Private equity investment funds are bespoke structures with their own set of rules and regulations as determined by the articles of association in the case of a Cayman company, or the partnership agreement in the case of a Cayman Islands Exempted Limited Partnership (ELP). Investors need to have a clear idea of investment parameters, such as the type of investment group and its likely duration, so a common term is a limitation on the duration of the investment period - how long the fund has before all the pool of investment money is actively invested. With the current market uncertainty managers have found it difficult to find investments which match the restrictions in the time frame the investment structure decrees they have available, and rather than giving up hope and starting again, they are looking to find ways to extend the investment period to take advantage of new opportunities.
What are the restrictions?
Fund documents usually permit follow on investments after the expiry of the investment period but extending the investment period for new investments is usually restricted. Common requirements to extend for new investments include obtaining majority investor consent. It is also usual to see fund documents provide that any changes to fund documents should not result in limited partners being exposed to more liabilities than they originally contracted for. So if Investment Managers cannot find a suitable investment for all of the partnership's pool of capital within the date specified in the Partnership Agreement (PA), but they find that they can invest that money at a date beyond the specified date, are they exposing their partners to more liability than that for which the partners have contracted even if the investors' capital commitment amounts are not increased? Who is liable if the new investment is not successful? Do they just leave the pool of capital uninvested? Estimates are that there is around US$150 billion of uninvested private equity capital which needs to be invested by the end of this year. Rather than leave that capital idle, managers are going back to get the investor consents and extend the time limits.
Asking for more time
The simplest option is to go back to its investors for more time. Investors recognize that there are simply not enough places to put their money. With only a halting recovery, and with investors ever more risk averse, suitable deals are hard to find. Rather than abandon their aversion to risk and have their capital invested hastily to meet an artificial deadline, most investors are willing to allow managers to extend the investment period. With such a glut of money to be invested and only slowly increasing opportunities for new investments in the offing, extending the time for investment is a natural step. Some investors are also willing to allow their managers to vary the balance of investments held, if there is a clear advantage in so doing.
Keeping it legal
Any alteration of this sort will need to involve a detailed analysis of the provisions in the fund documents (usually the terms of the partnership agreement as most Cayman private equity funds are established as Cayman Islands ELPs) to establish what procedures and consents are required to make any changes to them which are needed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.