By Cindy Valentine and Ravi Chopra, King & Wood Mallesons
Although permanent capital structures have been used in Europe and the US for many years in various forms, emerging markets have trailed developed markets when it comes to alternative structures. While managers in emerging markets have been talking about, and in some cases having preliminary talks with investors or attempting to go to market with these vehicles, we have historically seen very little interest or success. Recently, however, we have started to see an increased appetite for raising permanent capital translate into permanent capital vehicle (“PCV”) structures being deployed in emerging markets, in particular in Africa.
Why a PCV and not a Typical Fund?
One of the key drivers for a shift towards PCVs has been the increased appetite for infrastructure and real estate investment across Africa. These types of asset are particularly suited to longer term vehicles, which allow longer hold strategies and the ability to ride out short-term volatility, and indeed have generally struggled to fit comfortably in the standard selfliquidating private equity model (“Typical Funds”).
Another driver for raising longer term capital for managers is the ability to fundraise as capital is required (e.g. on-going basis or via multiple rounds) for organic growth, rather than be limited to the typical 12-24 month fundraising period of limited-life Typical Funds. Fundraising in this manner can enable managers to use the track record of the existing asset base to attract prospective investors down the line – it is therefore an attractive option for managers with a light track record. Furthermore, eliminating the need to return to the market on a regular basis to raise money for successor funds or other investment vehicles arguably means there is less of a distraction from the business of investment management.
For managers, there is an attraction in that assets under management can be retained and therefore provide a more stable income stream. There is also the flexibility to step away from the typical 2% management fee and 20% carried interest format and adopt fee and incentivisation structures that are better aligned with the target asset class, for example, valuation, rather than realisation, based incentivisation.