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Alternative Private Equity Structures

Although they are still the norm, the traditional blind-pool/committed-capital fund structure has been challenged by the harsh fundraising climate. New alternative solutions and new fund terms are appearing. Some of these structures, such as the managed accounts and pledged funds, are not really new—they just haven’t been traditionally used by private equity. Some lawyers refer to some new structures with significantly modified fund terms as fund-lite structures because they are significantly simpler/lighter than the typical traditional blind-pool fund. Investors who want more flexibility, more liquidity, shorter fund life, transparency, or a more hands-on approach to PE investments like these structures. Some of these fund-lite structures are briefly outlined here, in case you are having difficulties raising a traditional PE fund or if your LPs are challenging the traditional blind-pool fund structure:

  • Deal-by-deal structure—The vehicle is set up for one or more specific deals, and a “sponsorless GP” raises money for each deal.
  • Pledged funds—Investors have not contractually committed to invest but have “pledged” (through a participation agreement) certain money to invest in specific deals as they choose from time to time. A formal fund structure – separate limited partnership is set up for each investment, and every time a new investment is found, the manager offers to the investors the opportunity to invest in that deal.
  • Managed accounts—This is not a formal fund structure, but rather a segregated portfolio of assets owned directly by the investor. It offers the investors greater liquidity, and the scope of the account could be tailored to meet individual investor requirements.
  • Combined (“combo”) funds—A combination of vehicles (for example, a traditional committed-capital fund and a pledged fund), i.e., partly committed and partly pledged.
  • Annual programs—Investors commit capital on an annual basis, and they are free to recommit at the end of the term or pull their commitment.
  • Investment clubs—They are more informal than structured funds, and the fees are for the “membership” of the club and on closing a transaction. It’s more common in angel investing but is moving into other markets.
  • Co-investments—They are becoming increasingly popular and are usually provided to special investors to sweeten their investment in the main fund by providing more beneficial conditions and/or allow investments on a deal-by-deal basis to boost investors’ returns.
  • Fund lites—It is usually a single-investment fund that retains the hallmark structure of a blind-pull fund, but with typically shorter term (5 to 7 years) and reduced fees; they usually have one or only a few limited investments held in them. They help first-time GPs gain a track record and help established managers bridge between fundraises or invest outside of their funds’ policies.

Other key differences, compared to a traditional PE fund, are shorter life, reduced scope of investment objective, reduced fees (on committed capital only), deal-by-deal carry, and more transparency, among other solutions lawyers are trying to bring to PE clients.

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