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Innovation in Private Equity Using Structured Financial Products

High Growth, High Return Alternative Assets While Collateralizing the Principal

Vivaris Capital, LLC has created a structured financial product (a “VICAN”) that gives investors access to institutional quality, alternative asset investments while securing their principal.

The VICAN includes two strips of investment:

  • The first is invested in the common or preferred equity of middle-market acquisitions, growth capital for early-stage technology and life science companies, and real estate development projects.

  • The second is invested in zero-coupon bonds, banks, and insurance products that allow for the return of the principal amount invested at the end of a 7 to 10-year term.

VICAN investments are underwritten to provide at least a 15% annualized return to investors with additional upside and downside protection.

Principal Protection and Upside Potential Chart

What are Structured Notes

Structured notes are a hybrid security containing a bond component and an equity component. On a global scale, there are $2 trillion in structured note assets under management. They are much more popular in Asia and Europe, accounting for $1.1 trillion and $560 billion of that total, respectively. They are sophisticated, well-established products that are typically issued in multiples of a hundred million to over a billion dollars. During 2019, 81% were issued by some of the most prestigious, financial institutions in the world, and 18% were issued by governments.

Market linked notes are the most common type of structured note, but the product may be designed to address almost any combination of assets. Four parameters determine the structure.

  1. The notes have an established maturity that can range from six months to 20 years.

  2. They are tied to the performance of an underlying asset, such as the performance of a stock index or commodity.

  3. The instrument participates in some level of profit from that underlying asset.

  4. There is an established level of protection if the underlying asset loses value.

A VICAN is the first, institutional application of a structured note for alternative asset investments on a scale suitable for individual investors and institutions. As with all investments, there is a trade-off between risk and return. Risk is typically measured as the volatility of the price of the underlying asset as well as the risk of loss. A VICAN is structured to place a floor under the maximum expected drawdown of the underlying asset’s value.

Chart showing the annual return you can get on VICAN

Alternative Assets Offer Superior Return Opportunities

Alternative assets have become a significant option for investors. Alternative assets under management have grown from $2.5 trillion in 2004 to an estimated $14 trillion in 2020. According to KKR, sophisticated investors (pension funds, endowments, family offices) currently have 22% to 24% of their portfolio allocated to the class, with some prominent institutions targeting a 30% allocation. This is a substantial change from the conventional wisdom of a 5% share in the early 2000's.

Alternative assets offer many advantages over more traditional investments in publicly traded stocks and bonds. In general, the valuations of private companies are significantly lower than public equities, with typical enterprise value to EBITDA multiples of 6x to 9x, versus 12x to 18x multiples for the S&P 500 companies. Middle market and technology firms also offer significantly higher potential to drive growth in revenues, earnings, and value than their mature counterparts in the public markets. This growth in value may be driven from a wide variety of opportunities including penetrating new markets, realizing operational efficiencies, making tuck-in acquisitions, creating a critical mass of user adoption, and aligning with an acquirer’s strategic agenda, among many others.

Because of the lack of liquidity, alternative assets are appropriate for investors with a suitably long investment horizon, typically three to ten years. In addition, the returns for the asset class overall are quite good because the winners offset the losers on a portfolio basis. This requires broad diversification, however. Depending upon the correlation of the performance between each, individual company, and the volatility of that performance, an individual needs to invest in 30 or 40 companies in order to realize the average.

Democratizing Access: VICAN

The benefits of the alternative assets class are compelling and appropriate for nearly all types of investors. Historically, however, access has been limited to larger, institutional investors. Only those limited partners that made sizable allocations to multiple managers or made direct investments could access these opportunities in a sensible way. Vivaris Capital has lowered the barrier to investing by creating VICAN to bring access to alternative asset opportunities to individual investors, family offices, and smaller institutions. Instead of making the minimum investment of millions of dollars into multiple funds, VICAN navigates the investment maze so investors can diversify into high-quality private equity, technology, and real estate opportunities for as little as $100,000.

In addition to the financial threshold, there is a tremendous amount of complexity involved with making and managing the dozens of investments that are needed to manage risk. Large institutions have a full-time staff of professionals to administer this. Providing security for the principal amount eliminates the need for broad diversification and the entire process is streamlined dramatically.

Portfolio management theories are elegant and capture the mathematics of markets. Most investors, however, are concerned with the likelihood that they will lose all or a portion of their investment compared to the upside they are likely to realize. This risk has both practical and emotional aspects to it. Practically speaking, profits and losses are not symmetric; it takes a larger return, more time, and perhaps more risk to make up for the same percentage decrease. Emotionally, losing money hurts. It can erode self-confidence and cause fear and uncertainty about the future. The VICAN significantly reduces these risks. The repayment of principal is collateralized by investing in a diversified portfolio of investment-grade securities. This portfolio is held in a custodial account, separate from any potential liability associated with the operating company. The difference between the cost of the investment portfolio and their face amount at maturity is invested in alternative asset opportunities with high-return potential.

