Update

Mourant Ozannes Fund Transactions Conference 2017

The Mourant Ozannes Fund Transactions Conference was held on 17 May 2017 at The OXO Tower in London, and was followed by an exhibition of artwork created by leading Cayman Islands artists to celebrate Mourant Ozannes' 25th anniversary in Cayman.

We would like to extend our thanks to our panellists for sharing their knowledge and experience with us. The panel discussions were insightful, absorbing and entertaining. For those who were unable to attend, here is a quick snapshot of the topics considered:

First session: Responsibility, impact and philanthropy: creating a world where everyone's a winner

Responsible and impact investing, as an increasingly prominent consideration in the funds industry, appeared as a theme throughout the conference. In this keynote panel, the panellists discussed the problem of perception that higher impact means lower returns, concluding that this is absolutely not the case and that the current direction of travel is for investors increasingly to look for positive environmental, social or governance impact from their investments. The panellists highlighted some difficulties in building impact considerations into fund terms, such as the complexity of nomenclature and the ambiguity which may surround measurement of impact, whilst noting that a responsible or impact fund must look like any other fund to ensure familiarity and parity of costs for investors.

Lasting impression: Responsible investing as a strategy affords massive opportunity; both to meet the noble goal of mobilising private capital to meet ballooning global challenges, and also for managers to respond to investor demand and to differentiate themselves from peers offering similar returns without a focus on impact. Structuring to achieve social outcomes at the same time as financial outcomes ought to be achievable, and the two need not be mutually exclusive.

Session 2: Fund formation and distribution

The panel noted that global capital-raising mandates are significantly more complex than was previously the case, due largely to increasing regulation globally, and resulting investor requirements and increasing investor sophistication. The panellists discussed incoming changes, such as AIFMD II, BEPS, Brexit, MiFID II and US de-regulation, and managers' reactions to them; jurisdictional arbitrage will continue as a result of regulation and local capacity constraints, both of which look to favour offshore centres post-Brexit. Certain trends were identified, including an increased focus on co-investment terms in fund documents and parallel investment vehicles, and the move of private equity houses towards evergreen structures with longer terms, providing increased opportunity for value enhancements in portfolio assets.

Lasting impression: The industry continues to face multiple regulatory changes and several 'known unknowns' such as Brexit as well as significant volatility from a fiscal policy perspective. This means that increased sophistication and flexibility in fund structuring and documentation is key to enable sponsors and investors to achieve maximum alignment and outcome in a fast-changing world across the asset classes.

Session 3: Fund financing

The focus of the panel was on the evolution of subscription finance from a fairly straightforward product used solely for administrative purposes. Managers now use facilities to provide practical solutions to address operational issues such as IRR maintenance and financing of GP co-investment obligations, in addition to providing bridge finance. The panel noted the recent trend towards larger, syndicated facilities in a very competitive European credit market, and also that the market was becoming increasingly democratised, with more managers taking on facilities and more banks entering the market, such as Australian banks in the Asia-Pacific region. The panellists discussed the expectations of US banks entering the European fund finance market, causing a move towards uniformity in the borrowing and security provisions within underlying fund documentation of European and US funds.

Lasting impression: It will be interesting to see how fund finance is impacted when interest rates increase, with the panellists predicting that the market will continue to use fund level finance, though on more complex bases and with more strategic imperative in order to ensure that the increases in cost are well reasoned.

Session 4: Investing and divesting

The panellists discussed the status of the market, noting that there is currently a significant amount of cash/liquidity (or 'dry powder') available in the market. This glut of liquidity has been caused by various factors, including the lack of good quality assets available for purchase, increased competition for those assets as new types of buyers (such as pension funds, sovereign wealth funds and family offices) enter the market directly, and debt becoming available from alternative lenders as well as traditional lending banks. The panellists also noted the geographic differences in auction practices and expectations as to warranty protection between Europe and, in particular, the US, highlighting the need to be able to demonstrate certainty of funding and to move quickly. The resultant growth of warranty and indemnity insurance in this market was also covered.

Lasting impression: Given the disparity of practices across geographies, it is important at an early stage to manage the expectations of US or Asian bidders, or new players in the market such as family offices or sovereign wealth funds, entering into European asset auctions. Structuring issues remain fundamental to a successful transaction outcome.

Session 5: Distress, special situations and restructuring

The panellists predicted that recent developments within the distressed debt market would lead to interesting questions being posed in the future. One of the developments discussed was the placement of bonds in the market in Europe on US market terms and using US techniques, without the complex intercreditor arrangements customary in Europe. The impact of the increased use of US language and interpretation in high yield bonds, and of US-style 'covenant lite' bonds, in Europe will also be interesting to watch. One panellist predicted increased insolvencies at the operating company level of structures in the relatively near future. The panel also noted the continuing role of offshore jurisdictions in this sphere, describing their experience of using Cayman vehicles to achieve a clear and transparent mechanism for the successful sale of a distressed business; and of creditors appointing provisional liquidators in the British Virgin Islands and using the investigative powers available to take back some control in a debtor-friendly, Chapter 11 context.

Lasting impression: Offshore jurisdictions can add significant value when selling distressed assets for the ease of corporate structuring and certainty of the judicial system in those places. Change is also coming to the UK, with a move towards adopting an insolvency system similar to Chapter 11 and European jurisdictions establishing specialist courts and attractive scheme frameworks and other insolvency solutions which may attract some restructuring business away from the UK.