This article was first published in the Financial Times.
Against the backdrop of a stagnant IPO market, higher financing costs and dwindling deal opportunities, fund managers are increasingly turning to the divestment of portfolio assets to continuation funds as an alternative means of returning cash to investors.
The establishment of a continuation fund enables managers to transfer one or more portfolio companies to a new entity with an extended investment horizon compared to the original fund. Financing can be sourced from existing investors in the main fund, as well as new third-party investors. Given the urgency often associated with these transactions, there's a strong preference for swift execution, with stakeholders hesitant to bear the costs associated with establishing and operating the main fund.
In light of these factors, there's a compelling case for considering the formation of a continuation fund in a reputable international finance centre such as Guernsey, even if the main fund is domiciled elsewhere.
Why choose Guernsey?
Regulatory certainty and flexibility, tax neutrality, speed to market and cost efficiency have long been key attractions of Guernsey to prospective fund managers. These qualities are always high on the list of considerations for a manager looking to raise capital or structure investment vehicles. However, in the midst of a market downturn in which traditional divestment routes are harder to find, these qualities take on renewed significance to those looking to structure the disposal of a portfolio company to a longer-term vehicle.
In many cases, it simply won't be cost effective to establish a continuation fund in a jurisdiction in which the new vehicle will be subject to all the usual regulatory and operational costs of the main ('blind pool' and multi-asset) fund.
Guernsey provides an environment in which the level of regulation and its associated costs can be reduced accordingly where a continuation fund has only one or a handful of assets and few investors, who are not actively marketed to.
Case study
A fund manager has a fund approaching the end of its term. The fund has a number of remaining assets, which the manager believes can be further developed with additional time and capital. The fund also has valuable assets which the manager believes cannot be realised at an appropriate value in the current market. The manager has engaged with its investors and, whilst a number are supportive of additional investment in the portfolio and longer hold periods, a large number are having liquidity issues and want to exit the fund on schedule.
Context and additional information
With the support of its investors, the manager has decided to establish a continuation fund to acquire certain assets of the existing fund and facilitate additional investment into those assets.
As part of the transaction, existing investors will have the option to continue into the new vehicle, exit their investment or a combination of both. Additional capital will be raised from a mixture of existing and third party investors, which will provide liquidity to existing investors wishing to exit but will also generate additional capital to be deployed in existing investments. Transactions of this nature are complicated as there are a range of stakeholders with differing, and often conflicting, interests.
The timetables for entity establishment and required regulatory approvals in the jurisdiction of the current fund vehicle would require the manager to begin the process immediately, alongside its commercial discussions with investors, in order to avoid a delay to completion of its transaction.
This places additional pressure on the manager's operational teams who have to manage the regulatory process on top of the commercial process and run the timetables concurrently.
The Guernsey solution
This is where Guernsey steps in. The manager could defer the establishment/regulatory process for the new vehicle until it has more certainty regarding its requirements, following full consultation with the various stakeholders, by taking advantage of the fast-track formation and regulatory approval processes available in Guernsey.
The manager can focus on the commercial aspects of the transaction, without front loading costs. They can remain confident that, when necessary, the structure for the continuation vehicle can be established, regulated and ready to accept commitments within even the most ambitious of timetables.
By using a Guernsey structure, a manager could complete the entity establishment and regulatory approval process within the minimum of 20 business days that the Institutional Limited Partners Association recommends managers give to investors to consider their options in respect of the continuation vehicle. Strong consideration should therefore be given to Guernsey as a fast and cost-effective solution for continuation funds.
For more information about Guernsey's finance industry please visit www.weareguernsey.com.
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.
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