Private Equity Primer : Fund structure

Funds are typically structured as limited liability partnerships, with a general partner as sole driver of investment deals, seen as a Fund Manager.

Basically exchange control regulations in South Africa have resulted in a complex fund structuring process. A general partner has to raise and structure two limited liability partnerships, one for its International investors and a second for its domestic investors.

Investors’ commitments and share in the funds’ return is determined on the date of the first close where the participation ratio is set based on the capital commitment to the two funds. Limited liability partnerships will co-invest and share in the profits based on this participation ratio.

The first phase of a fund’s life cycle is the fundraising period up to 18 months. During this period a fund is marketed to the potential investors who commit capital. Capital commitments are promises to fund future investments when the general partner identifies it.

The second phase is the investment period of five years. Once fund raising is complete, the fund closes and the investment period begins. This period typically lasts five years. During this investment period the general partner calls up the commitments from limited liability partners so as to fund acquisitions.

Key considerations for a general partner when identifying potential investments are

- Growth prospects of the industry
- A hard earnings base
- Strong cash generation capabilities
- Management buy-outs
- Sale to other private equity entities.

The third phase, typical a final one, a general partner will look for exit opportunities. Identifiable strategies may include;

IPO’s
Recapitalisations
Management buy-outs
Sale to other private equity entities

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Private Equity Primer : Fund structure

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