Main Building Blocks and Vehicles of a PE Structure
Lawyers use three broad categories of vehicles as building blocks to create private equity structures:
Limited partnerships (and their equivalents in the relevant jurisdiction under consideration) and funds for joint account. Some of the most popular ones are listed here:
- Delaware Limited Partnerships—Although it is most often preferred by U.S. managers, this vehicle is also a vehicle of choice for non-U.S. sponsors. This is due to the jurisdiction’s well-developed case law and lack of obligation to disclose publicly the terms of the LPA, the identity of the LPs, and the partnership’s accounts, among other important characteristics.
- Cayman Exempted Limited Partnerships—Cayman Limited Partnerships are one of the most common vehicles if you want to go offshore. They represent quite a flexible alternative along the English model whereby the LPs have to be registered and gazetted with the Cayman Exempt Limited Partnership, which does not have many of the original limited partnership features and is more aligned with the Delaware model, also including a number of innovative features.
- English Limited Partnerships—Tax transparent for UK-tax purposes (for capital gains distributed to LP, as well as carried interest distributed to carried interest holders), it is one of the most commonly used vehicles in Europe, even by non-UK sponsors, and is also used by non-EU sponsors. Additional benefit for carried interest holders is that, on top of the beneficial treatment of carried interest (taxed with capital gains tax instead of income tax), they also “inherit” part of the base cost of the LPs (called “base-cost shift”), thus further reducing the capital gains tax liability of these carried interest holders.
- Scottish Limited Partnerships—While still tax transparent, unlike the English Limited Partnership, this vehicle has a separate legal personality, discussed in more detail in Chapter 11. That distinction makes it more suitable for fund of funds (FoFs) and carried interest vehicles.
- Jersey & Guernsey Limited Partnerships—These vehicles are the offshore equivalent of the UK limited partnerships with flexibility around the separate legal personality mentioned above.
- Luxembourg FCP (fond commun de placements)—As one of the few Luxembourg private equity regulatory regimes, this vehicle is a popular European fund vehicle, particularly for property funds. With no legal personality, represented by its management company, this vehicle is not a distinct corporate entity but a co-ownership of assets established by a contract.
- Dutch CV (commanditaire vennootschap) Dutch Limited Partnership—This vehicle is often used alongside English Limited Partners or Luxembourg FCP, rather than as a primary fund vehicle. They can be used to accommodate Dutch LPs that sometimes require a separate parallel fund vehicle structured so as to avoid classification as a “corporation” for Dutch tax purposes, which would potentially lead to adverse tax effect.
- Dutch FGR (fonds voor gemene rekening) Dutch mutual fund—An alternative way of structuring a fund (usually used for parallel or feeder vehicles), this vehicle is a set of agreements between the investors, the fund manager, and a depository.
- French FCPR (fonds commun de placement à risques)—Co-ownership of securities without a separate legal personality that is transparent for French tax purposes.
- German KG (Kommanditgesellschaft)—A vehicle often used, among others, by German institutional investors (such as pension funds and insurance companies) restricted from investing in non-OECD (Organization for Economic Co-operation and Development) partnerships.
- Spanish FCRs (Fondos de Capital-Riesgo)—Separate pools of assets that are legally and beneficially owned by investors but managed by a management company. The main characteristics of this vehicle are the lack of legal personality, limited liability, no tax transparency, and regulated status.
Taxable corporate fund vehicles. The most popular ones in Europe follow:
Luxembourg taxable corporates—There are a number of Luxembourg corporate fund vehicles that qualify for the Lux ‘Soparfi’ investment regime:
- SA (société anonyme)—Joint stock company or public limited company.
- Luxembourg SarL (société à responsabilité limitée)—A private limited company that is not generally used as a fund vehicle, but more often used at the SPV level.
- SCA (société en commandite par actions)—The closest Luxembourg corporate equivalent to the limited partnership.
- SICAR (société d’investissement en capital à risque)—An investment regime rather than a legal form (unlike the aforementioned SA, SarL, and SCA, which are legal forms). SICARs may be set up in various legal forms.
Dutch taxable entities:
- BV (besloten vennootschap met beperkte aansprakelijkheid)—The BV is required by law to have a “blocking close” in their articles of association to restrict the transfer of shares; therefore, it is not suitable for listed funds.
- NV (naamloze vennootschap)—The Dutch NV is very similar to the BV, except for the “blocking clause” that makes them more suitable for listed fund vehicles. The BV and the NV are treated in the same way for Dutch tax purposes.
- Dutch cooperative (coöperatie)—This vehicle could be used for fund vehicles, holding companies, and structured finance vehicles. It is popular due to its favorable tax treatment.
- German GmbH—A limited liability company.
Tax-exempt corporate fund vehicles. Some are listed here:
- Luxembourg SICAV (société d’investissement à capital variable, or “investment company with variable capital”) and SICAF (société d’investissement à capital fixe, or “investment company with fixed capital”).
- Dutch VBI (vrijgestelde beleggingsinstelling)—Exempt investment institution regime. These also may be set up in different legal forms (Dutch open mutual fund/open FGR, NV, or other similar European EU entity or entity from a Dutch tax treaty jurisdiction).
I will not elaborate on each of these vehicles. The purpose of this chapter is to put the private equity structures in the context of their accounting implication, not to explain the legal and tax implications. Some legal and tax aspects are mentioned, however, where relevant to the topic discussed.
This chapter focuses on the limited partnership as the preferred legal form for private equity funds, whether an English, Delaware, or Cayman limited partnership, or one set up in another jurisdiction. Therefore, unless stated otherwise, the discussions on accounting and reporting deal with a limited partnership structure in mind.
Domiciliation: Where to Form the Fund—Onshore or Offshore?
In addition to the legal form, the sponsor, with the help of legal and tax advisers, needs to decide on the jurisdiction where the fund will be domiciled. Of particular consideration is whether it will be in an onshore or offshore jurisdiction.
Simple or Complex?
Some lawyers say that it’s best to keep it simple, with as few jurisdictions as possible, but that rarely works. Tailored solutions can be provided according to the specific circumstances of each sponsor, their investor base, and underlying assets.
A Plain-Vanilla Private Equity Structure
Starting with the basic private equity structure in its simplest form is the plain-vanilla private equity structure in Figure 1.1 and Figure 1.2. These structures form the basis for understanding private equity structures in general. Even if your structure is complex because of your specific circumstances and structuring considerations, as long as you understand these structures, you should be able to follow along with more complex structures covered later in the chapter that use a combination of vehicles.
Figure 1.1 Simple U.S. PE fund structure
Figure 1.2 Simple UK PE fund structure