The deal-by-deal model of investing can be attractive for both investment managers and investors, as an alternative to a traditional investment fund. Jersey, a popular domicile choice for fund vehicles, has seen an increasing number of investment vehicles established in the Island as part of such a strategy.
The concept is simple. The investment manager identifies a single investment opportunity, raises capital from investors to finance the investment and then establishes a dedicated investment vehicle (an SPV) to acquire, hold, and then exit the investment. Investors receive shares or interests in the SPV in return for their money, which cannot be used by the SPV for any other purpose.
Contrast this with a traditional investment fund, where no particular investments are identified at the outset. The investment manager raises capital commitments from investors that may be used by the investment manager to make any investments that match the investment strategy for the fund and fall within the stated investment restrictions.
The advantages of a deal-by-deal model for an investment manager include:
- Ease of capital raising: it can often be easier to raise capital for a single deal than for a traditional fund.
- Improved carried interest prospects: carried interest tends to be paid out sooner (on exit of the investment rather than at the end of the life of the fund) and more frequently (the performance of each deal is ring-fenced from the performance of other deals, and the hurdle is more easily met due to lower management fees).
- Reduced regulatory burden: traditional investment funds tend to attract regulatory and reporting obligations that do not apply to single-asset investment vehicles.
But what are the advantages for an investor? Why should they consider investing in a single-asset investment vehicle?
- Visibility and choice: investors have complete visibility on the investment that the SPV will be making and can choose whether or not to invest.
- Improved deal access: investment managers employing a deal-by-deal strategy are not constrained by a particular investment strategy or investment restrictions, which can lead to access (for investors) to a wider variety of deals, some of which may be under the radar of a traditional investment fund.
- Reduced management fee: a traditional investment fund will charge a flat management fee (usually around 2% per annum) based on the committed capital, whether it has been deployed or not. Deal-by-deal structures tend to charge a lower fee, based on the deal value (say, 1% per annum), and only once the investment has been acquired.
- No abort costs: unlike with a traditional fund, any costs from an aborted investment opportunity are borne by investment manager, not the investors. If a deal successfully closes, there may be a closing fee to compensate the investment manager for its work in getting the deal to that point.
- Dip your toe: investing in a deal-by-deal arrangement allows investors to invest a smaller amount and 'dip their toe' with a particular investment manager or asset class without being locked into an investment fund.
- Earlier returns: single asset investment vehicles tend to provide an earlier return than traditional investment funds (the standard term for a PE fund is 10-12 years). There is little or no investment period (since the asset has already been identified) and there is only one asset to find an exit for. This may suit investors with a shorter investment time horizon.
- Learning opportunities: inexperienced investors, such as family members behind a family office, or those new to a particular asset class, can use experience from deal-by-deal investing (e.g. the exposure to the investment team and the visibility on investments) as a learning opportunity.
These advantages can be very appealing, but there are disadvantages too that investors should be aware of.
- No diversification: naturally, an investment in a single asset investment vehicle concentrates all the risk into that investment. Investors should use investments in a deal-by-deal structure as part of their broader portfolio.
- Investor resources: an investor in a single deal needs to have the time and expertise to evaluate the investment and decide (quickly, or else the opportunity may be lost) whether or not to invest. It is up to the investor and not the investment manager to decide whether or not it is right for them. The investor will also need to spend time and energy negotiating the terms of the deal with the investment manager, though these can sometimes be agreed up-front.
- Administration costs: administration costs over the life of a single asset deal may be proportionately higher than a traditional fund (since a new vehicle needs to be established for each deal) though this may be offset by the absence of a management fee and the reduced regulation and reporting burden.
- Timing/credibility issues: for each deal, capital has to be raised and investors given time to evaluate the investment. Deals can be lost due to an inability to move quickly enough or because sellers prefer a buyer with committed capital already available. Choosing an investment manager with good credentials and a slick operating model can mitigate against an investor spending time evaluating a deal which is ultimately lost due to timing or credibility issues.
In the private client space, investment in deal-by-deal investments may suit high net worth individuals with an investment background, professional trustees and family offices. Investment terms tend to be negotiated for each deal, so it's best to seek legal advice at an early stage.
Investment managers that use the deal-by-deal model include the likes of Duke Street, AAC Nordic, Charterhouse Equity Partners, Sterling Partners and Alicorn (Arowana's venture capital group). There are many more.
Similar to traditional investment funds, it is very common for single-deal SPVs to be established in leading international finance centres, such as Jersey, and Bedell Cristin advises investment managers and investors alike in relation to establishing or investing in such vehicles.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.
Author - Richard Le Liard, Partner, Jersey.
This article first appeared in the eprivateclient Jersey Report 2021: Looking ahead to a post pandemic world, April 2021.