Issue: September 2012 / November 2012
With pension funds now permitted to invest in private equity, Rosemary Hunter of Bowman Gilfillan points to qualifications that the funds should heed.
Private equity funds that comply with conditions stipulated in a recently-published pension funds notice will qualify to hold money and assets belonging to pension funds (TT cover story, June-Aug ’12). This development clarifies the manner in which private equity funds may qualify to attract investments from pension funds.
Hunter...where to watch
The Registrar of Pension Funds has set out the following conditions relevant both for pension funds and private equity funds:
- A pension fund may only invest in a private equity fund which is a member of a private equity fund industry body recognised by the Registrar and which is structured in one of the following ways:
- An en commandite partnership, provided the pension fund is the en commandite partner in the partnership. The effect of this is that the pension fund will invest in the partnership as a limited partner and cannot be held liable to creditors for more than its capital contribution to the partnership;
- A bewind trust, provided that the trust is a beneficiary. The trustees of the trust will control the assets of the trust whilst the effective rights of ownership of the assets will vest in the beneficiaries and not the trustees;
- A company, provided that the assets and liabilities of the company are limited to the assets and liabilities arising from investments made by the private equity fund; and
- A foreign private equity fund, provided it is a limited partnership, an open-ended investment company or a company in which the assets and liabilities are limited to the assets and liabilities arising from the investments made by the private equity fund.
It appears that the structure of the private equity funds is aimed at ensuring that pension funds enjoy the benefits of limited liability against the claims of creditors.
The Registrar has been given the discretion to determine the appropriate industry body of which the fund may be a member. This discretion is likely to cater for foreign industry bodies where membership of the SA Venture Capital & Private Equity Association (SAVCA) would have been difficult to obtain or inappropriate. The Registrar has yet to specify which industry bodies are recognized.
- Pension funds are limited to investing in private equity funds provided that any person rendering a financial service, whether discretionary or otherwise, to that private equity fund, is a discretionary Financial Services Provider (FSP).
On the face of it, this condition would suggest that all those involved with the private equity fund must hold discretionary FSP licenses. Although a new category of FSP license is contemplated, it is not yet in effect. Consideration to current structures should be given, in particular whether conversions of licenses from Category I to Category II are required.
- The notice provides a number of factors that pension funds must consider before investing in a private equity fund:
- the private equity fund’s investment strategy and objectives, investment and borrowing powers, restrictions and associated risks (including types and sources of leverage);
- the procedures by which the investment strategy and policy might be changed;
- details about the valuator, auditor, administrator of the private equity fund and any other service providers, requiring a description of the duties of the service providers and investor’s rights should a failure arise;
- liquidity risk management of the private equity fund as well as the pension fund as investor, including redemption rights both in normal and exceptional circumstances, and how fair treatment is ensured across investors;
- the ownership of the assets;
- the level of management fees, performance fees and any initial charges or early redemption fees;
- the manager’s risk and compliance management standards, including the necessary independence of these functions from portfolio management; and
- the liquidity profile of the private equity fund relative to the liquidity requirements and liability profile of the pension fund.
The private equity fund must submit to the pension fund, at least quarterly, investment reports recording the private equity fund’s performance, activities, the value of investments and any other information to enable the pension fund to fulfill its reporting requirements. The financial statements of the private equity fund must be audited annually and made available to the pension fund within 120 days after the end of the private equity fund’s financial year.
A pension fund may only invest in a private equity fund that has clear policies and procedures for determining the fair value of the assets of the private equity fund. This valuation must be independently verified at least annually be a third party and must be in line with the International Private Equity Valuation Guidelines.
The pension fund must ensure that the assets of the private equity fund are verified by the auditors through a scrip count at intervals not exceeding six months.
Fact-specific guidance should be obtained prior to making an investment in any private equity funds or before establishing a private equity fund.