Investors Eye a New Private Equity Opportunity
- by Bruce Blechman
Most private equity (PE) funds have some drawbacks. One drawback is that the usual term limit to the fund means that when it does liquidate, it might not be the right time for the greatest return to the investors in the PE fund. Also during this term, the lack of investor liquidity requires investors to wait for the various liquidations to occur.
There are other PE capital structures available to investors, but they have their drawbacks too.
SPAC—Special Acquisition Companies. Investors have to wait until a single investment is presented to them, which makes SPACs highly restrictive to investors.
PAM—Publicly Traded Asset Managers. Investors are limited to investing in the manager of the fund and cannot participate in the return generated by the assets of the fund.
BDC—Business Development Companies. Investors have to abide by the Investment Company Act, which limits them in scope and scale.
Enter PCAP, or permanent capital structures, a new financial innovation that eliminates drawbacks inherent in PE funds.
PCAP combine the traditional and established features of PE with new provisions for investors and managers of the fund. PCAP provide a method to transform a private equity fund that relies on private capital from limited partners into a publicly funded and traded fund that relies on permanent capital raised in the public markets. A PCAP is a publically traded limited liability company formed by a PE management team. In conjunction with an initial public offering, the PCAP acquires controlling interests in operating companies on a diversified or roll up basis in a general industry.
The PCAP structure is highly flexible and provides several distinct advantages over other PE-like structures:
- Availability of permanent capital without funding term restrictions.
- Direct participation in a perpetual acquisition vehicle that is treated as a publicly traded partnership for tax purposes.
- Complete liquidity for investors.
- Lower cost of capital.
- No regulation under the Investment Company Act or Investment Advisers Act.
- Managers also benefit from the customary 2 percent fee and 20 percent profit-sharing structures.
- Profits can be passed on to the investors who are investors in a public company.
- Various tax advantages to all parties because the fund is a limited liability fund and passes on its income without paying taxes itself. The PCAP generates all of is income from dividends and interest on intercompany debt thereby qualifying the PCAP for flow-through tax treatment for investors.
Perhaps one of the most exciting benefits to come out of this new financing structure is that it can be used as an excellent holding company vehicle where even small and midsize companies can use it to roll-up similar companies. This allows the PCAP to go directly to NASDAQ capital markets, giving the PCAP almost unlimited access to new capital to grow all its subsidiary companies.
It really can become a cash cow roll-up machine!