Private Equity: An Alternative Investment

Introduction

Private Equity invests in already existing private companies not listed in the stock exchange that are either promising companies in need of growth and expansion or those in need of ‘repair’. This is done by having a pool of investors investing in a fund; contributes to the fund and buy out the company whereby some changes are made such as change in strategy in reliance on the firms’ years of extensive know-how in the specific business and capital injection to improve the profitability of the company and thrive through the pangs experienced by young companies to grow to such levels. Once revived or fully grown, the company is sold or subjected to secondary buyout and the profits are divided among the various private equity firms that contributed to the fund.

There are three forms that a private equity can take including;

  1. A Limited Liability Partnership
  2. A Private Company
  3. A Trust

ADVANTAGES OF INVESTING IN PRIVATE EQUITY

  • Improves efficiency in the field invested in
  • Creates a dynamic growing company
  • Promotes diversification which helps mitigate portfolio risk and enhance long-terms returns
  • Creates potential for higher returns due to capital appreciation over the long term
  • Promotes Job creations
  • Promotes modernisation operations and promoting innovation and growth
  • Promotes better products acceptable and competitive in the market

REQUIREMENTS FOR ESTABLISHING A TRUST

Make an application to the Capital Markets Authority through a memorandum which should contain the following information;

  • all material information about the fund and the fund manager;
  • background of the key investment team of the fund manager;
  • targeted investors;
  • fees and all other expenses proposed to be charged in the duration of the alternative investment fund;
  • a statement that the directors, trustees or partners are liable for the correctness of the statements contained therein;
  • conditions or limits on redemption;
  • disclosure of all related fees and charges;
  • investment strategy;
  • risk management framework;
  • key service providers;
  • conflict of interest and procedures to identify and address them;
  • its enforcement history;
  • the terms and conditions on which the fund manager offers investment services;
  • its affiliations with other intermediaries;
  • its dispute resolution mechanisms;
  • manner of winding up of the fund; and
  • such other information as may be necessary for an investor to make an informed decision.
  • Demonstrate having adequate experience with at least one person having not less than 5 year’s experience in carrying on the activities of an alternative investment fund including;
    • Advising or managing pools of capital
    • Fund, assets, wealth or portfolio management
    • The business of buying of, selling of or dealing insecurities or other financial assets
    • Has relevant professional qualifications
  • Have fit directors, partners or trustees
  • Has necessary infrastructure and human resources to effectively discharge activates
  • Disclose to the authority and the investors;
    • The investment objective
    • Investment strategy
    • Investment purpose
    • Investment methodology
    • Targeted investors
    • Proposed tenure
    • Proposed scheme assets
  • Have at least two (2) but not more than one hundred (100) investors in Kenya or outside Kenya
  • Not make an invite to the public to subscribe to securities
  • Disclose any entity established by the fund manager that has not previously been denied approval by the authority
  • To solicit funds only by way of private placement
  • To not accept from participants investments of less than one million

COSTS

The official costs (government fee) include an Application Fee of KES. 10,000/- and an Approval and Annual Regulatory Fee of KES. 250,000/-. The amount does not cover legal fees.

TAX APPLICABLE

  1. AIFs structured as companies are subject to the general Corporate Income Tax rate, which is currently 30% for resident companies and 37.5% for non-resident companies.
  • Transactions involving the transfer of shares, real estate, and other assets within an AIF may attract Stamp Duty. The rates vary depending on the type of asset, with typical rates being:
  • Real Estate Transfers: 4% for urban land, 2% for rural land.
  • Transfer of Shares: 1% of the value of the shares.
  • Capital Gains Tax (CGT): AIFs disposing of capital assets may be subject to CGT at a rate of 15% on gains.
  • Withholding Tax: Dividends and interest payments to investors may attract withholding tax. The rates are:
  • Dividends: 5% for residents, 15% for non-residents.
  • Interest: 15% for residents, 20% for non-residents.

TAX RELIEF APPLICABLE

  1. Services provided by trustees in the administration of trusts that manage investments (such as Private Equity Funds structured as trusts) are VAT-exempt.
  2. Relief from double taxation through Double Taxation Agreements (DTAs) that provide mechanisms like reduced withholding tax rates, tax credits, and exemption clauses.

OUR SERVICES

We offer a range of services, including:

  • Company, Limited Liability Partnership or Trust formation
  • Conducting due diligence on the target corporation.
  • Preparation of Share Purchase Agreement as well as facilitating the registration of share transfer
  • Attending the documents registry to register the Trust Deed.
  • Making an application for trust incorporation at the Registrar of Companies.

Please note that the subsequent property transfer to the trust is charged separately from the trust’s formation and incorporation.

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