Overview of fund structures
When establishing a new private equity fund, investors and fund managers require the right investment strategy and a robust understanding of the governing legal and regulatory framework. This can be challenging given the complexity of legal, regulatory and compliance requirements.
Throughout this article and the next, we cover the fundamentals of private equity fund formation in Australia. The first article aims to help investors and fund managers understand, at a high level, the fund structures available for private equity investment and considerations when choosing a fund structure. Our second article will draw attention to the key legal and regulatory requirements that these funds must comply with.
Things you need to know
Various fund options are available including MITs, AMITs, VCLPs, ESCVLPs and CCIVs and consideration should be given to understanding the unique advantages and disadvantages of each structure.
The choice of fund structure has implications for both investors and fund managers including:
- the registration, licensing, and reporting requirements;
- the types of transactions the fund may participate in, including exchange listing; and
- tax concessions, the treatment of investor distributions and the performance fee/carried interest or other form of profit participation the fund manager will receive.
These factors can impact the funds’ source of capital, investment portfolio, revenue, internal rates of return, and return on investment.
Consider your commercial objectives and get in touch so we can help choose the right structure to align with your capital raising campaign and target asset allocation, and improve your competitive advantage.
Fund structure overview
Below, you will find an overview of common private equity investment structures from an Australian legal perspective.
| Structures | Features | Factors to consider |
| Unit Trusts | A unit trust is not a separate legal entity but rather is the legal relationship between the trustee and the beneficiaries. Accordingly, it is comprised of a trustee (who legally holds the assets of the fund) and the unitholders who are the investors and beneficiaries under a trust deed or constitution who hold units in the trust that represent their interest as beneficiaries in the trust. Unit trusts can be managed by the trustee or have the investment management functions outsourced to a special purpose investment fund management entity. When there is a separate management entity, they are often, but not always, related to the trustee of the unit trust. | – Investors will need a comprehensive trust deed or constitution that covers the powers of the trustee, the rights the unitholders have to make directions to the trustee, whether revenue is reinvested or distributed, and any liquidity or other exiting mechanisms afforded to unitholders in the trust. – The trustee will owe fiduciary duties to the unit holders. – The trustee contracts on behalf of the trust, subject to a contractual term generally limiting liability of the trustee to the assets of the trust with the trustee having a right of indemnification out of trust assets (except to the extent it has acted fraudulently, negligently or in breach of trust). – The liability of a unitholder is typically contractually limited to the amount it has committed to invest in the trust. |
| Managed Investment Trusts (MIT) | MITs are a form of unit trust as above which has its unitholders, being members of the public, collectively invest in passive income activities such as shares, property, or fixed interest assets. One of the requirements to be qualified as an MIT is being a ‘managed investment scheme’ under the Corporations Act 2001 (Cth) (Corporations Act). This is defined as: (a) people contribute money or money’s worth as consideration to receive an interest in the scheme (whether the rights are actual, prospective, or contingent and whether they are enforceable or not); (b) money from the different investors is pooled or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the investors who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); and (c) the members do not have day-to-day control over the operation of the scheme (regardless of if they have the right to be consulted or to give directions). Unless all of the investors are ‘wholesale clients’ for the purposes of the Corporations Act, MITs must be registered with the Australian Securities and Investments Commission (ASIC) as a ‘managed investment scheme’ where: (a) it has more than twenty members; (b) it was promoted by a person or an associate of a person, who was in the scheme of promoting managed investment schemes when the scheme was being promoted; or (c) a determination has been made by ASIC that is one of a number of related schemes that together have more than twenty members. | – MITs allow investors to diversify their investments by pooling their capital with others and gain access to markets that rely on mass buying power. – Foreign investors who are a resident of a country that Australia has an effective Tax Information Exchange Agreement may be eligible for a reduced rate of withholding tax on fund payments from an MIT provided other eligibility criteria are met. – The MIT must be operated or managed by an appropriately regulated entity which can lead to higher fees and expenses involved in the operation of these MITs. – Some funds invest in assets that are not liquid which means an investor may not be able to redeem their units easily or at the price equal to the net asset value of the unit. – Some funds can have fees or restrictions on when you can withdraw your money. |
| Attribution Managed Investment Trusts (AMIT) | The AMIT is an MIT that has elected to apply the AMIT tax rules in Division 276 of the Income Tax Assessment Act 1997 (ITAA 1997). An MIT is eligible to become an AMIT when: (a) the trust is a MIT for the income year; (b) the members of the trust always have clearly defined rights to income and capital of the trust when the trust is in existence during the income year; and (c) the trustee makes an irrevocable choice to apply the AMIT system. | – In addition to the considerations relevant to MITs, AMITs are taxed on the amounts attributed to them from the AMIT, instead of on their entitled income share of the AMIT. – AMITs will be treated as a fixed trust for an income year. The trustee of an AMIT will be liable to pay income tax on certain amounts reflecting under or over attribution of tax offsets. |
