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Special report: Funds – Social climbers
4 August 2014 | By Joanne Harris
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Entries for this year’s Lawyer Awards Funds Team of the Year saw innovative structures and many firsts for good causes
Investment funds cover a multitude of areas, and the flexibility of the structures on offer these days means this is one practice area that really rewards innovation.
That was the single uniting factor among the entries for this year’s Lawyer Awards Funds Team of the Year. Although every one of the funds submitted for the judges’ consideration was quite different, each was also, in its own way, a ‘first’.
A good cause
For two of the firms in the running, the aim of their work was to structure a fund that would raise money for good causes.
Ashurst’s entry focused on the creation of a fund structure for Investing for Good, a social investment company that is working alongside the Cabinet Office to create the basis for a set of new social investment funds. The capital raised will be invested in social enterprises and charities.
Social impact was also behind Osborne Clarke’s work for Bridges Ventures. The company launched a Social Impact Bond fund, which will invest in payment by results projects. The firm has since advised on the first investment, in adoption services.
Ashurst’s work, which scooped it the Funds Team of the Year award, was carried out pro bono by a team led by partner Piers Warburton.
Warburton explains that when the Cabinet Office approached Ashurst for help, the project seemed like a “win-win situation” for the funds team.
“It was a project to which our team felt they could genuinely add something, and it looked like a cause well worth doing,” he says. “We thought we might learn something from doing it as well, and we did.”
The fund structure allows capital from philanthropic foundations to attract further capital from commercial organisations, which are co-mingled into a single fund and invested in social enterprises or charities. The advantage is that charitable capital can usually attract significant investment from commercial investors.
Warburton says similar structures have been used in the past in other countries, but the Cabinet Office required a UK-domiciled onshore product.
“It also needed to be something that would be understood by market participants,” he adds.
Ashurst’s structuring was designed to make the funds attractive to commercial organisations. The terms involve a ‘first loss’ position to philanthropic foundations, and required analysis of the taxation outcomes for both types of investor.
The template documents for the potential structuring for such funds, and a summary of the terms to govern them, have been made available by the Cabinet Office – opening the door for similar funds to be launched by other groups in the UK.
Investing for Good is currently working on a launch fund.
Socially responsible investment
Osborne Clarke was also looking at socially responsible investing for longstanding client Bridges Ventures. Like Ashurst’s Investing for Good fund, Bridges Venture’s Social Impact Bond Fund was a first.
Although the funds are small in size, with assets under management of less than £30m, they have the potential to make a real difference for the organisations they fund. Investors, meanwhile, get the opportunity to share capital responsibly and deepen their engagement with communities.
The launch of the social impact fund was not all easy-sailing, with challenges raised by the involvement of US endowments.
Osborne Clarke also examined the ‘waterfall and carry’ of the fund, in other words the reward to the management team, and managed to structure in a two-tier approach that would ensure that both financial and social performance was rewarded.
The Social Impact Bond Fund is investing in a bond that will support adoptive families for ‘harder to place’ children. Osborne Clarke is continuing to advise.
Funds such as the Ashurst template and the Social Impact Bond Fund are likely to remain popular as a way of investing.
“A lot of people aren’t familiar with the concept yet,” Warburton points out. “But it could be used for any situation where there is a need for both social capital investment and financial capital investment.”
However, funds innovations are not restricted to the socially responsible sphere. Legacy Lawrence Graham’s funds team embarked on a true first when it created the first-ever residential UK real estate investment trust (REIT) for Gravis Capital Partners (GCP) last year.
The work was won out of a previous failed pitch for GCP, when Lawrence Graham missed out on advising the company on the IPO of closed-ended fund GCP Infrastructure Investments. Instead, it found itself acting for the placing agent and bookrunner on the offering.
But two years later the firm was instructed by GCP to launch GCP Student Living, a fund that scooped Wragge Lawrence Graham & Co second place in this category. Partner Oliver Riley, who led the work from the funds side along with tax partner Elliot Weston, explains that the evolution of the REIT regime in the UK meant the time was finally right to kickstart the residential REIT market.
