination of both - have to consider what is permitted in relation to each structure in terms of how to pay investors their returns - return could in the form of cash or capital (accumulation of units)
Entity type
Unit trust, limited partnership or company - each entity has their own characteristics and limitations which should be considered when establishing a fund - guidance from legal and tax advisors
What are the three main entity types available in fund structuring?
Limited partnership
Limited partnership - transparent for tax purposes - income attributed to limited partners - general partner operates the fund and has unlimited liability (usually a ltd co) for a fee - limited partners liability is limited to amount committed
Limited liability partnerships
Combination of LP and company - combining limited liability with flexibility of a limited partnership - most popular onshore
Unit Trust
Requires a trustee to be appointed - responsible for the management of the trust and its assets
Governed by terms of trust deed
Investors hold units in the trust
Like cell companies steerage pools of assets can be created
Company
Limited liability - limited to amount left unpaid on shares
Can be cellular or non cellular
Cell companies allow various pools of assets each segregated from the other to be created
Cell companies - different types and their characteristics
Unincorporated cells
Each cell is governed by the core also known as the PCC
Each cell referred to as a protected cell - they do not have their own legal personality
Each cell has own shareholders and assets - assets are segregate and separate from those of the core and other cells - non-recourse
Common board for the PCC and the cells
Cells cannot transact with each other
Incorporated cells (ICC)
Each cell has own legal personality
Also has a core which governs the cells
Incorporated cells can transact with one another
ICCs can be incorporated as non cellular entity whilst still sitting under the umbrella of the core
Share a common board
Flexible entities allow creation of separate funds while under same management
Costs of the core are met by the cells - core usually does not undertaken any business activities
Although cells will need to be established and obtain regulatory approval - reduced timescales can be achieved as they are formed as part of a structure which the regulator is already familiar with structure
Reduced overall cost in terms of establishing and running new funds - shared board etc
Consolidated structures - to allow various methods of investment into a fund
Co-investment or side by side investment vehicle
Secure significant investment to the fund but on different terms to the main investing route (i.e. Discounted management fees)
Parallel vehicles
Similar to co-invest structures - set up to allow investment in same pool of assets alongside another participant where different investor types require differing treatment
Master and feeder structures
Master is established to invest directly into and manage the assets - feeder is established to accept investor subscriptions which are then invested through the master into the fund
Fund of funds
Fund established to invest into other funds - underlying assets wil, only be funds
Series or vintages
A family of funds which share similar characteristics - such as common manager or investment premise
What are the key documents of a fund?
Offer document/ prospectus
Key marketing document and legally binding contract between investors and fund - on completion and acceptance of an application form
Statutory documents
Mum & Arts, trust deed, limited partnership agreement
Application / subscription form
Completed by the investor and submitted to the fund with relevant information and CDD - fund will consider whether to accept investment
Adherence Agreement
Required for Unit Trusts or Limited Partnerships - required in order for investor to become party to overarching agreement
Investment management agreement
Scope and parameters of services to be provided by manager to fun - sets out their entitlement to fees from the fund for services provided -biding
Custodian agreement (where applicable) Scope and parameters of services to be provided and fees due for services - binding
Administration Agreement
Scope and parameters in relation to the provision of administrative services to be provided to the fund - sets out fees due to be paid
