Types of private equity transactions

What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?

Private equity transactions in South Africa are as varied as they are in other jurisdictions. Generally, they can be classified into three categories, namely venture capital, development capital and buyouts. Typically, partnerships (usually en commandite or limited liability), trusts and companies are the most common legal structures used as vehicles for private equity investments. In addition, captive funds of financial services players, such as insurers, play an important role in the country's private equity industry. Collective investment scheme structures might sometimes be utilised where it is possible to accommodate the relevant regulatory requirements. Certain investors (for example, pension funds) are entitled to specific and often beneficial tax treatment, in which event the transaction is structured so that gains 'flow' through the investor, so that the fund entity is 'tax-transparent'. Private equity transactions are funded by equity or debt or a combination of both. Sources of funding generally include independent private equity firms, banks, government or development funding institutions and institutional investors, including pension funds, endowments and insurance structures. Investors in private equity funds will generally derive a return in the form of dividends, interest, proceeds from the sale of shares, initial public offering or recapitalisation.

The majority of transactions concluded by the private equity industry in South Africa have a significant black economic empowerment (BEE) component and indications are that this will continue to be the case in the future. BEE is a statutory policy designed to facilitate greater economic participation for black, historically disadvantaged individuals through the acquisition of equity ownership or management of an investee company (or both). BEE is an important factor to consider when structuring private equity transactions. In addition, BEE transactions themselves represent a significant class of private equity transactions.

Written by Lele Modise, Mogola Makola and Hannine Drake

Article first published on March 27, 2012