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Demystifying Private Capital Funds

As private capital attracts a wider investor base, which fund structures are the most popular and when are they appropriate?

Against a backdrop of high interest rates and low growth, alternative assets can provide investors with steady long-term returns and a stable vehicle for capital.

Activity in the private equity space may be slowing, but private credit and real estate remain buoyant. As we move into the next economic cycle, distressed funds are anticipated to flourish.

Alternatives can be complex assets, and managers moving into these areas or expanding their allocations need to be cognizant of tax, regulatory and legal requirements, investor demands, and compliance obligations.

With that in mind, what structures are managers using to meet their growing needs? And what makes the most sense as private capital targets a wider investor base?

This was the starting point for our latest Private Funds Industry Live event: Demystifying Private Capital Funds.

I was joined by Lindsay Trapp, Partner at Dechert LLP, and Colin Leopold, Head of Research and Insight at Global Fund Media who chaired the event.

The retailization of private capital

One of the key themes of the discussion was the continued retailization of private capital and the most appropriate structures for targeting this investor base.

Trapp said in the U.S. the popularity of business development companies (BDCs) is testament to the retailization trend, providing a gateway to credit and distressed investing for non-institutional investors.

Much of the focus in the U.S., she added, is on dealing with tax concerns around direct lending. The status of BDCs as regulated investment companies (RICs) makes them attractive, and their relative transparency offers comfort to retail investors.


In Europe, Luxembourg’s special limited partnerships (SCSp) and Ireland’s investment limited partnerships (ILPs) perform similar roles. Both these structures have the advantages of simplicity, transparency, and legal protections, making them attractive to a broader investor base. McHugh said the ILP, which came into being in 2021, could build momentum in 2023.

He also pointed to the great success of the variable capital company (VCC) in Singapore, which can also be offered to retail investors. More than one thousand VCCs have been registered since the structure’s introduction at the start of 2020.

That level of success has eluded the EU’s European long-term investment fund (ELTIF), introduced in 2015. Its aim to create a long-term investment culture among both professional and retail investors didn’t scale up as the European Parliament expected. The European Parliament decided to amend the ELTIF regulation in a new attempt to boost long-term investments in the EU economy. The evolution of ELTIF is worth watching. It’s a work in progress and may lead to a greater uptake in 2023.

Both Trapp and McHugh noted continued growth in the creation of parallel funds, with U.S. managers launching European structures to attract European investors or house assets on the continent. 

Managing liquidity in private capital

Another key trend identified in the discussion was the challenge of liquidity management. Trapp explained that this is a particular issue for hybrid funds, but also more broadly as economic headwinds gather.

“It’s a key factor for both investors and managers,” she said. “Fund prospectuses should make sure they provide clarity on redemption policies and gate clauses.”

General partners are using provisions around gating and longer lockup periods to ensure healthy levels of liquidity. Some funds are attempting liquidity matching. Trapp added that no one-size-fits-all solution to liquidity management is possible because each hybrid fund is unique.

An intriguing year ahead

Both experts agreed that new investors are moving en masse to alternatives, regardless of the structure in use.

This significant movement of capital offers opportunities as well as challenges. In the U.S., McHugh said, increased regulation is expected in private market funds. In Europe, ESG requirements and new AIFMD II rules will place additional obligations on managers.

The challenges are significant, but the overall impression to take away from this illuminating session was of a sector that is in relatively good health.

As the economy tightens, we can expect to see a more concerted push towards the retailization of private capital in 2023, and a corresponding uptick in the use of structures that facilitate it.

Our Halo Framework identifies and describes a next-generation fund operating framework for private capital. Download it here.

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