It's a wrap

This, in case you also need reminding, is when a banking institution picks up a sizeable allocation in a GP’s latest fund, and then dices up the allocation into a series of packaged smaller chances, which it then sells on to clients, almost always HNW customers of its private banking/wealth management arm. Individually, most of the HNWs could not normally afford the minimum access threshold for the fund, but the wrap gives them a chance to participate in private equity that they would not ordinarily get.

Although not much seen in Asia to date, wraps are growing increasingly significant in the region, and in the PRC in particular, are often the prime fundraising mechanism for RMB funds. This could be cause for concern. In itself, the wrap is naturally vulnerable to all the problems of securitized – and often leveraged – vehicles that the GFC exposed. The kind of alignment and disclosure issues already raising the hackles of LPs worldwide are also only magnified in a wrap structure. And legal issues surround the questions of how the vending institution markets the wrap to its investors, and whether they are sophisticated enough to really understand the product. Sources aver that, in China especially, many aren’t, even if they are HNWs.

More to the point, observers might ask why a GP would even give an allocation to a bank to do a wrap. After all, exclusivity and privileged access are the stock in trade of many intermediaries in the business, who promise access to top-quartile and top-decile funds. Many GPs cultivate the image of exclusivity to keep investors keen.

Yet on practical grounds, rather than prestige or perceived value, a wrap deal with a bank may make a lot of sense. Many banks already have active placement units, and these can build useful synergies with the parent’s private wealth groups to deliver an end-to-end solution for at least part of a fundraising. And a GP that deals regularly with a bank for leverage, deal sourcing and other purposes may well wish to cultivate a strategic relationship with that group through a fund allocation.

However, the whole principle of a wrap still calls even more into question the myth of access. As AVCJ sources have remarked time and time again, pre-crisis, post-GFC and right now, exclusivity went out the window when fund sizes started soaring into the multi-billion-dollar range. Especially in the still-difficult fundraising environment since 2008-09, GPs are increasingly reluctant to turn away money, and particularly to give preferential treatment to any LP in a manner that would cut out others. GPs, AVCJ sources admit, simply want to access the capital.

The ultimate lesson for LPs should be obvious. If somebody and their agent is telling you that something is an exclusive deal, and demanding a price premium or a higher commitment on that basis, see what happens if you walk away. As an industry still too wedded to secrecy, obscurantism and opacity, private equity needs to have its myths challenged from time to time – especially the self-serving ones.

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• Topics
• Fundraising
• Funds
• Advisory
• Renminbi fund