A less common legal form with a lot of potential
Almost exactly 21 years ago, the legal form of a PCC (Protected Cell Company) was created in Guernsey. The success of this innovative legal concept means that it has since found its way into many jurisdictions, often under the name “Segregated portfolio company”.
The PCC is a legal entity which necessarily consists of two organic parts, namely
- A core (core or non-cellular part) and
- One or more separate cells or segments (Cells).
Each cell is assigned to a specific field of activity of the company with each cell having its own assets and liabilities. However, the individual cells do not have their own legal status.
The special concept underlying this structure is that the assets assigned to the core (which is responsible for managing the structure) or to the individual cells are legally separate and thus also protected from each other. This means that a single cell does not have to be liable for third party claims against the nucleus or another cell despite the fact that they are all technically part of the same entity.
Originally conceived for use in the captive insurance sector, PCC’s have been recognised as a “go-to” solution for a wide range of fund structures as well as other forms of financing such as investment vehicles, separate managed accounts or club deals, and have found a multitude of different applications there.
Private Wealth Management / Open Asset Allocation / Funds of Funds
These structures are typically marketed under the legal form of a PCC to sophisticated investors and private clients of private banks. The cellular structure of PCC’s allows the bank and/or client to operate an asset allocation model efficiently so that investors can have all their assets in one or two cells instead of managing several small portfolio companies or funds. The classic model would be to have one income cell, one growth cell and one balanced cell.
Established examples include Investec World Axis PCC Limited and Kleinwort Benson Elite PCC Limited in London.
Private equity and real estate / deal by deal
Increasingly, however, the PCC is also being used for non-fund structures, particularly for a deal-by-deal structure; a series of transactions where potential target investors have the opportunity to decide whether or not to invest on a particular occasion. The Private Placement Memorandum (PPM) for the core and terms thus remain constant, while each cellular investment remains individually presented (including a separate PPM, separate accounting and bank account) and the full responsibility of the respective cell investors.
In this way, investors can perform their own due diligence on each individual transaction instead of relying exclusively on an asset manager. Alternatively, investors can exit each cell individually or vary their potential exposure based on risk appetite or available cash flow.
The ability to create tailor-made offer documents for each cell means that an investor is provided with information about a single investment strategy (PPM segment) and there is little chance that an investor will invest in a strategy that is unsuitable for him.
With regard to a cost-benefit analysis, whether the establishment of a PCC, a fund or several investment companies is more cost-effective must be assessed individually. In principle, however, it may be said that a PCC can be expected to result in considerable cost savings, both for the core and for all cells since only one board of directors / supervisory board, one audit office, one administration, compliance, etc. will be required.
Performing due diligence obligations
Although the PCC is used as a flexible legal investment instrument, it must not serve to undermine existing due diligence obligations, in particular those relating to the identification of beneficial owners. The segmentation therefore has no effect whatsoever on the due diligence obligations.
From a legal point of view, it is also possible that the individual cells have different beneficiaries compared to the core or that different people are beneficial owners of the different cells. (e.g. by issuing segment shares). The due diligence files must be managed accordingly and subdivided according to cells.
By far the greatest advantage of the cellular structure of the PCC is the separation of liabilities both between different cells and between cells and the central corporate structure. This gives the Protected Cell Company a clear advantage over traditional (non-cellular) investment structures and may allow products with higher risk to be placed in the same corporate structure, thereby reducing overall costs.
Conversely, the individual cell/segment is not assessed independently of the legal entity (the core). This may be particularly relevant in the context of double taxation treaties, where often certain minimum requirements regarding employees, sales etc. must be met.