Estate Living Magazine #liveyourbestlife - Issue 46 December 2019 | Page 37

D E V E L O P
&
I N V E S T
A traditional private equity funding structure
Private equity funding structures in South Africa have traditionally been
set up as limited partnerships, with some older funds using bewind
trusts. Individual investors attract tax on a see-through basis as if they
own the underlying assets directly, with each partner being taxed in his
or her personal capacity on their share of the profits. The partnership is
birthed by a general partner (GP) who sets out the rules and regulations
to govern the fund. GPs contribute a relatively small portion of the
total funding requirement (in some instances between 1% and 3%),
with the remaining investment contributed by investors, ranging from
individuals to pension funds, known as limited partners (LPs). Each LP
carries liability in proportion to the capital contributed.
LPs make contributions for a predetermined time period, usually
between four and six years. Once the portfolio of assets invested in has
been realised, either via sale to a strategic buyer or as part of an initial
public offering, the fund distributes proceeds back to limited partners.
Fee structure and returns
As is the case with hedge funds, a private equity fund charges both a
management fee and a performance fee. The management fee is paid
by the LPs, and is generally calculated based on a percentage of the
assets under management to cover the administrative and operational
costs of the fund.
The performance fee, on the other hand, is a share of the net profit that is
allocated to the GP based on a percentage of profits made. Stipulations
are often included whereby the GP only earns this fee after a hurdle rate
is successfully achieved.
Due to their illiquid investment nature, the performance of private
equity funds is not easily measurable. But internal rate of return and
investment multiples are two measures that the astute investor can use
to assess the performance of his or her private equity investment.
Private equity funding 2.0
The traditional private equity funding structure continues to evolve,
with many alternative investment mechanisms presenting themselves
as real options, particularly in the real estate space. Issues such as
complexity, liquidity, regulatory mechanisms and fund management
fundamentals continue to drive the conversation.
N
Disclaimer
The contents above should not be construed as investment, tax, legal,
accounting and/or other advice. For advice on these matters, consult
your preferred adviser. All mentioned returns are forecasted, and
calculations are based on an investor in the highest tax bracket.
Ryan Enslin