Protected cell companies for fund and non-fund structures
06 January 2015
The protected cell company has come a long way since its creation in Guernsey in 1997 as a vehicle designed for use in the captive insurance industry, explains Joe Truelove, Head of Fund Services at Carey Group.
The concept underpinning the structure is that the protected cell company is one separate legal entity within which there are a series of pools of segregated assets and liabilities. Apart from the cells there is also a core which is responsible for the management of the structure and has the board of the entity attached to it.
Private wealth management open ended asset allocation umbrella funds
From the captive insurance sector it was an obvious step to begin to use the protected cell company as the legal structure of choice for umbrella funds. These open ended structures still exist and are managed in Guernsey. Well established examples include Investec World Axis PCC Limited (net value of US$761m spread across five cells – cautious, core, flexible, global equity and stellar – all of which are listed on the Channel Islands Securities Exchange) and Kleinwort Benson Elite PCC Limited (net value of £285m spread across 11 active cells with 36 share classes, 27 of which are listed on the Channel Islands Securities Exchange).
These structures are typically marketed to offshore sophisticated investors and private clients of the private banks which promote them.
The cellular structure gives the manager the opportunity to operate an asset allocation model efficiently so that investors may have all of their assets in one or two cells instead of managing multiple small portfolios. The classic model would be to have an income cell, a growth cell and a balanced cell. The costs of operating many small portfolios are reduced for the client and for the manager. There is also a cost saving with respect to the servicing of the structure – there will only be one audit firm required, one board of directors, one administrator and one company secretary.
Multi manager ‘rent a cell’ structures
A number of providers have formed protected cell companies or incorporated cell companies as ‘platforms’ which they can then use to ‘white label’ to a series of investment advisers. There a number of these structures in existence in Guernsey. This approach helps new investment advisers to build a track record in an established investment vehicle with an investment manager, service providers and corporate governance in place. Adding a new cell is a cost effective and straightforward process. Investment advisers can launch one cell or multiple cells if they have multiple strategies. Valuation frequency and exchange listing can be varied for each cell.
Closed ended listed protected cell companies
The London Stock Exchange is home to many closed ended investment companies. A number of these are constituted as protected cell companies. Perhaps the best known is Better Capital PCC Limited which was formed in 2009 and then added a second cell in 2012.
Each cell in this structure represents a different vintage and replicates the launch of a successor fund to the previous cell. Another example is Real Estate Credit Investments PCC Limited which is managed by Cheyne Capital and was first launched in 2005.
The Core is listed on the Main Market of the London Stock Exchange with one cell listed on the Specialist Fund Market, demonstrating another feature of the protected cell company- listing cells on different exchanges or having listed and unlisted cells in the same structure to meet differing client needs.
Baring Vostok Investments PCC Limited has followed a similar route but this time with a Channel Islands Securities Exchange listing for both the core and one cell instead of a LSE listing. Again, the core shares are listed and contain the bulk of the portfolio of the fund, but one particular asset is held within the cell of the protected cell company so that it has a different group of investors and is segregated from the rest of the assets. The benefits of utilising a protected cell company for a listed fund are the speed and cost effectiveness with which a second cell can be added to a protected cell company compared to the launch of a new legal entity.
Private equity and real estate ‘deal by deal’ protected cell company structures
Even established fund managers have found it difficult to raise funds for traditional ‘blind pool’ investment funds since the credit crisis.
As a result of this, some managers have responded by launching co-investment vehicles, separate managed accounts or club deals. In many instances they have retained the structure of a limited partnership as the co-investment vehicle with a general partner as the manager.
Increasingly, however, clients are utilising a protected cell company for these non-fund structures in particular for a ‘deal by deal’ structure; a series of transactions where the potential target investors have complete optionality over whether or not to invest in any given opportunity. The core private placement memorandum and terms remain constant and the variability is with each investment which is set out in a cellular appendix.
We have observed a marked increase in the popularity of protected cell companies being used as vehicles to structure a series of distinct private equity or real estate transactions. In this way, investors may conduct their own due diligence on each and every transaction rather than rely entirely upon a fund manager. Alternatively, the investors may wish to opt out of sectors, geographies or deal sizes or vary their potential commitment by deal based on their risk appetite at the time or simply available cash flow.
If a potential client intends to make more than two distinct investments or sub funds, then a protected cell company will be more cost effective than launching three separate co-investment vehicles or standalone fund structures.
Protected cell companies are clearly a very useful legal form for the investment management sector, whether for open ended or closed ended investment funds, whether the cells or the core are listed or not and for a cost effective holding company structure where a series of investments is intended. Protected cell companies also work well for managed accounts (one cell per investor) and family offices (one cell per portfolio company to segregate the potential liabilities arising from a series of businesses).
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