Regulatory changes introduced a couple of years ago meant that it was possible to launch the REIT on the Specialist Fund Market of the London Stock Exchange (LSE) instead of the main market. The fund also had to be structured so that the seed asset was a single building, although technically it comprised a number of separate flats.
“There were quite a few tax hurdles that we had to go through,” says Riley.
Lawrence Graham’s fee terms were aligned with the investment manager’s and the company’s interests, with the full fee payable only on launch.
The firm went on to advise GCP on the launch of closed-ended fund GCP Sovereign Debt Infrastructure in December 2013, while a second residential REIT for another company, Empiric Student Property – also investing in student accommodation – launched on the LSE main market a few weeks ago.
Riley believes the future is looking good for residential real estate funds.
“Real estate is definitely an in-vogue asset class, whether you go down a funds route or a non-funds route,” he says. “It’s really an asset class that fits in with what is popular in the investment funds world at the moment; it’s an asset class that throws off a yield.”
He points out that a fund that yields a steady return is of more interest to many investors right now than one that offers a potentially greater capital upside but more risk.
More residential REITS are likely, with many people looking at ways to structure a pool of houses or flats to fit into the REIT regulations.
Authorised contractual schemes
Firsts were also on the cards for Eversheds and Norton Rose Fulbright in their shortlisted entries. Eversheds advised HM Treasury and HM Revenue & Customs to
establish the first UK structure for authorised contractual schemes (ACS), which enable investors to be in the same position for income tax purposes as if they had invested in the underlying portfolios. Other jurisdictions such as Ireland and Luxembourg have had such transparent schemes for some time.
Led by partner Michaela Walker, Eversheds designed a structure built on current industry models – with the aim of limiting costs. Two structures were ultimately designed – an ACS in which investors hold the asset as co-owners, as well as a structure that builds on the UK’s existing limited partnerships regime.
The legislation came into force in July 2013 and Eversheds has been instructed on five ACS projects since the regulations were implemented.
Meanwhile, Norton Rose Fulbright acted for Greencoat UK Wind on its IPO, which was the first renewable energy IPO last year and set a template for green infrastructure investment funds.
The fund was an opportunity for institutional investors to make a direct investment into the UK wind sector, and also offered wind farm developers a chance to exit operating wind farms.
The listed investment company was backed by the Green Investment Bank and Scottish & Southern Energy (SSE). The fund acquired a seed portfolio of six onshore and offshore operating wind farms from SSE and German energy company RWE.
Herbert Smith Freehills’ (HSF) entry, advising Goldman Sachs on the IPO and structuring of CVC Credit Partners European Opportunities Fund, sounds, on the face of it, more routine than other funds shortlisted this year. The €350m vehicle was CVC’s first closed-ended listed fund and the IPO was one of the biggest in the funds sector since the financial crisis.
HSF partner Scott Cochrane explains that the challenge the team faced was to structure a fund that was accessible by different types of investors, while trying to avoid the discount that often creeps in when a closed-ended fund is sold to multiple investor classes.
This was achieved by designing a capital structure and discount control mechanism that enables shareholders to tender shares for repurchase on a pre-programmed quarterly basis.
“It’s the first time we have thought hard about how we can put in place a mechanism to manage that discount,” says Cochrane.
As in the case of several of the other shortlisted funds, the work done by HSF has provided a template that others could theoretically follow. Cochrane adds that Goldman Sachs is keen to use the structure again in other funds.
Such innovation is key at the moment, in a regulatory environment that is divided between new legislation from the EU and US, amid ongoing economic challenges.
“There’s a real risk that the EU has forgotten that part of its role is to promote competition,” Cochrane says. “From a business perspective we are having to be more innovative because we are having to find ways to achieve what both the managers and investors want in a regulatory environment that is increasingly complex.”