What is a Permanent Capital Vehicle (PCV)?
Permanent capital is an investment for an indefinite period of time in an underlying vehicle. The vehicle can be any form – a corporation, trust or partnership. The investment entity could be publicly traded or privately held.
A Permanent Capital Vehicle (PCV) is typically used for long-term investments, such as investments in private equity, real estate, infrastructure, and venture capital. It is an investment vehicle with a large cash flow and allows for the release of capital over a long period of time, allowing for the growth of capital through reinvestment and/or distributions. The money invested in a PCV is typically locked in for a long period of time, making it a good option for those who are looking to make a long-term commitment to an asset class. Additionally, PCVs are typically structured to provide tax benefits, offering reduced rates on capital gains and dividends, as well as other tax incentives.
Example Of Permanent Capital As an Investment Vehicle
The most recognized, and perhaps most successful, example of a permanent capital investment vehicle may be Berkshire Hathaway. In simple terms, Warren Buffett created a pool of investments where new capital could be added, capital could be withdrawn, management is incentivized and the investments within the pool could change. Family offices have been doing this for years. This is why REICG quotes Warren Buffett in our video, “My favorite holding period is forever.”so it is safe to say short term is not the objective. For 50 years, Warren Buffett has been able to reinvest profits from his businesses and the premiums from his insurance operations without investors pressuring him to return cash to them. The result is that Berkshire Hathaway is one of the largest companies on the U.S. stock market.
Permanent capital can also be used to invest in private companies. Using a permanent capital vehicle, investors can inject capital into a private company and have the option to exit when they choose, instead of being forced to exit when the company is sold or taken public. This gives entrepreneurs more freedom to build their businesses and gives investors more control over their investments. It also provides a unique opportunity to build long-term relationships between the investor and the entrepreneur. This can be beneficial to both parties in the long run, since they can work together to create a successful venture.
Permanent Capital Private Equity
For private-equity investors looking for private equity funds, permanent capital is an open ended investment in a company, akin to buying shares of a company on the NY stock exchange without determining in advance when you are going to sell. This is very different from the way private-equity currently invests in U.S. commercial real estate. Typically, private-equity invests in a private real estate investment fund for a specific period, usually five to seven years, with annual profit distributions, and then the real estate is sold and the cash proceeds are delivered back to the investors. The fund manager/sponsor then has to start all over again for the next deal.
PCVs are also known as “Evergreen” structures, sometimes called “Evergreen Funds” where evergreen is defined as “always reliable”. There was an article written in 2015 that referred to Permanent Capital Vehicles as “Long Term Cash Machines”.
Permanent Capital Vehicles are attractive to investors because they offer long-term benefits and stability. Unlike traditional private-equity investments, with PCVs, investors are not tied to a specific time frame, and can exit investments when they see fit. Furthermore, PCVs offer the potential for higher returns than traditional private-equity investments. This is because in a PCV, the capital is locked in for the long-term, meaning that it can be invested for a longer period of time, meaning higher returns. Additionally, PCVs can be attractive to investors because they are typically less risky than other types of investments, and thus more attractive for those looking for a safe and steady return on their investment.
The Benefits of a Permanent Capital Vehicle
A permanent capital vehicle has many beneficial advantages to offer. It allows investors to invest in a company or project for the long term, providing them with stability and a return on their investment. Permanent capital vehicles also provide companies with access to capital that can be used to fund projects and investments over the long term. This is especially advantageous for companies that need to finance their long-term strategies. Finally, permanent capital vehicles offer companies a way to diversify their sources of capital and reduce their risk by providing them with a more stable source of income. All of these benefits make permanent capital vehicles a great option for companies looking for long-term capital investments.
Permanent capital vehicles are also a great way for companies to attract investors. By offering investors the opportunity to invest in a company or project for the long term, companies can gain access to a larger pool of capital. Additionally, permanent capital vehicles can provide investors with an attractive return on their investment, as they are not subject to market fluctuations or other short-term risks. This can make them a great option for investors that are looking for stability in their investments. Furthermore, permanent capital vehicles can help companies build and maintain relationships with investors, as they are able to demonstrate their commitment to their investors over the long term. All of these advantages make permanent capital vehicles an attractive option for companies and investors alike.
Structuring a Permanent Capital Vehicle
A permanent capital vehicle can also be structured to provide more stability and protection to investors. For example, the vehicle could be designed to include a variety of asset classes such as equities, bonds, and real estate, allowing for greater diversification of investments. Additionally, measures can be put in place to ensure that the vehicle is insulated from market volatility, such as limiting the amount of leverage available or setting a floor for the fund’s net asset value. Lastly, investors can be provided with the option to redeem their shares at pre-determined prices, ensuring that their capital remains safe even in the event of a downturn.
In addition, the vehicle can be structured to provide a long-term return profile and to keep investors’ capital safe from inflationary pressures. To achieve this, the fund could be designed to invest in assets with a long-term horizon such as stocks, bonds, and real estate, while avoiding short-term investments such as derivatives and commodities. Furthermore, the vehicle could periodically review its investment portfolio and rebalance it in order to ensure that the fund remains properly diversified. Finally, the fund could also be structured to issue regular distributions to its investors in order to provide them with a steady stream of income.
Exit Strategies for Permanent Capital Vehicles
Permanent capital vehicles offer investors a number of different exit strategies, some of which are more advantageous than others depending on the specific situation. One option is to sell the investment to another investor, allowing the original investor to realize a profit on the sale and allowing the new investor to benefit from the potential appreciation of the investment. Another option is to liquidate the investment, allowing the investor to receive the full value of their original investment. Another option is to refinance the investment, allowing the investor to access additional capital to fund other investments or to pay off existing debts. Finally, the investor may choose to hold onto the investment and wait for the value to appreciate, allowing the investor to realize a long-term gain.
Another option available to permanent capital vehicle investors is to roll over their investment into another similar investment. This approach allows the investor to benefit from the appreciation of the new investment while also preserving the original capital. It can also be beneficial to the investor if the new investment offers a higher rate of return than the original. The downside of this approach is that the investor could potentially lose out on some of the appreciation of the original investment if the new investment does not appreciate as quickly. Additionally, the investor may be subject to additional fees and taxes associated with the rollover process.
Case Studies of Permanent Capital Vehicles
Permanent capital vehicles have become increasingly popular in recent years, particularly in the venture capital and private equity markets. This is because they provide a way for companies to raise capital without having to go public or take on additional debt. Permanent capital vehicles also allow companies to focus on long-term growth strategies, as the capital is not subject to the same pressures of short-term returns as traditional investments. These vehicles have been used to great effect by many companies, from startups to established businesses, to provide them with stability and the capital they need to pursue their growth objectives. A few notable examples of companies that have used permanent capital vehicles include Uber, Airbnb, and Dropbox.