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Philip Millward, partner, Walkers

Opinion: Cautious optimism in Cayman for primary private equity fundraising


Statistics and anecdotal evidence from the first months of 2011 suggest that a significant upturn is underway in primary private equity fundraising, and offshore jurisdictions are set to benefit from the trend, according to Philip Millward (pictured) and Julian Ashworth, a partner and senior counsel respectively with Walkers’ private equity group in the Cayman Islands.

Anecdotal evidence and attorneys’ workloads during the first quarter, along with successful closings for some of the industry’s leading names, suggest cause for cautious optimism in the primary private equity fundraising market this year.

The key indicators are positive and supported by renewed enthusiasm for, and a revival of, buyout activity, alongside huge private equity interest in the Latin American and China markets, together with improved exit opportunities.

Against the backdrop of an evolving regulatory landscape, there is also increased interest in jurisdictions such as the Cayman Islands that have robust regulatory, anti-money laundering and tax information exchange regimes.

This year looks as if it will bring a significant upturn in primary fundraising compared with the recent past. New products featuring among recent fund launches seen by Walkers include funds targeting mezzanine finance and commodity-based investments, as well as others with defined geographical focus, especially on emerging markets in Latin America, China and Africa.

Bargaining power has been recalibrated, with the pendulum swinging back toward the centre. Although investors continue to have meaningful sway, negotiations tend to work toward an alignment of general partner and investor interests on a case-by-case basis, with consideration given to a manager’s deal flow capability and investment pace.

In this regard, there has been much debate on the significance of the Institutional Limited Partners Association’s recently-revised investment guidelines. The broad objectives of improving investor reporting and transparency, strengthening the alignment of interests and enhancing partnership governance have been endorsed by many significant fund managers, including KKR last month.

Some of the specifics, however, such as GP clawbacks and waterfall mechanics and the extent of advisory board powers, remain contentious because they are seen as inflexible and even impractical in certain circumstances. As a result, the guidelines appear more likely to evolve into a platform for GP-investor negotiations than an industry checklist demanding compliance.

There have been some very notable closings in the first quarter, for example by BC Partners, which raised EUR4bn in the first close of its latest fund this month, exceeding many commentators’ expectations. The European stalwart has joined other names either closing or looking to raise funds this year, such as Montague and Cinven. Meanwhile, data from the Private Equity Growth Capital Council indicated that private equity-based buyout activity reached USD221bn in 2010, its highest level since 2008.

In Asia, amid growing comfort with emerging markets, China has been the beneficiary of significant international attention, which leading global players such as Carlyle, KKR, Blackstone and Morgan Stanley lining up to establish targeted funds. Walkers in Asia has seen a strong rebound in fund formation, with real estate a particularly hot sector, as well as robust activity in pre-IPO equity and debt financing, mergers and schemes of arrangement.

The climate for buyout activity is also cautiously favourable, with sufficient time since the market downturn to reassess the situation. There appears to be a closer alignment of price expectation between buyers and sellers and a more sustainable approach to leverage and lending patterns. This also coincides with several larger funds nearing the end of their investment periods, which potentially represents a catalyst for some market activity.

On the exit front, opportunities have broadened over the past 12 months. The rebound in stock markets has made prospective initial public offerings more attractive, as evidenced by hospital operator HCA’s USD3.79bn IPO in March, the biggest ever private equity-backed IPO in the US.

A number of large offerings are expected to follow in the US despite market volatility resulting from global events. There has also been widely-reported enthusiasm for private placement of internet-based businesses that are leaders in their respective fields.

Trade sales have been robust and strong trade buyers are well positioned to meet or outbid private equity bidders in competitive processes. Secondary sales remain strong thanks to activity by general partners, albeit not necessarily with the same high profile as a year ago, while refinancing remains an attractive partial exit option because of historically low interest rates.

Regulatory changes affecting the industry following the financial crisis have also brought new opportunities. We have already seen a flurry of deals as the likes of HSBC, Citigroup and Barclays spin out their private equity units, following the introduction of the Volker Rule and the Dodd Frank Act in the US. Private equity funds may have the opportunity to acquire assets to be divested by investment banks, resulting in greater secondary market opportunities involving ready-made portfolios from managers with good track records.

From an offshore perspective, we are seeing increased demand for Cayman-domiciled products. According to the Cayman Islands General Registry, January and February 2011 saw the formation of 272 Exempted Limited Partnerships, a 10 per cent increase from the same period in 2010 and up 76.6 per cent from the first two months on of 2008.

This may well be linked with the increase in the number of new private equity fund formations seen since the new year, combined with increased activity from general partners with multiple funds under management with common investment strategies that have established aggregator vehicles to make investments into underlying target companies.

We expect this demand to continue given Cayman’s willingness to embrace the requirements of new regulatory regimes in the US and Europe, coupled with its reputation for maintaining a robust regulatory, AML and tax information exchange regime.

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