Sebi plans to allow perpetual funds
February 23, 2023
These funds can potentially exist for perpetuity and are aimed at long-term investors such as pension funds and insurance firms which do not want return of capital but regular income.
The Securities and Exchange Board of India (Sebi) is deliberating on allowing permanent capital vehicles (PCVs), evergreen or perpetual funds, where the capital available is managed for an unlimited period of time, into India.
These funds can potentially exist for perpetuity and are aimed at long-term investors such as pension funds and insurance firms which do not want return of capital but regular income. The funds could be structured in a way to give investors an option to redeem a certain portion of their investment after a 5, 10 or 15-year lock-in. PCVs can thus be considered as an alternative to PE funds with limited life cycles.
“Such vehicles are emerging in the West and are supposed to survive perpetually as they do not have a tenure. The fund may or may not be listed and the fund may adopt a strategy which allows it to give a redemption option at periodic intervals to investors. This benefits the fund manager because he is not working through a finite cycle where he has to raise money and exit every few years even if the asset looks good and promising from a longer term perspective,” said a person familiar with the matter.
Several alternative investment funds (AIFs) in India have been facing an issue with fund extensions and have been unable to liquidate their investments within the given life cycle of the fund, which is typically 8-12 years.
“With India rapidly coming up the learning curve on private investment funds, it may be the best time to introduce PCVs in India. Unlike traditional funds which have a finite tenure, PCVs can have an open term with respect to the tenure and don’t have a sunset period,” said Divaspati Singh, partner, Khaitan & Co.
PCVs can be of various types, including limited partnerships traded publicly on an exchange, real estate investment trusts, closed-ended funds, interval funds and variable funds such as annuities and life insurance.
In the Indian context, since Category I and II AIFs are permitted to launch close-ended schemes only, legally the concept of evergreen funds has not evolved in the country, according to Parul Jain, head – fund formation practice, Nishith Desai Associates.
“Recently, Sebi has floated the concept of continuation funds by proposing to allow a fund manager to roll over unliquidated investments into a new scheme, subject to certain regulations. However, in contradistinction, an evergreen fund allows a fund manager to raise capital on an evergreen basis, and even recycle proceeds from exits, without being bound by closings, fund life extensions or legal complications in setting up new structures,” said Jain.
Globally, PCVs are becoming more popular. In late 2021, venture capital firm Sequoia said it would create a permanent structure to house investor capital, which would channel money into its sub-funds, giving it the flexibility to hold stakes in tech companies and reap the rewards for much longer. The plan mirrored the permanent capital formula that asset managers, including Blackstone and hedge funds such as Pershing Square started applying several years ago, according to a Financial Times report.
Calculation of management fees and that of carried interest or performance becomes a little more complex in such funds. While the carried interest is calculated following a waterfall distribution — a way to allocate investment returns or capital gains among participants of a group or pooled investment — for a typical fund, the investments of a PCV may not be realised for extended periods of time.
“A fund manager draws its carry based on the fund net asset value as compared to an IRR model. Nonetheless, in a private equity fund context, exits from an evergreen fund raises certain challenges since investors may exit through secondaries, and the valuation of underlying investments may not be completely market driven, but based on NAVs negotiated or arrived at by third party valuers. Given the liquidity challenge for private equity funds, fund managers may need to determine a viable mechanism to be able to drive investor exits/fund redemption,” said Jain.
[The Financial Express]