Guide to Private Equity Fund.doc


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Guide to Private Equity Fund.doc

  1. 1. Financial Services Commission Guide to Private Equity Fund Contents • Background • Private Equity Funds Generally • FSC Authorisation Policy • Annexes Background Government Initiatives Following the Government's announcement to invest massively in the equity of enterprises in the priority sectors - through the setting up of a one billion rupee Equity Fund, measures were taken to encourage equity participation in private enterprises by Private Equity Funds. "Private equity" has become an increasingly important part of mainstream investor portfolios. The Financial Services Commission sets out in this paper the basic criteria on which applications for the establishment of Equity Funds will be considered. Definition There is no standard definition of Private Equity Fund per se. According to the British Venture Capital Association (BVCA), private equity means the equity financing of unquoted companies at many stages in the life of a company from start-up to expansion and also management buy-outs (MBOs) or buy-ins (MBIs) of established companies. Venture Capital is a subset of private equity, covering the seed to expansion stages of investment. It is believed that the activities undertaken by Private Equity Funds in Mauritius will act as a catalyst for the development of the economy as a whole by providing equity capital to enterprises in key sectors and hence giving them the necessary support to renew equipment and technology as may be necessary. The equity investments may be directed to both listed and unlisted companies in a bid to capitalise companies adequately. Legal Basis Applications for authorisation to operate an Equity Fund should be submitted to the Financial Services Commission under the provisions of the Financial Services Development Act 2001 (FSDA). Attention is drawn to section 2 of the Income Tax Act 1995, as amended, which provides for the setting up of Equity Funds to be approved by the Financial Services Commission (FSC). The establishment and operation of Private Equity Funds in Mauritius will be governed by own specific legislation to be enacted hereafter and the Companies Act 2001. In the meantime, they will be regulated by the Financial Services Commission (FSC) under the provisions of the FSDA in accordance with international best market practices and appropriate prudential controls. Private Equity Funds Generally Structure of Private Equity
  2. 2. Private equity investors will invest either directly or through a fund of funds or by way of limited partnership. (a) Limited Partnerships *[1] The predominant vehicle in the global private equity industry is the independent, private, fixed-life, closed-end fund, usually organized as a limited partnership. The limited partnership is a fund of pooled interests managed by a General Partner who raises capital (i.e., committed capital or commitments) from outside investors (Limited Partners). The partnership is independent in that the management of the investment pool is performed by a management firm that has no outside affiliation or ownership. Most funds of this type require a nominal investment by the General Partner. In addition, the General Partner usually takes a profit split (known as carried interest). Another unique feature of these types of vehicles is that any proceeds from investments must be distributed to investors – they cannot be reinvested except under a few exceptional conditions. (b) Captive Funds Some private equity funds are organized as captive or semi-captive rather than independent. Captive refers to a fund that only invests for the interest of its parent company. This parent may be a company, a banking or financial institution. The notable feature of this type of private equity is that typically the fund is not a fixed-life investment pool – it is ‘evergreen’, i.e., a fund with no fixed cost basis as the parent company can contribute additional capital or withdraw capital from the fund whenever it chooses. A fund of this type typically charges no management fee to its parent company and does not really have a ‘carried interest’ profit split, although a few creative groups have compensation schemes for the investment officers that work similar to a ‘carried interest calculation’. (c) Semi-Captive Funds There is another type of hybrid vehicle called semi-captive fund that mixes capital from both outside investors and the parent company. These funds typically charge a management fee and carried interest similar to the independent funds, but they are typically ‘evergreen’ (i.e., not with a fixed life), and are not independent, but may be closed-end as the number of investors is fixed. (d) Open-end Funds Another investment structure of a private equity fund is an open-ended investment company that acts much like a mutual fund, whether listed or unlisted. Typical Characteristics The key elements of private equity will typically include – 1. Investments in unquoted companies 2. Equity capital 3. Medium to long-term stake 4. Target companies with growth potential Committed Minimum of 250 million Mauritian rupees Capital Manager’s Fund Managers typically invest their personal capital alongside their investors’ capital Commitment which often creates a higher level of confidence in the fund. Investors look for a “meaningful” manager investment of at least 1 % of the size of the fund.
