In brief
Whether it's due to certain jurisdictions becoming competitive hotspots for investment activity, increasing activism from particular institutional investors, or overall tough fundraising conditions for blind-pool funds, it seems that private capital joint ventures, platforms, programmes, funds of one and separately managed accounts are more popular than ever – but what exactly is the difference between all of these arrangements, and which one should transacting parties be looking to use?
Joint ventures
The term "joint venture" can be used to cover all manner of arrangements. It tends to carry a different meaning in a traditional M&A context, but in the private capital space, this is most typically used to describe an agreement between either: (i) two or more managers, or (ii) a fund manager and an institutional investor.
Manager joint ventures
A joint venture between two or more managers is usually entered into for the purpose of:
a. Raising additional capital: this can be purely contractual or be a formalised Co-GP or Co-Sponsor arrangement, where the parties collectively intend to raise and manage a fund and share in the economics
b. Benefitting from a characteristic that one of the managers has: this may be sector or jurisdictional specialism, regulatory position or market access, and often the other manager(s) pay fees to compensate the manager with the relevant characteristic as a result.
Manager-investor joint ventures
A joint venture between a fund manager and an institutional investor tends to involve larger and more active investors. Such investor may hold key strategic rights over the venture, and even board seats or other aspects of control that wouldn't typically be held by an investor in a blind-pool fund.
Whether the parties are treated as effective equals in the venture, or if there is still an expectation that the fund manager is the party that "manages" the joint venture (and therefore owes the investor the typical obligations that it would owe to investors in a blind-pool fund), is all down to the commercial agreement between them. The nature of this agreement can therefore influence the type of "joint venture" arrangement that the parties would prefer to enter into.
So, focusing on an arrangement between a manager and investor, if the parties say "joint venture", what might they mean?
Fund of One/Separately Managed Account
The terms Fund of One and Separately Managed Account tend to be used interchangeably to mean a single investor arrangement that involves a fund manager investing and managing capital for one sole investor. Whilst these arrangements can take a pure contractual form, often it will be structured as a limited partnership or other corporate vehicle, reflecting that the investor retains more of a "passive" role, more similar to the role of an investor in a blind-pool fund, where an investor would not typically be involved in day-to-day management.
That said, the investor will still usually receive more benefits and/or more active rights in a Fund of One compared to a blind-pool investment, which could be lower fees, a more bespoke investment criteria tailored to the investor's choosing, and even certain key or reserved matters over some aspects of the management of the Fund of One. This often includes an opt-out/opt-in right over the investments that the Fund of One makes, giving the investor far more control than in a typical blind-pool fund, but not extending so far as to allow the investor to see and/or approve all decisions taken by the fund manager. As such, a Fund of One therefore still maintains the base element of the manager being the party that is "managing" the investments to the exclusion of the investor, just as you'd find in widely-held private funds.
Funds of One are usually set up to make multiple investments, but – because there is no one size fits all in this space - they may also be established for a single deal or a standalone co-investment.
Programmatic joint ventures
One notable benefit of a Fund of One that is made through a corporate vehicle is that all the investments relating to such joint venture are then neatly made through the Fund of One structure, and once it has been set-up, there should be little or no need to enter into new documents to make new investments. However, both parties face the exact opposite drawback if the Fund of One doesn't proceed to make any investments: the existing fund vehicle continues to incur basic running costs and would usually need both parties to agree to terminate it, unless early termination rights happen to be expressly provided for in the terms governing the Fund of One. Perhaps then, a programmatic joint venture could be the joint venture of choice?
A programmatic joint venture is usually structured to have either an overarching contractual agreement or an initial corporate entity, which set out the manager and investor's intentions to enter into one or more joint ventures together. Often, but not always, this will come about because there are identified seed assets that the parties want to proceed to enter into a first joint venture in respect of, and the parties negotiate the terms that will apply to such joint venture. If the manager is likely to be able to identify other similar assets and the parties think they might like to do more joint ventures on similar terms, then a programmatic joint venture allows the manager and investor to agree how and when the manager would offer future joint venture opportunities to the investor.