| Venture Capital Limited Partnerships (VCLP) | VCLPs are separate legal entities established under the Venture Capital Act 2002 (Cth) (VCA Act) and are typically structured as an incorporated limited partnership with no size restriction on the size of the partnership. There is a minimum requirement of $10 million committed capital to be registered and no restriction on the maximum amount a VCLP holds. In terms of lifespan, a VCLP can exist anywhere between 5 to 15 years. If registered with Industry Innovation and Science Australia (IISA), a VCLP can then make venture capital investments in companies or unit trusts with total assets of not more than $250 million. The investments must also meet other criteria and be held for a minimum of 12 months. | – The use of VCLPs is typically limited to venture capital and mid-market private equity funds because of the restrictions on the types of investments that VCLPs can make. – VCLPs can only invest in eligible venture capital investments which excludes investing in companies that predominantly undertake the following as their business: property development or land ownership, construction or acquisition of infrastructure, finance, insurance or making passive-type investments. – There is a tax exemption from income tax on profits (capital and revenue) from the disposal of eligible investments by some foreign limited partners in the VCLP. The structure does not provide the same advantages for Australian resident investors. – A VCLP is a tax flow-through vehicle allowing distributions to be taxed for each investor. |
| Early-Stage Venture Capital Limited Partnerships (ESVCLP) | ESVCLPs extend on the VCLP regime under the VCA Act. An ESCVLP requires a minimum of $10 million and up to $200 committed capital. ESVCLPs allow for fund managers and investors to help stimulate early-stage venture capital investments. While there is no definition of ‘early stage’ it is understood that the gross assets of the desired investee company do not exceed $50 million, this threshold can include expansion stage investments. If registered, an ESVCLP can then make early stage venture capital investments in companies or unit trusts that are at the following stages of development: – pre-seed – seed – startup – early expansion The investments must also meet other criteria and be held for a minimum of 12 months. | – Subject to how an ESVLP is structured, the disposal of eligible investments will be exempt from income and capital gains tax that come from the disposal, for both domestic and foreign investors. – ESVCLP’s require an approved investment plan showing a focus on early-stage venture capital. IISA evaluate the potential ESVCLP extensively across legal criteria and public policy that supports early-stage companies. – The committed capital of a limited partner in an ESVCLP, together with that partner’s associates, must not exceed 30% of the ESVCLP’s total committed capital. An exception applies if the limited partner is an ADI, life insurance company, a public authority constituted by a law of a State or internally Territory that caries on a life insurance business, a widely-held complying superannuation fund or a widely held foreign venture capital fund of funds. IISA may also, on application by a limited partner, make a decision to allow the limited partner’s committed capital in the ESVCLP to exceed the 30% limit. |
| Corporate Collective Investment Vehicles (CCIV) | Established under the Corporations Act, the CCIV is a company limited by shares which has at least one or more sub-funds and is a separate legal entity. A CCIV and its sub-funds must be registered with ASIC. Each sub-fund has its own assets, liabilities, and taxation which allows for easy identification and ensures each sub-fund has protection from the other sub-funds. While being treated as a company, a CCIV may only have one director (typically a corporate director) and is not allowed to have any other employees. The corporate director must be a public company with its own officers and employees and hold an AFSL with a licence that authorise it to operate the business and conduct the affairs of the CCIV. A CCIV can be a retail CCIV or a wholesale CCIV. A CCIV must have a constitution. The constitution of a retail CCIV must make adequate provision for certain matters (not dissimilar to registered managed investment schemes). | – From a tax perspective, the legislative intention is to tax a CCIV on a flow-through basis, like a unit trust or VCLP/ESVCLP, with the general tax treatment of CCIVs and their members being aligned with the existing tax treatment of AMITs (and their members). – One of the key features, and potential key advantages of a CCIV as a collective investment vehicle over a unit trust, is that the assets and liabilities of a CCIV are allocated to distinct sub-funds of the CCIV. – Separate registration with ASIC of each sub-fund of a CCIV, and the clear identification and segregation of the assets and liabilities of each sub-fund of a CCIV, ensures each sub-fund is protected from the business of other sub-funds of the CCIV, enables counterparties and creditors of a CCIV to be able to identify the part of the business of the CCIV with which they have business transactions, and can provide greater protection in an insolvency context. |
What does this all mean?
There is no universal approach to establishing a private equity fund in Australia, with structures varying widely, including MITs, AMITs, VCLPs, ESCVLPs and CCIVs. The choice of structure will have a significant impact on the fund’s tax treatment, legal obligations, and the investment strategy pursued. It will also influence the jurisdiction and type of capital sourced from investors. Careful consideration must be given to which fund structure you settle on.
Keep an eye out for part two of this article series where we discuss the regulatory bodies that govern private equity funds and the legal and regulatory requirements that they may impact your fund.
Next steps
We act for both new and established funds management, venture capital and private equity firms across Australia. Our tax and corporate advisory team can help you establish your new fund.
When you are preparing to establish your fund, please get in touch with us if you would like to discuss a suitable fund structure that will work to your advantage. We can also help you understand your regulatory and compliance obligations under with Australian law, including registration and AFSL requirements, tax treatment, and foreign investment strategies into Australia.