Private Equity and Hedge Funds in Armenia
In the western legal culture both PE and HFs are set up as either a limited partnership or limited liability corporation. The limited partnership is the traditional US instrument. Limited partnerships are also used in Europe, often with modified features to reflect the local tax and regulatory requirements․
According to the law of the Republic of Armenia “On Investment Funds” funds can be created and structured as:
- Contractual fund (majority operating in Armenia): group of assets that are pooled based on contractual investment fund management contracts; or
- Corporate fund: fund with the status of a legal entity, assets are being pooled only by the underwriting stocks or other stock securities.
In the case of HF and PEs, including VC, in addition to joint-stock companies, the organizational and legal form of a partnership founded on trust is provided by law. Partnership founded on trust can be named as the Armenian analog of limited liability partnerships where general partners bear liability for the obligations of the partnership, and limited partners bear the risk of losses within the limits of amounts of investments provided and do not take part in the entrepreneurial activities conducted by the partnership.
What about investment structures?
- Venture capital (VC) invests in early-stage or expanding businesses that generally have limited access to other sources of funding.
- Leveraged buyouts (LBO) that tend to invest in more mature businesses, usually taking a controlling interest and leveraging their equity investment with substantial amounts of third-party debt. Buyout funds are typically significantly larger than venture funds, which reflects the relative size of their target investments.
- Growth capital refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change in control of the business.
- Distressed and Special situations։ Distressed or Special Situations is a broad category referring to investments in equity or debt securities of financially stressed companies.
The focus of HFs is on maximum short-term profits, so investments are primarily in highly liquid assets. Hedge funds by design are empowered to invest in a wide range of investments, with various funds focusing on derivatives, distressed firms, currency speculation, convertible bonds, emerging markets, merger arbitrage, and so on whatever the fund manager sees as offering high potential returns in a short period of time.
There are some requirements on the investment structure in Armenia:
Additional risk (HFs) and PE funds, including VC, are considered specialized funds. which means that total assets or a part thereof, but not less than 30% are targeted to be invested in certain types of assets.
In the case of the PE funds not less than 50% of the fund’s assets shall be invested in securities not allowed for sale in the regulated market.
If the PE fund acts as a VC, in case according to the fund’s rules or charter, not less than 50% of the fund’s assets shall be invested in
- securities not allowed for sale in the regulated market and issued by organizations that are newly created or
- are in the early stage of their development, for the purpose of their growth, development or
- enabling their securities to be sold in the regulated market.
The assets of the hedge fund shall be mainly formed:
- Through issuing unlimited amount of debt and using derivative instruments and/or
- Through the sale of such assets that the fund does not possess at the time of the transaction (short sale).