  3. 3. Duration The investment term for most private equity funds is 7 to 10 years, with the possibility of extensions for another two years. The investment remains usually illiquid during this period of time but distributions may be made as investments are sold. Investment On average, private equity funds invest committed capital over a three to six year period. Period Management Fund fees traditionally include an annual management fee of around 1.2 to 2.5 % of the Fees committed capital, which should approximate the actual costs of operating. Performance A share, typically 20% of total returns that is payable to the Manager. This is known as Fees “carried interest.” Preferred The carried interest may be subject to the fund exceeding a certain level of returns on Return: the drawn down money. This preferred return is a margin on the risk free return per annum over the life of the fund. Reporting and Valuation Because of their unique characteristics, additional reporting requirements are needed for private equity funds. In order for any performance reporting requirements to be meaningful, the return calculations must be based on accurate values of the underlying securities. Unlike investments in publicly traded securities where there are well-defined prices, an objective valuation of venture capital or private equity investments is more difficult to compute. Various organizations such as the British Venture Capital Association – BVCA, have developed valuation guidelines in an attempt to standardize the methods used for valuing such assets. More information about BVCA reporting and valuation can be obtained from its web site ( FSC encourages potential applicants to adopt standards and guidelines as published by BVCA with regard to venture capital and private equity funds. *[1]This is a vehicle 'par excellence' . However , Mauritius has not enacted legislation on limited partnership. Pending enactment of such legislation , applicants should use the structure of a limited liability company registered under the Companies Act 2001 Structure of Private Equity FSC Authorisation Policy General Principles One of the main objectives of the FSC is to develop and consolidate the financial services sector in Mauritius and as such much emphasis will be laid on the profile of the fund’s promoters and/or shareholders. 1st Principle: When considering an application to operate a Private Equity Fund, the FSC will have regard to the overall aspects of the application and will in particular take account of provisions relating to the protection of public interest (where the fund will be marketed to the public) and the good repute of Mauritius
  4. 4. as a sound financial services centre. The FSC will also have regard to the risk profile and sophistication of the investors investing into the fund. If the fund is targeted to institutional investors or sophisticated investors, the FSC may rely on adequate disclosure. Since professional or institutional investors are considered as discerning players, the FSC may afford to be less rigorous on regulatory disclosure in such cases. However, the FSC will pay close attention to applications where a fund will target investors with different risk profiles. 2nd Principle: Certain essential criteria must be satisfied by every Applicant before obtaining an authorisation to operate a Private Equity Fund. (“The Applicant” means the CIS in whose name the authorisation [if granted] will be issued. By extension, it includes representatives of the Applicant). These criteria include whether the Applicant: 1. and all those who are associated with the application are “Fit and Proper” – this includes competence, integrity and solvency; • is likely to carry on its business in accordance with the law and all relevant regulations and guidelines; and • can demonstrate an acceptable history of sound business conduct. The manner in which the FSC interprets the “Fit and Proper Criterion” and the basis on which it is applied in Mauritius are described in full in FSC’s “Guide to Fit and Proper” – a copy of which will be made available on request. In addition, the FSC may impose such other conditions as it deems fit from time to time (see Annexes 3 and 4). Annex 3 sets out the conditions for the authorization of a Private Equity Fund. Annex 4 sets out the schedule of conditions for a management company of a Private Equity Fund which requires a licence under section 14 of the Financial Services Development Act 2001 to operate. Applicants are encouraged to discuss their applications with FSC prior to submitting official documents.
  5. 5. Authorisation Process Preliminary Stage (Initial Review) At this stage, a formal application should be submitted in writing, giving:- 1.1 An Outline Memorandum or a Structure Paper or Placement/Offer Document containing the information set out in Annex 1. 1.2 A detailed Business Plan which inter-alia describes the fund’s business and operations, summarises its business strategy and includes detailed financial projections. 1.3 CV details and personal questionnaire forms for relevant people involved in the scheme at the level of the fund or the functionary. The Manager of the Fund must also be licensed by the FSC. 1.4 Where applicable, a copy of the audited financial statements of the promoters for the last three years should be submitted. 1.5 A copy of all constitutive documents including draft agreements or material contracts between the fund and its functionaries should be submitted. 1.6 The Fund’s operational manual including AML-CFT Procedures, Customer Due Diligence (CDD) checks should accompany the application. Every effort will be made to ensure that an Applicant knows –at the outset – what additional information the FSC may require. Pre-Authorisation Stage (Document Review) On the understanding that the application meets the FSC’s authorisation requirements, FSC will submit the application to its Board with recommendations, observations and comments. Typically, the FSC may within 15 days complete the processing of an application. Alternatively, it may decide to refer the application back to FSC Management for further processing as may be necessary. Upon approval-in-principle, a letter of intent (see Annex 2) will be issued wherein some pre and post authorisation requirements and the proposed conditions shall be set out. Post-Authorisation Stage (Formal Authorisation) Prior to formal authorisation being granted, an Applicant should satisfy all the pre-authorisation requirements. The Applicant should communicate in writing to FSC its acceptance of the authorisation conditions. The Fund is also required to submit within one month of the authorisation date certified copies of all the material contracts duly executed, the Fund rules and board resolutions passed at the first and subsequent board meetings held to launch the fund and a copy of the Offer Document in its final form. Submission of Applications Applications should be addressed to the Chief Executive,
  6. 6. Financial Services Commission 4th Floor, Harbour Front Building President John Kennedy Street Port- Louis. Tel: (230) 210 7000 Fax:(230) 208 7172 ANNEXES • Annex 1 Information to be contained in the Information Memorandum • Annex 2 Letter of intent • Annex 3 Schedule of conditions to authorize Private Equity Funds • Annex 4 Schedule of conditions to license Investment Management activities