Why VICAN? Add Equity Upside with Principal Protection to Your Portfolio

A VICAN is a desirable option for a wide variety of investors. It provides a source of alpha returns that are uncorrelated to the overall stock market. These returns are generated by the active, operating management of the portfolio company as well as by financial engineering. It also provides exposure to the high rates of return available from investing in alternative assets without the volatility associated with nearly every other class.

Many VICAN offerings provide current income as well as capital appreciation. This is the best of both worlds, debt and equity. It has the credit risk of a bond, distributions that exceed the interest provided by similar debentures, and the potential for yield enhancement that could be several times higher still, ultimately. Moreover, the principal protection reduces the downside risk of a naked, equity investment to that of an investment-grade instrument.

A VICAN is also an attractive option for mission-driven investors who are interested in supporting their philanthropic goals. Many socially conscious investments have a “triple bottom line.” This requires identifying the economic, social, and environmental impact of an investment then making trade-offs among them. It is common for investments that drive social benefits to require sacrificing a higher return on investment. In some cases, social venture projects are designed to become sustainable but not to return capital to the investors or to earn a profit. A VICAN allows these types of projects to be financed so that the investors recoup their principal in seven to ten years. The social mission can be achieved with no loss of capital.

Similarly, a VICAN turns a high risk, moon-shot into a manageable risk. It’s like buying insurance for your investment. For example, one of the many mission-based options for a VICAN is biotechnology development. There are many scientific breakthroughs each year that hold the promise of curing rare diseases. Many of these technologies never make it from the laboratory to the clinic because the cost and risk are too great. The ones that do succeed and become approved therapies can earn hundreds of times their investment over time. A VICAN gives access to financing to commercialize these discoveries from investors that wish to combat specific diseases in which they have a personal interest without risking their entire investment in the process. A current mission-based offering sponsored by Vivaris Capital is the United Cancer Centers VICAN.

An Application of VICAN: United Cancer Centers

Vivaris Capital is using the VICAN structure to finance and launch United Cancer Centers, Inc. (UCC). Cancer is a disease that touches nearly everyone. UCC’s mission is to provide comprehensive cancer treatment for Stage 3 and 4 patients who are not responding to traditional measures. This innovative delivery of care is now possible in the United States under the recently enacted Right-to-Try legislation. Right-to-Try allows patients to be treated with promising and safe drugs that are still in clinical development but have not yet received full FDA approval. This includes any therapeutic, diagnostic, or medical device that has cleared an active Phase I clinical trial. Potentially life-saving treatments that may become the standard of care in the U.S. in years to come or may already be approved in other countries are now available. In addition, Right-to-Try provides substantial legal protection for the attending physicians, healthcare institutions, and pharmaceutical companies that provide patient care under the legislation.

UCC is based on the internationally renowned, CHIPSA Hospital located in Playas, Tijuana, Mexico. The hospital has been using an integrative approach to cancer treatment for over 30 years, including immunotherapies, nutrition, and psychological therapy along with chemotherapy and traditional interventions. The owners of CHIPSA are among the founders of UCC. CHIPSA receives interest from approximately 15,000 patients annually but can only treat about 500 per year at the international clinic due to its size and the logistical issues involved with sick patients traveling to Mexico. UCC has a $50 million pipeline of patients with immediate interest and a sophisticated marketing process for patient recruitment. It is led by a world-class team of clinicians, researchers, and managers.

The UCC VICAN will invest in the preferred shares of UCC. The preferred shares provide for redemption at five times the purchase price. The preferred shares also receive a percentage of all UCC revenues which will be distributed to investors. Based on the timing and amount of the distributions, the timing of redemptions, and the return of principal, the UCC VICAN provides investors with an anticipated return on investment of over 15% annually with downside protection. All limited partner units are available only through the private placement memorandum and offering process.

Special Thanks to Our Contributor

Vivaris Capital Logo

Vivaris Capital is an established private equity group with more than 25 years of experience that’s focused on successful investments in alternative assets. Vivaris Capital aligns its interests with those of the investors with the goal to maximize their return on investment. As such, it does not charge any fees based on assets under management (AUM). Vivaris Capital creates value by driving operational performance, realizing increasing scale, aligning strategically with acquirers, and through financial engineering. The VICAN structure has transformed how the company invests and manages risk. They work to share it with investors who want to reduce the risk of loss on equity investments, increase yields compared to investment grade fixed income investments, and support mission-based investors.

About PrimeAlpha

PrimeAlpha is today’s leading technology platform for alternative investment opportunities founded in 2015. We generate connections and help investors discover differentiated opportunities.

PrimeAlpha was developed by industry practitioners as a cutting-edge technology platform to help managers and investors discover and network. Like many great solutions, PrimeAlpha was born from the pain points faced by both managers and allocators in the investment life-cycle and marketing and IR process. Today, PrimeAlpha optimizes ROI-driven solutions emphasizing engagement and efficiency through a technology-enabled yet high-touch platform.

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