The private funds space is constantly evolving. In this article, we take a closer look at some trends in the industry that sponsors, investors, placement agents and advisors should be aware of.
Seed Capital Funds
More commonly, fund sponsors looking to form new private funds are accepting investments from large institutional investors in the form of “seed money” to defray the costs associated with forming a fund. In exchange for providing the seed money, the investor usually gets a profit sharing stake or in some cases, equity, in the entities managing the fund or the general partner of the fund. It is also not rare for the sponsor to grant future participation rights to the investor within the actual fund.
The growth of the secondary market for unfunded commitments of existing investors to fund private funds has been rapid the past few years. The secondary markets give investors the opportunity to purchase from existing investors the remaining unfunded commitment obligations of the existing investors to access a particular fund’s investment portfolio.
Secondary markets provide liquidity for investors in private funds which may be attractive to existing investors for various reasons. The existing investor might have an unforeseen immediate need for cash or perhaps its investment strategies have changed since its initial investment. Conversely, the investor looking to purchase an interest in a private fund through the secondary markets might want to take advantage of purchasing an interest in a private fund at a discount to its net asset value.
Another trend is the increasing use of private investments in public equities (PIPEs). The concept of PIPEs has been around for some time now but the financial crisis of 2008 has led the industry to revisit PIPEs as a possible investment strategy in private funds. PIPEs typically provide a form of financing to companies whose shares are registered and trade publicly on an exchange. For a public company, the advantage of using a PIPE investment is avoiding a registered public offering and the costs associated therewith. The advantage for an investor is that the shares are usually bought at a discount. However, PIPE investments don’t carry the control aspect normally associated with private fund investments; that is, PIPE investors are not involved with management or determining the direction of the company.
For more information regarding the above trends or the formation of private funds, please contact an attorney in the Klinedinst Private Funds Practice.
Klinedinst PC’s Private Fund team represents clients in the formation of a wide variety of domestic and international private funds, from start-up funds to established high value funds. In addition, we work closely with our clients to provide counseling and advice in general fund matters after the formation stage. The opinions expressed in this newsletter are general in nature, and are not meant to provide specific legal advice. For more information, please contact Christian Fonss or Mariel Estigarribia. No attorney/client privilege is created or assumed by reading this newsletter.