Private Equity & Private Debt

*This use case is a scenario from our partner GenTwo

Private Equity & Private Debt

Private equity and private debt are one of the most important, and interesting, alternative investments today. RainFin solutions help asset managers and investors gain easy and transparent access to them.

How it works

Private equity and private debt are becoming increasingly important components of today’s alternative investment universe. And no wonder. Both offer professional and institutional investors a powerful tool to improve the risk/reward characteristics of an investment portfolio, with the opportunity to generate higher absolute returns while improving portfolio diversification.

Yet despite these advantages, for a variety of reasons, many market participants still hold little or no exposure to this asset class. This is mostly because both asset classes involve non-listed companies or direct, private investments.

In private equity, for instance, investors take equity positions in operating companies that are not publicly traded on a stock exchange. Strategies can include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In private debt, investors lend money directly to private companies, generally through debt instruments like private loans or bonds.

In both cases, investors face hurdles. Because these are private opportunities, they can be hard to find or access without the right network. Minimum ticket sizes can also be high, as can the legal complexity and costs involved with carrying out such transactions. Asset managers and other financial intermediaries looking to offer private equity or debt products to their clients will be confronted with these hurdles too.

Traditionally, the only way investors or asset managers could overcome these challenges was to invest directly, provided they could source the opportunity, or gain access via a fund structure. Yet direct investments, limited partnerships and funds consume substantial time and resources to set up, to maintain and to adapt to the regulatory framework, resulting in high costs (often referred to in terms of high total expense ratios or TERs).

SOLUTION

Luckily, many of these challenges can now be met through securitization, a process which allows issuers to turn illiquid assets, like private investments, into investable securities.

With a RainFin securitization solution, for instance, a customer can easily create a special purpose vehicle (SPV) to raise cash from a pool of its clients or investors, often in the form of an actively managed certificate (AMC) or a tracker certificate, which can then be used to subscribe or invest directly in the desired underlying.

Issued from a protected cell company (PCC), both AMCs and trackers offer the ease of set up of structured notes combined with the segregation of assets and corporate governance more akin to traditional investment funds. There are however differences between the two vehicles:

Actively Managed Certificate

An actively managed certificate is a vehicle that allows investors to access a portfolio of private investments in a fast, flexible, and affordable way. An AMC is issued by a PCC, which allows for the customization of the certificate for every private equity investment strategy according to the segregation needs of the asset manager or client.

Tracker Certificate

The tracker certificate is another option to offer the shares in a privately held company to select investors through a fast, flexible, and affordable vehicle. Like the AMC, the tailor-made issuer, a protected cell company (PCC), allows for the issuance of a tracker certificate for every deal or group of deals according to the segregation needs of the product manager or asset manager.

RainFin’s securitization solutions for private equity and private debt products offer a fast, simple and highly flexible approach for accessing this compelling investment universe, with advantages for both the asset managers who want to issue such products and end investors.  

Advantages of this approach

With RainFin, the client only thinks about the transaction itself. All the operational elements are taken care of by us. This includes performing the necessary due diligence and compliance, both of the underlying target and any due diligence on the Issuer requested by the underlying target. RainFin also handles the details like the product term sheet, and all investor operational tasks with the paying agent, like issuance of certificates, cash transfer, calculating and publishing net asset value (NAVs), paying coupons, and so on.

Our standardized structures simplify operations. An example: there is only one set of documents as the asset manager is the sole investor. The products are fully transparent to the asset manager as well, as the manager can always see the full balance sheet. Streamlining processes reduces complexity during the investment process, which means lower costs for investors.

Last but not least, AMCs offer additional privacy to the end investors, as these typically invest through their bank, which keeps the investor’s personal information. The owner of the underlying assets that the AMC or tracker invest in does not need to know, and indeed cannot know, the identity of the investors.

Advantages

Asset Manager

  • Standardization of structure
  • Carry can be structured as capital gain
  • Fully transparent (AM can always see the full balance sheet)
  • AML stays with custodian bank
  • Combination of Private Equity & Private Debt possible​

Investor

  • Lower costs => more return
  • Lower ticket sizes
  • Diversification & potential performance generator
  • More privacy
  • Fully transparent (market prices during the term as a performance indicator)

See how RainFin is evolving finance