Method and system for adding liquidity to alternative investment transactions

• US 8,560,425 B2
• Filed: 12/10/2002
• Issued: 10/15/2013
• Est. Priority Date: 12/10/2001
• Status: Active Grant

• Current Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Original Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Inventors: Freund, Peter C.
• Primary Examiner(s): Hammond, III, Thomas M
• Assistant Examiner(s): LOFTUS, ANN E
• Application Number:
  US10/315,242
• Publication Number:
  US 20030130920A1
• Time in Patent Office: 3,962 Days
• Field of Search: 705/35, 705/36.R, 705/37
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

The invention provides a method and system for providing liquidity to an alternative investment fund, such as to address the problem of illiquidity for investors in primary funds such as alternative investment funds. The transaction system includes investors in an alternative investment fund, a manager of the fund, and a structure that provides liquidity to investors who are otherwise saddled with illiquid ownership interests in the fund. The structure provides a fund investor with an option to designate some of the investor'"'"'s interest in the fund to the structure, which will provide a preferred cash flow to the structure and which will provide immediate funds to the investor. In one aspect of the invention, the liquidity-providing structure is implemented using a trust to which the investor assigns his interest. The goal of the invention is to provide liquidity to investors of otherwise illiquid assets.

Claims

1. A computer-implemented system for providing liquidity to an AI fund through the use of a liquidation trust, the liquidation trust managed by a structure general partner and in communication with a transaction structure via a network, the transaction structure operable to monitor value arising from the AI fund, wherein the AI fund is managed by a fund general partner and a plurality of AI fund investors commit to investment in the AI fund, wherein the AI fund investors are able to utilize the transaction structure to obtain liquidity, the computer implemented system comprising:

a memory storing information and at least one set of instructions, the information pertaining to the liquidation trust component of the transaction structure, the liquidation trust providing liquidity to the AI fund, wherein the AI fund comprises equity interest in investments selected from a group consisting of private equity funds, hedge funds, leveraged buyout funds, venture capital funds, partnerships, real estate investment trusts, real estate properties, and private company stocks;

at least one computer processor accessing the information stored in memory and the at least one set of instructions to perform steps including;

receiving an assignment from a designated AI fund investor of a portion of a designated AI fund investment to the liquidation trust, and conveying the assignment from the fund general partner to the structure general partner, wherein the fund general partner and the structure general partner are distinct;

determining funds for receipt by the designated AI fund investor in return for the assignment;

establishing at least two classes of trust equity interests based on the assignment, the two classes of trust equity interests providing distributions based on returns on the assigned portion and including a senior equity interest and a junior equity interest;

determining the senior equity interest by calculating (1) a preferred amount equity component to be paid in priority to the junior equity interest and (2) a first portion of a non-preferred equity component that is paid after satisfaction of the preferred amount;

calculating the junior equity interest comprising a second portion of the non-preferred equity component that is paid after satisfaction of the preferred amount, wherein the senior equity interest and junior interest thereby share in the non-preferred equity component return;

transferring title of the senior equity interest from the designated AI fund investor to the liquidation trust;

assigning the junior equity interest from the liquidation trust to the designated AI fund investor;

assigning the senior equity interest from the liquidation trust to a trust participant other than the designated AI fund investor, thereby providing for at least the one designated AI fund investor to obtain a liquidation of AI funds while continuing to share in a potential up-side return based on the junior equity interest; and

receiving capital at the liquidation trust from the AI fund based on the assignment from the designated AI fund investor and calculating payment to the trust participant and the AI fund investor.

2. The system of claim 1, wherein the senior equity interest includes the preferred amount and a portion of a residual component of capital return following satisfaction of the preference amount.

3. The computer-implemented system of claim 1, wherein the preferred amount corresponds to no greater than 30% of the fair market value of the designated portion of the interest, thereby providing for the senior equity interest holder to receive returns from the designated portion of the interest in the AI fund up to that preferred amount before returns are paid to the junior equity interest holder.

4. The computer-implemented system of claim 1, wherein, wherein the preferred amount is 30% or less of the fair-market value of the designated portion of the interest, thereby providing a senior equity interest that has the characteristics of investment grade debt.

5. The computer-implemented system of claim 1, wherein the designating AI fund investor receives funds corresponding to no greater than 30% of the fair-market value of the designated portion of the interest in the AI fund, thereby providing the designating AI fund investor no greater than 30% liquidity while maintaining a longer-term upside interest in the performance of the AI fund through the junior equity interest held by the designating AI fund investor.

6. The computer-implemented system of claim 1, wherein the non-preferred equity component is paid out to the trust equity interests in subordinate priority to the preferred advance rate amount, the senior equity interest receiving a first portion comprising 10% of the non-preferred equity component and the junior interest receiving a second portion comprising 90% of the non-preferred equity component, thereby providing for the designating AI fund investor holder of the junior equity interest and the holder of the senior equity interest to share in the long-term upside of the designated AI fund interest.

7. The computer-implemented system of claim 1, wherein the liquidation trust establishes a plurality of equity trust interests comprising a senior interest and a plurality of junior interests, the junior interests being subordinate in priority to the senior interest, each of the junior interests having established return components that define the priorities as between said junior interests.

8. The computer-implemented system of claim 1, wherein the liquidation trust establishes a plurality of equity tranches corresponding to the senior equity interest and a plurality of junior equity interests.

9. The computer-implemented system of claim 8, wherein the non-preferred equity component is shared among the senior equity interest and multiple junior equity interests.

10. The computer-implemented system of claim 1, wherein the entity that receives the senior equity interest is a individual buyer.

11. The computer-implemented system of claim 1, wherein the entity that receives the senior equity interest is a second fund.

12. The system of claim 11, wherein the second fund pools the senior equity interest with senior equity interests from other alternative investment funds or from other AI fund investors.

13. The computer-implemented system of claim 1, wherein the entity that receives the senior equity interest is a second trust.

14. The computer-implemented system of claim 1, wherein the designated investor'"'"'s interest is an ownership interest in the AI fund.

15. The computer-implemented system of claim 1, wherein the designated investor'"'"'s interest is a right to distributions from the investor'"'"'s ownership interest in the AI fund.

16. The computer-implemented system of claim 1, wherein the compositions and respective priorities of the senior equity interest and the junior equity interest are negotiated between the designating AI fund investor and a buyer receiving the senior equity interest.

17. The computer-implemented system of claim 1, wherein a plurality of AI fund investors designate portions of their respective interests in the AI fund for liquidation, the designations resulting in issued classes of trust equity interests that differ between at least some designating AI fund investors.

18. The computer-implemented system of claim 17 wherein the AI fund investors can select the portion of their respective interests to be liquidated, such that some investors liquidate different-sized interests than others.

19. The computer-implemented system of claim 1, wherein the senior equity interest has priority with regard to the junior equity interest, but is subordinate in priority to another senior equity interest.

20. The computer-implemented system of claim 1, wherein the senior equity interest has a first portion of a non-preferred equity component, the junior interest has a second portion of the non-preferred equity component, and there is at least one additional trust equity interest subordinate to the senior equity interest that receives a third portion of the non-preferred equity component.

21. The computer-implemented system of claim 1, wherein the AI fund investor repurchases or buys back all or a portion of the senior equity interest.

22. The computer-implemented system of claim 1, wherein the AI fund investor sells all or a portion of the junior equity interest to a third party.