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Profit participation certificates are increasingly becoming an attractive instrument for institutional investors who are looking for higher returns and structural flexibility away from traditional financing models. Especially in the case of real estate and infrastructure investments, it is worth taking a closer look at this form of participation, even if it is associated with higher risks.
In the case of real estate investments, profit participation certificates are usually issued by a special purpose vehicle that owns the property. The investor provides capital through the subscription – for purchase, renovation or expansion. The overall financing is usually provided through three levels: senior debt, subordinated bonds and profit participation certificates, which are considered equity on the balance sheet and are the last to be serviced in the event of insolvency.
Subordination leads to an increased risk, which is compensated for by the chance of significantly higher distributions. In addition to interest, investors also benefit from special income and sales proceeds with profit participation certificates. A yield advantage of three to four percentage points over bonds is typical. If a well-founded assessment of the investment and its risks takes place as well as continuous, professional support during the term, the higher risks can be realistically assessed so that they can be easily represented within the framework of the overall investment.
Another key advantage of profit participation certificates is their flexibility: distributions can be variable and the volume can be staggered. The runtime can also be adjusted. It is usually linked to the planned holding period of the property. However, if the market environment proves to be unfavourable towards the end of this period, the term may be extended. In addition, an early exit is possible if the issuer and investor agree. And last but not least, shares can be transferred to other investors.
Profit participation certificates can also be advantageous in terms of regulatory classification: In the Investment Ordinance, they are considered securities and usually fall under quota 9 – unlike direct investments in real estate, which are recorded under quota 14. Institutional investors can thus expand their real estate exposures without exceeding the permissible real estate quota.
The use of profit participation certificates is not limited to real estate. Infrastructure projects – for example in the areas of renewable energies, transport, education or digitalisation – also benefit from this form of financing. The public sector is dependent on private financing partners for many of these projects. Profit participation certificates can mobilise private capital as an equity-like component – while at the same time ensuring a high level of creditworthiness of the project partners and long-term predictable returns.
The overview shows that as an equity-like financing instrument, profit participation certificates can be a useful addition to existing capital structures. With them, institutional investors can benefit in several ways – from higher yields, flexible structures and regulatory advantages. The advantages are associated with a higher risk than with classic forms of investment such as shares or bonds. However, with careful analysis and professional management, this risk can be easily classified and controlled – and profit participation certificates become a worthwhile return driver in the portfolio.
