In more detail

1. Choosing the right vehicle(s) for fundraising

Conceptually, limited partnerships are the most popular type of vehicle for private capital with some variations across jurisdictions, although technically other forms of organizations with similar mechanics and governing framework may be adopted. Often, the choice of jurisdiction(s) for general partners (GP) is as important as the types of vehicles and there are various factors that influence the decision-making process, including investors' appetite, tax considerations, the locations and types of investors and foreign business restrictions relevant to the target assets. The focus of the discussion below will be on the Thai private capital space.

Private equity (PE) trust

Given that Thai corporate law did not take into account the use of limited partnerships as private capital vehicles when it was enacted and so far no amendment has been made to support such use case, Thailand-incorporated limited partnerships are not a vehicle of choice for those looking to raise private capital in Thailand. Thailand's answer to limited partnerships in the private capital context is the so-called PE trust, which is a type of investment vehicle under the Trust for Transactions in the Capital Market Act B.E. 2550 (2007), regulated by the Securities and Exchange Commission of Thailand (SEC). The SEC intends for PE trusts to function as a new type of investment vehicle for private equity (PE) fundraising and investment activities in Thailand, much like what other jurisdictions have achieved with limited partnerships. Despite their name, PE trusts can be used for a variety of investment strategies: private equity, venture capital and private debt.¹ While PE trusts are structurally and legally not limited partnerships, they are flexible investment vehicles in terms of their ability to alter profit-sharing ratios (particularly for the accrual of carried interest to the GP) and capital contribution arrangements – much more so than other vehicles, such as private limited companies – and many of the common features of international private capital funds could be baked into PE trusts' constitutive documents. For example, it is possible to adopt the concept of capital commitment and capital contribution in PE trusts, where the investors (the beneficiaries of the trusts) make a commitment to provide capital to the trusts upon subsequent capital calls. Notably, PE trusts are only allowed to raise funds from institutional investors and no more than 10 high-net-worth investors (each a defined term under SEC regulations).

Private limited company

Private limited companies are another possible option for private capital funds, but this type of legal structure is far more rigid than PE trusts due to corporate law restrictions. These restrictions may not accommodate the commercial arrangements that private capital stakeholders aim to adopt. Indeed, using Thai private limited companies as fundraising vehicles for private capital would require creative workarounds. Prime examples are the rigidity around minimum capital requirements and profit allocation under Thai corporate law, which may prove challenging for private capital fund sponsors who usually require a great deal of flexibility in when and how capital is demanded from investors and how the fund's profits are shared among the stakeholders.

Feeder-type vehicles

One common fundraising arrangement seen in the Thai market is where funds are raised from Thai investors to feed into another private capital fund in another jurisdiction, such as a feeder fund or fund of funds structure. This is typically done through a Thai asset management or securities company. For example, an asset management company may establish a mutual fund to raise funds exclusively from eligible investors to invest in one or more private capital fund in an offshore jurisdiction (managed by an unrelated private equity firm).

Combination of onshore and offshore vehicles

Another interesting recent trend we have seen is the use of both onshore and offshore vehicles, where funds are raised both through Thai and offshore vehicles, which are injected into an offshore structure and in turn reinvested in Thai targets. This kind of arrangement has gained traction in recent years as it circumvents certain restrictions and complications under Thai laws on vehicle structures while lending credibility to the overall structure, especially in the eye of offshore investors who may be more familiar with offshore vehicles. One caveat, particularly when the ultimate investment targets are in Thailand, is the general foreign business restrictions, which need to be taken into account during the structuring phase of fundraising.

2. Fund governance and investors-manager relationship

In the final section of this newsletter, it might be useful to touch on what the relationship between the GP and limited partners (LPs) of a private capital fund may look like in a typical limited partnership agreement (LPA), especially one that is based on the ILPA² model LPAs.

