Raising capital from investors is a crucial aspect of any investment fund and, therefore, a particularly important topic for fund sponsors. This article explores three alternatives to the classic model of raising capital from investors.
1. Co-Investment Vehicles
Co-investment vehicles allow investors to invest directly in a dedicated vehicle alongside existing flagship funds, enabling them to support specific and predetermined investments. These vehicles are generally offered to investors with lower management and/or performance fees, or even excluding these fees altogether, thereby increasing net returns.
From the sponsors’ perspective, co-investment vehicles provide access to additional capital and enable investments that would otherwise be unavailable to the main fund by itself. Since these vehicles are intended for specific and known investments/investors from the outset, sponsors can draft related documents very specifically while remaining aligned with the main fund’s documents.
2. Secondary Market (LP)
A secondary transaction refers to the scenario when shares held within a fund are sold or transferred before reaching the end of their planned investment cycle. Liquidity is one of the main advantages of the secondary market. The possibility of exiting a fund earlier through secondary transactions allows investors to mitigate the risk associated with a fund, a particular vintage year, or to provide immediate cash flow if necessary, or even to reallocate within their overall portfolio.
For buyers, secondary transactions are generally carried out at a discounted price compared to the initial purchase price, allowing them to avoid the decline due to the “J curve.” This also enables investors to make initial investments without having to do so during the initial capital-raising period.
3. Continuation Funds
A continuation fund is an investment vehicle designed to extend the holding period of one or more assets of an existing fund that has reached or is approaching the end of its life cycle. The primary objective of a continuation fund is to allow promoters to continue exploiting certain assets and benefit investors (existing or new), while offering liquidity options to existing investors who wish to exit the existing fund.
Continuation funds offer several advantages for both sponsors and investors (existing or new):
- Flexibility for Investors: Investors can make decisions based on their liquidity needs and investment strategies, either by investing in the continuation fund or receiving their distribution from the initial fund.
- Retention of Excellent Assets: Sponsors can retain excellent assets without having to sell them to third parties or competitors.
- Strengthening Relationships: The opportunity to develop and strengthen relationships between the sponsor and investors seeking to establish long-term partnerships.
By considering these three alternatives, fund sponsors can attract investor capital more effectively and provide tailored solutions that meet the diverse needs of their investors.
An article written by Ashurst Luxembourg Investment Funds department.
