The growth of private funds

Private funds are redefining the boundaries between private wealth management and traditional investment funds by offering bespoke, flexible structures for individual investors and families.

Traditional investment funds function as a collective investment structure – they are simply a vehicle for a range of investors to pool their money together and invest in a project, or multiple projects. That is a tried and tested model with which we're all very familiar. What we are seeing now is using the same vehicle for a single investor or family to provide them with a structure to invest in one or more projects.

The structure provides a pooled, organised vehicle for the family's assets and can define their interests and rights in relation to the assets. It may also provide future opportunities to open investment to others outside of the family to tap into a larger investment pool. This is a different and largely untapped market for fund managers and fund administrators to be thinking about. 

What has motivated this trend? 

Clients are not always establishing new investments – we have seen instructions where they have been moving family-held investments out of one structure, and into a private fund structure, because they saw it as a much more flexible option.  

In one case the clients were an international family who have UK-based real estate assets worth approximately £400 million owned by different offshore companies. The thinking was that as time went by there were more family members and an increasing risk of the shareholding in the companies becoming more widely spread. 

The solution was a private fund – with assets on that scale it was important to put some professional management and structure behind them, and to allow everyone to contribute their respective shareholdings in a new fund vehicle - and finally to distribute the shares so that all the family members became passive owners. 

So, in this example, we were not establishing a fund vehicle in order for that family to invest in new things, we were taking existing investments and effectively putting a fund structure around that for them. The assets in this case have been real estate – but there is absolutely no reason why it needs to be limited in that way, it could be any asset class.   

That new structure adds new options. The investment manager or one of the family members who is qualified in this area - can go out and borrow to increase the portfolio. Moreover, a fund is regulated and recognised and so more attractive to third party investors. They then have the ability to offer shares in the fund to third parties – the family vehicle could potentially become a vehicle used by third party investors. 

Where are we seeing private funds? 

We are seeing them across all our jurisdictions – and particularly in Guernsey, Cayman, BVI and in Jersey – the regulators and legislators in these islands have developed new “private investment funds” products which restrict the number of investors, establish a minimum investment and prohibit or limit retail public offerings in return for a less demanding regulatory regime than would be applied to funds offered publicly to retail investors. 

How is this type of fund likely to develop? 

As an alternative to trusts, private funds have a role, and that's driven by the value of the assets and the changes in the profiles of beneficiaries as families grow and develop in sophistication. They are quite different but in Guernsey there is no limit on the legal vehicle that you use – company, limited partnership, or unit trust. 

The factors motivating clients to choose Guernsey are also those attracting professional fund promoters to the jurisdiction, rather than others. These include a familiarity with the jurisdiction and its structures, robust infrastructure and connections, a high-quality regulatory framework with diverse regulatory options, excellent service providers, a convenient timezone, and a reputable legal system. 

How can Ogier help? 

We're well-placed to deal with this kind of work – Our practice spans Funds and Private Wealth services and it is the combination of these two different elements which is so important. We operate in the three key jurisdictions for this kind of activity – Cayman, Guernsey and Jersey.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

Regulatory information can be found under Legal Notice