A handful of smaller U.S. private equity players think they have found a more convenient way to raise cash to fund U.S. deal flow: closed-end funds listed on London’s Alternative Investments Market. The idea is to tap European institutional investors to raise funds of $50-500 million by issuing shares in a publicly traded private equity fund. The proceeds can be used for multiple acquisitions and capitalizations for portfolio companies, which in turn can eventually go public on the AIM. So far, no one has raised a fund on the AIM to finance U.S. private equity deals.
The structure is appealing because dealmakers can raise funds with a contained group of institutional shareholders at a much lower cost than what they would pay in the U.S. to list the fund and for ongoing compliance costs. The AIM has also become an increasingly attractive option for small and mid-sized growth companies that have found it more difficult to get analyst and investor attention in the U.S. (CFW, 12/26).
“I’ve teamed up with two brokers who are proposing to raise a small private equity fund on the AIM of around $75 million to do about 10-12 deals in the U.S,” said Phil Tuttle, a private equity executive at Davis Tuttle Venture Partners in Houston. He added the as yet unnamed fund would provide the portfolio companies with the first three rounds of financing, and then he would look to take the newly formed or acquired entities public on the AIM. “It’s the conduit that makes sense right now and it provides a bridge to get other financings done for my portfolio companies.”
While private equity-like acquisitions could be done through a U.S.-listed specified purpose acquisition company (SPAC), Tuttle says he prefers having the flexibility to finance and acquire a number of different companies at the same time. SPACs are limited to one acquisition per fund and include terms that restrict management’s decision power when it comes to seeking out targets. An AIM-listed closed-end fund is treated like a regular corporation, which grants the issuer access to a broader base of investors without the $1-2 million in annual costs smaller U.S. companies face under Sarbanes-Oxley.
“We’re working on some closed-end funds, or venture capital trusts, that are an alternative to SPACs,” said Marc Blazer, head of investment banking at Cantor Fitzgerald in New York, referring to the closed-end fund structure. He added the vehicles would likely focus on real estate and energy deals. “It’s the equivalent of raising a progress fund.”
“We haven’t seen any U.S. companies do these yet,” said Delphine Currie, a corporate finance partner at London law firm SJ Berwin, but she adds this is clearly a developing trend as her firm has clients currently exploring the option. In the past, this type of investment fund tended to be set up through tax-saving companies based in Bermuda, Cayman, or the Isle of Mann, she said.
“Normally private equity funds are set up as limited partnerships, but what people realized over here is that in an LP structure they’re depriving themselves of funding from a number of important sources, such as U.K. pension funds which aren’t allowed to invest in private situations,” said Currie.