Separate Accounts vs. Commingled Funds: Similarities And Differences In The Context Of Credit Facilities

Keywords: managed accounts, investment, separate accounts, private equity funds, strategic partnerships, credit facility, capital call facility,

The use of managed accounts as an investment vehicle has been widely publicized of late with institutional investors such as the California State Teachers' Retirement System and the New York State Common Retirement Fund (referring to such vehicles as "separate accounts"), and the Teacher Retirement System of Texas and the New Jersey Division of Investment (referring to such vehicles as "strategic partnerships") making sizeable investments with high-profile private equity firms such as Apollo Global Management, LLC, Kohlberg Kravis Roberts & Co. and the Blackstone Group.1

Regardless of name, these tailored investment vehicles represent a significant trend, with 32% of surveyed fund managers indicating they were intending to invest more from separate accounts during 2013.2 And although structurally divergent from commingled real estate or private equity funds ("Funds"), these separate accounts share a common objective with Funds: to produce strong returns with respect to invested capital in the most efficient manner possible.

In many situations, accessing a credit facility can facilitate achieving investment objectives. This is quite clear in the context of Funds establishing subscription credit facilities, also frequently referred to as a capital call facility (a "Facility"). These Facilities are popular for Funds because of the flexibility they provide to the general partner of the Fund in terms of liquidity and the efficiency associated with consolidating the number of capital calls made upon limited partners. These benefits would equally apply to institutional investors establishing separate accounts with private equity firms and, despite fundamental differences between separate accounts and Funds, a separate account may be structured to take advantage of the flexibility afforded by a similar credit facility.

Definition of "Separate Account"

The term "separate account" has been used generically to describe an arrangement whereby a single investor provides virtually all of the necessary equity capital for accomplishing a specified investment objective. It is important, however, to distinguish a "separate account" from a joint venture or partnership in which there is an additional party (frequently the investment manager) with an equity interest in the owner of the investment. The equity provided (or earned) by the investment manager may be slight in comparison to the equity capital provided by the institutional investor. However, despite the imbalance of...

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