City of London Investment Group plc (City of London) aims to raise up to $200 million (ecu 180 million) for an emerging markets fund-of-funds. The Emerging Markets Special Opportunities Fund (EMSOF) will acquire interests both in hybrid funds – quoted vehicles which take stakes in both public and unlisted stocks in emerging markets – and secondary positions in private equity funds.
City of London, founded in 1991, has its roots in a brokerage that specialised in overseas closed-end funds, particularly those focusing on emerging markets. The group now has a database tracking more than 1,000 closed-end funds worldwide.
Starting with just GBP300,000 (ecu 440,000) under management, the group’s strong performance enabled it to make substantial inroads into the US institutional market, raising $500 million for investment in closed-end funds between 1993 and 1996. City of London, which has offices in London, the US and Malaysia, currently manages $700 million through seven institutional and retail funds, of which three are domiciled in Delaware, three in Canada and two, the Emerging Market Companies Trust and the Emerging Asia Companies Trust, in the UK.
At present, only some 5% of City of London’s total portfolio is invested in private equity positions. Mark Dwyer, a fund manager in City of London’s Pennsylvania office, explained that two principal factors underlie the group’s decision to widen its mandate to include secondary private equity fund positions in emerging markets. Firstly, private equity funds share the characteristic illiquidity of other closed-end funds and can similarly often be purchased at a substantial discount to net asset value. Secondly, in the wake of the huge international private equity fund-raising boom in recent years, City of London expects distressed sellers to provide a substantial flow of secondary acquisition opportunities in emerging markets in the near future. Meanwhile, Mark Dwyer said, it is “relatively easy” to acquire positions in hybrid funds at discounts to net asset value of as much as 40%.
EMSOF’s remit is global, and City of London expects its portfolio to be relatively evenly split among Asian, Latin American and Central and Eastern European funds, but it also hopes to capitalise on opportunities in Israel and the Middle East.
The fund will initially be capped at $50 million. City of London expects to be able to invest between 40% and 50% of the first EMSOF tranche straight away in hybrids. The balance will be invested in pure private equity secondaries over the next six months or so. When the first tranche reaches 75% investment, City of London plans to take the fund’s total to $200 million in the following 12 to 18 months.
The fund is structured as a Delaware Business Trust with a five-year lock-in period and an annual liquidity option thereafter. The lock-in period will be calculated from the closing of EMSOF’s second tranche. EMSOF, which will draw down its committed capital fully at the outset, has no performance fee and will charge a straight 1.5% management fee.
The fund seems tailored to find a natural constituency among institutions that subscribe to the “opportunity in crisis” argument. City of London has begun to market the EMSOF to its current US client base. Mark Dwyer reported that the fund has generated very positive initial feedback and said City of London may soon also approach European institutions.