Many people think about the big, well-known US-based funds with billions of dollars under management when we talk about private equity funds. However, “private equity” simply refers to using private capital to acquire a business or operating asset, and the structure is used across the spectrum of deal sizes and industries. The structure is available for use on a small scale and is worthy of consideration by those interested in business acquisition.
What structure is used for a private equity fund?
The structure of the fund can be simple to complex and depends on a variety of factors. The typical structure will have an investment entity (where investors’ ownership interest resides) on top of a holding structure (which owns the business or operating asset).
Who can invest in a private equity fund?
Generally speaking, private equity funds are higher-risk investments because they will be concentrated in a relatively small number of investments, and in most cases they do not offer liquidity until the fund exits from an investment or the fund’s stated expiry date. Moreover, investors will (typically) have no involvement or influence over the fund’s management.
Private equity funds are generally (but not exclusively) geared to people who are “accredited investors”. The most common classes of “accredited investor” are these: (i) an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000; (ii) an individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5,000,000; (iii) an individual whose net income before taxes exceeded $200,000 in each of the two most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year, (iv) an individual who, either alone or with a spouse, has net assets of at least $5,000,000, (v) a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements. Other capital-raising exemptions may be available.
What are the regulatory requirements?
Whether there are filings related to raising capital from investors will depend on the prospectus exemption used. In a typical private equity structure, the management entity will be actively involved in the management of the underlying business(es) and not engaged in ongoing capital raising, so it would not be required to be registered as a portfolio manager or investment dealer. This is an important assessment as failing to comply with securities laws would have a significant impact on a fund and its managers.
As a trusted legal advisor, our role is to help you strategize and develop the appropriate structure and assess your capital raising options, facilitate your capital raise, and act for you in carrying out your acquisition plan.
We would be very pleased to work with you. Please contact us for further information.
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