A good overview of the structure of the Australian private equity market can be found in a paper published recently by the Australian Private Equity & Venture Capital Association Limited (AVCAL).

AVCAL defines ‘private equity’ as investment typically in unquoted companies that are considered to have strong cashflows from operations and/or high growth potential. Used in this broad sense, it includes venture capital as well as later stage investments. Investments are normally made through funds formed specifically for the investment.

 The fund is usually structured as a limited partnership. The managers of the fund are general partners of the limited partnership and liable for its debts and obligations. The investors are limited partners, with their liability for debts and obligations of the fund limited to the amount of their investment. To protect their limited liability they are passive investors only, prohibited by the constitution of the fund from being involved in investment activities.

Investors are usually super funds, governments and sovereign wealth funds, financial institutions and other sophisticated investors: Australian super funds were the source of 55% of funds in Australian private equity in the 2008 financial year. The ten largest Australian private equity firms manage about 70% of the private equity funds invested in Australia.

Foreign investors make up slightly more than half of their funds under management. Foreign participation is usually lower in smaller funds. About 92% of foreign limited partners are from countries with existing tax treaties with Australia, mostly OECD countries. International funds often channel their funding commitments through feeder collective investment vehicles or ‘fund-of-funds’ in offshore financial centres.

The Cayman Islands is the most popular jurisdiction, and has become one of the main geographical hubs for accessing private equity funds.

Funds are set up this way so that investors avoid double taxation on their gains as the funds flow up the chain from Australia back to the home jurisdiction of the limited partner. AVCAL’s paper was issued in response to draft tax determinations from the Australian Taxation Office (TD 2009/D17 and TD 2009/D18), which if made final may make these kinds of structures less tax effective for foreign investors.