casemark/structuring-permanent-capital-vehicles

Structuring Permanent Capital Vehicles

Designs permanent capital structures including listed vehicles, evergreen funds, and non-traded REITs with perpetual-life governance.

When To Use

• Structuring an evergreen or open-ended fund with no fixed termination date
• Designing a listed permanent capital vehicle (e.g., BDC, closed-end fund, listed partnership)
• Forming a non-traded REIT or non-traded BDC with perpetual-life features
• Converting a drawdown fund to an evergreen or semi-liquid structure
• Evaluating NAV-based subscription/redemption mechanics for open-ended vehicles
• Advising on governance frameworks that balance perpetual life with investor liquidity expectations

Inputs To Gather

• Vehicle type: Listed closed-end fund, non-traded REIT, evergreen LP/LLC, interval fund, tender-offer fund, or hybrid structure
• Investment strategy and asset class: Illiquidity profile of underlying assets (private credit, real estate, infrastructure, PE secondaries, etc.)
• Target investor base: Institutional, retail-qualified, non-accredited; channel (wirehouse, RIA, institutional placement)
• Liquidity mechanism preferences: Periodic tender offers, interval fund redemptions, NAV-based subscriptions, secondary market listing, or no liquidity
• Fee structure goals: Management fee, incentive allocation/fee, early-redemption penalties, upfront placement fees
• Regulatory regime: 1940 Act registered vs. exempt; Regulation A+, Regulation D; state blue-sky requirements [VERIFY]
• Tax structure: REIT election, RIC qualification, partnership pass-through, or C-corp blocker
• Capital raise timeline and distribution strategy: Continuous offering, periodic closes, or single close with subsequent subscriptions

Workflow

1. Classify the vehicle archetype

   • Determine whether the structure is listed vs. non-traded, registered vs. exempt, and finite-life-with-extensions vs. truly perpetual
   • Map the investment strategy's liquidity profile against the proposed redemption/liquidity window frequency
   • Identify whether 1940 Act registration is required or advisable given investor base and offering size [VERIFY]

2. Design the capital structure and subscription mechanics

   • Draft NAV-based subscription procedures (pricing frequency, subscription cut-off dates, minimum investment)
   • Specify share classes if applicable (e.g., Class S, Class D, Class I with differing distribution fees and minimums)
   • Define the continuous offering mechanics, including any volume caps or gross-asset triggers that pause subscriptions
   • For listed vehicles, address IPO mechanics, over-allotment options, and at-the-market (ATM) programs

3. Construct the liquidity framework

   • For interval funds: set repurchase offer frequency (quarterly typical), repurchase amount range (5%–25% of NAV), and pro-rata allocation for oversubscribed tenders [VERIFY applicable SEC requirements]
   • For tender-offer funds: design board-discretionary tender mechanics, establish pricing methodology, and draft early-redemption fee schedules (e.g., 2% if redeemed within 12 months)
   • For non-traded REITs: structure the share redemption program (SRP) with quarterly caps, hardship exceptions, and suspension triggers
   • For listed vehicles: assess managed distribution policies and discount-management tools (buyback programs, rights offerings)

4. Build the governance and perpetual-life framework

   • Draft GP/board authority provisions addressing: continuation votes, conflicts of interest in perpetual structures, valuation oversight, and independent director requirements
   • Define the valuation governance process — NAV calculation methodology, independent valuation cadence, valuation committee charter
   • Address key-person and removal provisions adapted for perpetual (no wind-down trigger, but potential conversion or internalization paths)
   • Structure advisory committee or LP advisory board role for ongoing consent on conflicts, related-party transactions, and fee modifications

5. Design the fee and incentive architecture

   • Structure management fees on net assets (typically 1.0%–1.75% annually for non-traded vehicles; varies for listed)
   • Design incentive fees/allocations: total-return hurdle with catch-up vs. income-based incentive fee vs. crystallization mechanics
   • Address the "perpetual compounding" problem — ensure high-water marks or loss-carryforward provisions prevent fee drag over long horizons
   • Include fee-waiver or expense-cap provisions for the ramp-up period

6. Address tax and regulatory structuring

   • For REIT vehicles: confirm compliance with 75% asset test, 75%/95% income tests, distribution requirements (90%+ of REIT taxable income), and TRS usage limits [VERIFY current thresholds]
   • For RIC-qualifying vehicles: validate diversification tests and distribution requirements under Subchapter M [VERIFY]
   • For partnership structures: draft allocation provisions addressing Section 704(b) substantial economic effect, and design distribution waterfall for perpetual vehicles without a traditional liquidation event
   • Evaluate UBTI exposure and blockers for tax-exempt investors

7. Prepare the structuring report

   • Compile vehicle comparison matrix if multiple structures are under consideration
   • Summarize key commercial terms, governance provisions, liquidity mechanics, and regulatory requirements
   • Flag open items requiring securities counsel, tax counsel, or board/GP decision

Output

Deliver a Permanent Capital Vehicle Structuring Report containing:

• Executive summary: Vehicle type recommendation with rationale tied to strategy, investor base, and liquidity needs
• Structure diagram: Entity chart showing fund vehicle, GP/manager, feeder structures (if any), and blocker entities
• Capital formation mechanics: Subscription procedures, share class terms, continuous-offering parameters
• Liquidity framework: Redemption/tender mechanics with frequency, caps, pricing, and gating provisions
• Governance summary: Board/GP powers, valuation oversight, continuation/conversion provisions, advisory committee role
• Fee schedule: Management fee, incentive allocation, placement/distribution fees, expense caps
• Tax and regulatory summary: Qualification requirements, distribution obligations, key compliance tests
• Open issues and recommendations: Items requiring further counsel input, marked with [VERIFY] where jurisdiction- or regulation-dependent

Quality Checks

• Confirm the liquidity mechanism frequency and caps are consistent with the illiquidity profile of the target asset class (e.g., quarterly tenders inappropriate for highly illiquid assets without sufficient liquid reserves)
• Verify that fee structures include appropriate high-water mark or loss-carryforward provisions for perpetual vehicles
• Ensure valuation governance is robust — independent valuation at least annually, NAV calculation methodology documented, board/valuation committee oversight specified
• Check that REIT/RIC qualification tests are accurately reflected with current thresholds [VERIFY against current IRC provisions]
• Validate that the continuous-offering mechanics include volume or asset-size triggers that prevent over-capitalization relative to deployment capacity
• Confirm governance provisions address the unique agency risks of perpetual structures (no natural wind-down discipline) including fee reasonableness reviews and periodic continuation or internalization votes
• Flag any assumptions about state-level blue-sky exemptions or NASAA guidelines for non-traded offerings [VERIFY]