2.1. Governance

Generally, the GP holds the responsibility and the power of managing and overseeing its private capital fund, akin to the authority and responsibility wielded by the board of directors of a company. Similar to companies, agency problems and conflict of interests may arise in the context of private capital funds where certain types of matters require some form of consent or approval from the LPs. The following types of approval mechanics are common in most LPAs.

1. A majority in interest (or other higher thresholds) is usually required for a number of matters of importance such as an extension, suspension or termination of the commitment period (see more details in 2.2 below), replacement of a key person³ or the GP and the transfer of the GP's interest in the fund.
2. A limited partner advisory committee (LPAC) is typically established in an LPA, whose members are nominated solely by the fund's LPs (usually those with highest capital commitments). The functions of an LPAC are generally of a consultative and advisory nature, with very limited decision-making power. The most common function of this body is to resolve matters of conflict (or potential conflict). We may from time to time see an LPAC effectively making decisions for LPs (for example, an alternative route to a majority in interest).

2.2. GP's responsibilities

The life of a private capital fund typically has a fixed term and well-defined phases. Following the initial closing⁴ of a fund, the first period – the commitment period – is when the GP sources investment opportunities and puts the fund's capital to work accordingly. This usually lasts 3-5 years or shorter if the GP manages to deploy most of the fund's capital before then (or where the commitment is earlier terminated pursuant to the terms of the LPA). During most, or all, of this period, the GP is usually bound by a certain level of exclusivity to the fund, for example there might be a prohibition on the GP managing competing funds and a requirement that both the GP and its specified "key persons" devote all business time to the fund (otherwise the commitment period would be suspended).

Other periods are less well-defined contractually. The investment period is when the GP deploys the fund's capital, which usually overlaps with the commitment period. Similarly, the harvesting or liquidation period may overlap with the investment period. In terms of the GP's responsibilities post-commitment period, there may be certain investment restrictions agreed in the LPA that may include the following, depending on the strategy of the fund

• Concentration restrictions, in particular a hard cap on:
  • A particular sector.
  • A particular portfolio company and a group of affiliated companies.
• Explicit prohibitions on certain investment strategies:
  • Investments in public equity (usually with the exception of PIPE⁵).
  • Investments outside target regions.
  • Hostile bids.

2.3. LPs' responsibilities

As the name suggests, LPs' responsibilities are generally limited to the provision of committed capital. Other decision-making and advisory roles have been discussed above. In most LPAs, LPs can expect extensive provisions regarding the satisfaction of the capital commitment and the (usually severe) consequences of a default. These provisions normally include forfeiture and/or suspension of certain rights, such as the defaulting LP's interest in the fund and distributions, as well as a forced sale of interest at a deep discount, in addition to recovery of damages.

In our next newsletters in this series, we will explore other aspects of the private capital landscape in Thailand, including the frameworks and legal considerations for buyout transactions and venture-type investments.

Baker McKenzie takes pride in offering a comprehensive suite of services essential for private capital fundraising. Our teams have a strong track record in navigating fund structuring, governance and documentation while also providing advice on intricate multijurisdictional tax considerations. Our firm has long stood as a trusted one-stop solution for all the tailored requirements of our private capital clients.

1 Although technically the law requires that non-equity financial support provided by a PE trust be subsequently convertible to equity.

2 Institutional Limited Partners Association.

3 Most funds would designate certain senior members of the GP's team who are supposed to be responsible for the management of the fund as "Key Persons." This often comes with a requirement that the Key Persons devote all or substantially all their business time to the management of the fund. Certain Key Persons events that result in the Key Persons ceasing to exercise control over the fund or certain Key Persons ceasing to devote their time and attention would require, among others, a remediation plan to be approved by the LPs.

4 Funds may have multiple "closings" (i.e., multiple rounds in which different groups of investors commit to investing in the fund). Depending on the fund's strategy, the investment period may start right after the initial closing

5 Private investment in public equity.

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Related content:

Thailand: Series introduction - Exploring the private capital ecosystem

Thailand: Chapter 2 - Private equity (PE) buyouts