Usually, the parties also agree to adopt either agreed form pro forma documents or the negotiated first joint venture documents as a base for any future joint venture that they will enter into. The aim of a programmatic joint venture is therefore to do most of the negotiation up front and allow the parties to continue entering into new joint ventures on similar terms, as and when they come up, whilst allowing an element of flexibility and separation for those future joint ventures, which will usually be governed by distinct documents (based on those existing or pro forma documents agreed up front) and established under new entities.
Programmatic joint ventures are typically less "fund-like" in nature than a Fund of One, and so each joint venture may be structured in a way that gives more active rights to the investor, but once again, there is no strict rule around this. Investors who do not intend to actively engage in governance may still prefer programmatic joint ventures for other reasons – be that as a result of the type of investor, its internal consent process, or even a preference to avoid being considered as a more passive "fund" investor.
Platforms
Another type of joint venture that is often mentioned in the market is the concept of a "platform"; which typically means a joint venture specifically focused on developing, growing or building expertise in a sector or asset class – for example, a logistics platform, or, if even more focused, a logistics platform for investment in India.
Platforms tend to involve only the most active of investors, including large pension funds and sovereigns who have both the relevant expertise and a large enough team to be actively involved in running some aspect of the platform. As a result, investors in a platform may therefore want to hold board seats or have a wider range of reserved matters in respect of the governance of the platform, compared to more typical and more passive fund structures.
Platforms could alternatively be established between two or more managers, so unlike Funds of One, this is not reserved as an investor/manager relationship. Managers coming together to form or operate a platform will usually be relying on the relative strengths they each bring to the venture. Taking the same example mentioned above of a logistics platform in India, one manager may have a lot of experience within the logistics sector in the region, whilst the joint venture partner could be a manager whose well-established name and reputation would attract investor capital to the platform.
By their very nature, platforms tend to go beyond a single deal, as the intention is to build and/or grow something wider, which can result in the development of new brands, intellectual property or newly formed and jointly held manager entities. Whilst it would be expected that there is some element of packaging across the deals that ties them into the platform, this does not have to be through corporate ownership, and the "platform" itself may be contractual in nature.
Single joint ventures
Of course, a capital joint venture can be as simple as a one-off contractual or corporate arrangement between parties, without this being a fund structure, a platform or a programmatic joint venture – it all depends on what the parties' plans are.
Even where a joint venture is initially only in respect of one asset or one portfolio of assets, if successful, the parties may agree to enter into future joint ventures on the same or similar terms, giving a similar outcome to a programmatic joint venture, but without the upfront agreement around any exclusivity or rights of participation over future joint ventures.
What's in a name?
Whilst this insight touches on a few of the most common private capital joint venture structures, players in the space will also be aware of overlap between some of the structures described and other arrangements like sidecars and club funds. Any of these structures could also be multi-party joint ventures, and so, the complexity grows.
Unless the parties actually risk falling into the realms of a regulated activity by describing the agreement between them in a particular way, it matters very little what the parties call the arrangement, and the key focus should always be on ensuring that the parties are both on the same page about the roles they will each play, and the expectations they each have in respect of the joint venture arrangement.
Referring to the joint venture a particular way can, however, sometimes lead the parties to misunderstand these expectations – for example, an active investor discussing a joint venture with a fund manager may still expect the fund manager to owe typical obligations towards the investor, including rights of the type you would expect to find in a fund, but the fund manager may assume that the investor would be more of an equal partner, and would therefore not benefit from the protections or rights that a passive fund investor would typically enjoy.
Our advice is therefore always to have these discussions from the outset to avoid misalignment and wasted costs down the line, and to drill down into the terms and responsibilities of the parties. That way, the joint venture made by any other name will still be just as sweet!