New Uses for Hedge Funds and Record Levels of Private Equity Buyouts Drove Offshore Finance Market
GEORGE TOWN, Grand Cayman, Jan. 4 /PRNewswire/ — As we begin 2007, 2006 can be summed up in a single word, “more,” according to Walkers, the global offshore law firm of choice for fund managers, corporations, financial institutions, and international law firms. The market saw more hedge funds and private equity funds involved in takeovers and buyouts, more varied use of alternative investment vehicles, and more investment activity in emerging markets last year.
One of the biggest market drivers was the increase in buyouts of public companies by private equity firms and bigger deals overall. As of December 2006, the value of private equity buyouts in the United States was on pace to almost triple, with U.S. deals approaching US$370 billion for the year. In the UK, companies had announced US$75 billion of takeovers in the first 11 months of 2006, compared with US$34 billion in 2005. Globally, 2,262 private equity deals worth US$563.2 billion had been struck by December 2006. In 2005, the total private equity deals were worth US$350.1 billion.
Takeover targets represented a wide range of industries and included brand names such as HCA Inc., Equity Office Properties Trust, Home Depot, T-Mobile, the London Stock Exchange Group, Dunkin’ Donuts, Clear Channel Communications, SunGard Data Systems, Neiman Marcus, and Metro-Goldwyn-Mayer.
“There are several contributing factors to the growth in number and size of these private equity deals,” Iain McMurdo, a partner in Walkers’ Investment Funds group said. “Some public companies are trying to avoid the burden of Sarbanes-Oxley regulations by going private. In addition, private equity funds have billions of dollars to invest, which is fueling the takeover activity worldwide.”
For a third consecutive year, pension funds continued to drive investments into hedge funds. This trend was supported by companies such as Unilever, whose pension funds in 42 countries will soon be able to invest into funds of hedge funds. Traditional hedge fund investors including New Jersey’s state pension funds and the Indiana State Teachers’ Retirement Fund, upped their investments. New Jersey increased its commitment to hedge fund investment from US$800 million in 2006 to US$4.6 billion in 2007. Even emerging markets got in on the activity. China’s state pension fund is preparing to make its first investments abroad, putting up to US$1 billion into foreign financial markets in an effort to improve returns on its reserves.
The pension fund twist in 2006 was that private equity investments were also being added to the mix. For example, the governing agency for the San Diego City Employee Pension Fund is weighing investment in private equity funds for the first time. David Gamble, former head of British Airways Pension Investment Management, one of the UK’s largest company pension plans, supported investments in private equity as part of a diversified portfolio. Britain’s biggest pension fund, BT, is switching about a third of its UK equity holdings — some 3 billion pounds — into hedge funds and private equity as well.
Continued interest and investment by pension funds into hedge funds is likely to continue in 2007 following the 2006 mid-year amendments to the US Pension Protection Act. These amendments have reduced the number of hedge funds that need to operate in compliance with ERISA and eased the compliance burden for hedge funds that manage the ‘plan assets’ of ERISA investors.
“Both the enormous amount of activity in the private equity markets, as well as the claims that the line between private equity and hedge funds continue to blur, have encouraged pension funds around the world to leverage alternative investments as an influential part of their investment strategies,” Jonathan Tonge, Investment Funds Group Managing Partner for Walkers, said.
As is to be expected in financial markets, regulation was also a big topic in 2006. While the Securities and Exchange Commission (SEC)’s New Rule 203 was reversed earlier in the year, the Commission continues to look for ways to protect investors including the introduction of measures to prohibit fraud by investment advisers and the raising of the net-worth standard for investing in hedge funds. The UK’s Financial Services Authority (FSA) is also looking for ways to increase transparency and change access to some types of funds.
In the Cayman Islands, changes to the jurisdiction’s Mutual Funds Law were enacted to improve certain aspects of doing business in Cayman for outside investors, including the introduction of innovative and market-leading electronic audit and electronic reporting procedures. Similarly, in the British Virgin Islands, the segregated portfolio company (SPC) regulations were enacted, thereby allowing the incorporation of SPCs for mutual fund and insurance companies in the British Virgin Islands. Further amendments were also made to the recently enacted BVI Business Companies Act to fuel the jurisdiction’s growth as an offshore financial center.
Finally, emerging markets such as Asia and the Middle East continued to mature. Asian investors embraced more sophisticated structures including real estate investment trusts (REITs), increased the flow of venture capital investments into businesses in China, and continued to support the use of unit trusts within hedge fund vehicles as a way to combine new investments with more traditional standards. Dubai also continued to see record-breaking growth in the size and number of private equity deals, as well as the use of sukuk to finance debt while still adhering to Islamic principles.
“In a year where hedge funds domiciled in the Cayman Islands passed the 8,000 mark, it’s clear that global investment opportunities are expanding,” Mark Lewis, a Senior Investment Funds Partner for Walkers, said. “Even with some notable fund crashes in 2006, we continued to see growth in all of our offices — from Cayman, London, and Jersey to Dubai, Hong Kong and the BVI.”
About The Walkers Group
From offices in the Cayman Islands, the British Virgin Islands, Dubai, Hong Kong, Jersey, London, and Tokyo, the Walkers group provides legal and management services to leading FORTUNE 100 and FTSE 100 global corporations and financial institutions, capital markets participants, investment fund managers, and growth- and middle-market companies.
The Walkers group is comprised of leading offshore law firm, Walkers; fund services provider, Walkers Fund Services Limited; and SPV and corporate services providers, Walkers SPV Limited, Walkers (Jersey) Limited, and Walkers (BVI) Limited.
In 2006, Walkers was named as the Who’s Who Legal Law Firm of the Year: Cayman Islands, the PLC Which Lawyer? Yearbook Leading Cayman Islands Law Firm, The Lawyer’s Offshore Law Firm of the Year, and was one of two firms honored as “Offshore Legal Team of the Year” by the Society of Trust and Estate Practitioners (STEP).
For more information on the Walkers group, visit us on the Web at www.walkersglobal.com or contact us by e-mail at info@walkersglobal.com. To contact Walkers by phone, call our Cayman Islands office at +345-949-0100.
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