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| Strategic Investment Funds
Legal structure
A broad range of factors affects the choice of legal structures, which vary widely depending on the legal tradition of the jurisdiction concerned. Legal structures are typically chosen on the basis of the options they provide in terms of the rights, duties, and fiscal treatment of parties investing in, controlling, and managing the fund (see table 3.5). Investment funds tend to be formed as companies in countries operating under common law and civil code legal traditions, as trust forms in certain common law countries, or as contractual forms, typically in countries without trust laws (World Bank 2015). As discussed earlier in this chapter, SIFs may also be created as bespoke government entities (typically statutory corporations). Globally, however, private equity–type funds are usually created using the limited partnership structure, which allows a set of limited partners to provide capital passively and take on limited liability while the general partners actively invest the capital (see table 3.5 and box 3.4). Despite these differences in structure and associated legal provisions, there is considerable convergence in the form and function of investment funds around the world. Whereas public capital SIFs that invest domestically, and do not seek outside investment at the level of the fund, typically adopt bespoke structures under special legislation or use local commercial structures, mixed capital SIFs tend to adopt globally recognizable private sector management and capital
TABLE 3.5
Examples of legal structures used by global SIFs
COMMONLY USED SIF LEGAL STRUCTURES
KEY FEATURES
No legal entity / contractual forms
• No separate legal existence. • Pass-through taxation. • Liability, control rights, supervision, management, and life of the fund may be set by agreement or secondary legislation and so on.
Statutory corporation / body corporate
• Statutory corporation created by the state through specific legislation. • Does not have constitutional documents typically required under Companies Act, such as articles of association / memorandum of agreement. • The Act defines the entity’s mandate, powers, governance structure, and so on. • Statutory corporation allows for separation from government to ensure independence. • Not incorporated and not subject to the insolvency regime unlike companies incorporated under Companies Act.
Investment company
• Incorporated as a separate legal entity. • Perpetual life / permanent capital vehicle. • Can be recognized as tax transparent (for example, limited liability company in some jurisdictions) or provided tax exemption. • Governance structure usually includes board of directors.
Trust
• Rights and obligations are governed by trust deed. • Governance structure revolves around the trustee, which manages the fund or outsources responsibility to a fund manager. • Investors purchase units in a trust. • Can be recognized as tax transparent.
Limited partnership
• Two types of partners: limited partners that passively contribute capital and take on limited liability, and general partners that represent the sponsor of the fund, take on unlimited liability, and invest the fund’s assets through a management company in return for a fee and share in profits. • Finite life fund, typically 10 years for private equity. • Typically recognized as tax flow-through entity: the fund does not pay taxes, and income is taxable at the investor level.
Source: World Bank. Note: SIF = strategic investment fund.
