Structuring Investments in Private Equity Companies and the Rise of the AMC Structure

view original post

Although the history of modern private equity investments goes back to the beginning of the last century, they didn’t really gain momentum until the 1980s. That’s the date when technology companies got a much-needed boost from venture capital.

Many fledgling and struggling companies were able to raise funds from private sources rather than going to the public market. Some of the big names we know today – Apple, for example, were able to put their names on the map because of the funds they received from private equity.

Even though these companies could promise investors big returns, they may not be readily available to the average investor. Firms generally require a minimum investment in the millions of USD or more, which means private equity is geared toward institutional investors or those who have a lot of money at their disposal.

That is why VC funds are attractive to investors. They offer the investor the opportunity to invest in a diversified portfolio of opportunities that have been analyzed by experts and access to the portfolio without having to invest hundreds of thousands of dollars in a single company or fund. 

But before you make that investment in a private equity fund, you should have a good grasp of these funds’ typical structures.

Private Equity Fund Structure

  • Private equity funds are usually closed-end funds that are not listed on public exchanges. Lately, VC funds are registering themselves on exchanges (especially on the Swiss Exchange SIX) and this gives the investor extra protection, regulation, administration, and more. The fund then can register for secondary trading and the client can access the investment using regular trading rooms of the banks. The Structure will then have objective valuations provided by the fund administration team as defined in the fund’s prospectus. 
  • Usually, their fees include both management and performance fees.
  • Private equity fund partners are called general partners (GP), and investors are called limited partners (LP).
  • The limited partnership agreement outlines the amount of risk each party takes along with the duration of the fund. (This is the alternative to a prospectus). 
  • Limited partners are liable for up to the full amount of money they invest, while general partners are fully liable to the market.

Private Equity Fund Basics

Private equity funds are usually closed-end funds that are considered an alternative investment class. Because they are private, their capital is not listed on a public exchange. These funds allow high-net-worth individuals and a variety of institutions to directly invest in and acquire equity ownership in companies.

Funds may consider purchasing stakes in private firms or public companies with the intention of de-listing the latter from public stock exchanges to take them private. After a certain period, the private equity fund generally realizes its holdings through several options, possible initial public offerings (IPOs), or sales to other private equity firms.

Unlike public funds, the capital of private equity funds is not available on a public stock exchange.

For the most part, private equity funds have been regulated much less than other assets in the market. That’s because high-net-worth investors are better equipped to sustain losses than average investors. But lately, as these funds become more and more available to families that have accumulated wealth to finance retirement, the government has looked at private equity with far more scrutiny than ever before.

The Move to Actively Managed Certificates on The Swiss Stock Exchange 

Actively managed certificates (AMC) are nothing new on the market, but they have become increasingly popular in recent years due to their flexibility, and application options and are following a steady growth path. Unlike most other structured products, AMCs have unique features that allow you to select and fine-tune the components of your underlying strategy actively. 

Lately, The AMC has Become The Vehicle of Choice for VC Funds 

There are several ways that asset managers can manage their clients’ assets. 

Managing individual customer accounts is not scalable and can become inefficient as the number of customers increases into alternative allocations. In addition, various investments such as real estate funds and private equity funds have a high minimum investment amount or are restricted to institutional investors. These restrictions are why many asset managers develop their own investment instruments. 

Known and widespread fund structures are, however, in many cases, not accessible or appropriate due to various restrictions. For example, with several months of start-up time, high installation and operating costs, low flexibility, marketing restrictions, and official restrictions also a fund structure may not sufficient, for investment vehicles with an AuM of less than USD 50 million. 

The alternative that overcomes all of these limitations and has become popular in the past decade is the Actively Managed Certificate (AMC). Actively managed certificates are advertised as the fastest, most flexible, and most profitable investment vehicle available today. 

AMCs are now more mature and have proven to thrive over funds or other structured products. The legal aspects are very simple and offer the asset manager a seamless integration of unique asset classes that have not been traditionally regulated into the client’s portfolio. 

AMCs are also of great interest to customers. They offer real market diversification and timing. Whenever an asset class emerges as an opportunity, the AMC responds in a way that captures customer objectives. Unlike traditional funds, AMCs can be customized to respond quickly to customer needs. They show excellent transparency and are easy to monitor. They have very competitive payment structures in comparison to traditional funds. 

The article was written in collaboration with Dr. Boaz Barak:

Dr. Boaz Barak the CEO Of Bonart Financial Solutions Ltd (Zurich) has over 30 years of experience working in global banking and investment firms. Dr. Barak has an international career, focusing on wealth management and transforming innovative financial products into bankable solutions, and he served on the senior management team of the two leading Swiss banks, Credit Suisse, and UBS.

Dan Dobry was the founder of the Union of Financial Planners in Israel (UFPI), served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 – 2018 and from January 2019 is a member of the Committee for Standards and Qualifications for the European Union (SQC).