Knowing how to start a private equity fund in Canada gives investors and managers the advantage before engaging in such ventures. This article will also discuss the relative issues in founding and operating private equity funds as provided under Canada’s laws.
How do I start a private equity fund in Canada?
Private equity firms are entities that acquire capital or investments from Limited Partners. These funds or investments are then managed by the General Partner, also called the Managing Partner.
The General Partner is also responsible for:
- the administration of these funds for investments in other entities
- decision-making for the fund
- all other day-to-day operations
The capital raised may be used for numerous investment purposes, such as:
- acquire and develop other companies
- produce new goods, products, or technologies
- expand another company’s working capital
Starting a private equity fund in Canada usually observes the following process:
- Setting up the General Partner, including its legal, accounting, and administrative team
- Legal compliances for registration or licenses with securities regulatory bodies
- Raising capital from the Limited Partners and growing the capital fund
Watch this video for a quick view on how private equity funds operate:
For legal counselling on how to start a private equity fund, hear from a private equity lawyer. Consult with the Lexpert-Ranked private equity lawyers in Ontario if you’re in Toronto or any other area in Ontario.
What are some issues to consider in starting a private equity fund in Canada?
There are some practical considerations for both General Partners and Limited Partners when starting a private equity fund in Canada.
Contributions and Alignment of Interests
Having aligned interests between the Limited Partners and the General Partner builds a strong foundation for the creation of the private equity fund. As such, the General Partner may also have to make a relative contribution to the fund as a way of aligning its interests with the Limited Partner.
While the exact figure may depend on the agreement of both parties, the General Partner’s contribution may range from 1% to 5% based on market practice or upon the agreement of both parties.
In addition, Limited Partners may also provide funds for the management or operational expenses up to a cap, and the General Partner would then be responsible for the expenses exceeding this cap.
Returns
Interest in the returns of the private equity fund is also one way to ensure that both the Limited Partners and General Partner are still aligned.
As for the Limited Partners, their investment capital must be repaid, on top of the agreed priority return based on the parties’ agreement.
For General Partners, their entitlement to the “carry” of the investments must be realized after giving the Limited Partners its due. This carried interest can be the subject of a clawback or escrow provision which applies when the fund is liquidated.
As to the rate of the Limited Partners’ priority return and the General Partner’s carry rates, this entirely depends on the agreement of both parties.
The Limited Partners’ return of its investment capital will be subject to write-downs on unrealized investments. This is in relation to the nature of investments which may or may not bear returns in the future.
Management Fees
In Canada, management fees may range from 2% to 2.2% of the capital of the private equity fund. Management fees are usually agreed upon by both parties at the start, which will also include the agreement on any other fees, such as:
- break up fees
- monitoring fees
- consulting fees
- directory fees
These fees contrast with performance fees, which are the payment made to the General Partner or the Manager for the positive returns of the fund. Most performance fees range from 15% to 25% based on the profits of the investment funds.
While fees are generally based on the parties’ agreement, or how much fees or rate the other party is willing to accept, management fees have some relation to the size of the funds invested by Limited Partners. This means that for large investments, parties are inclined to reduce the management fees so that interests between the General Partner and Limited Partners are aligned. The other way applies for smaller investments.
Are private equity funds regulated in Canada?
Regulation of private equity funds may be common to all other jurisdictions, but some would be unique according to Canada’s laws that may directly or indirectly affect private equity funds. As such, a General Partner and its Limited Partners will have to check these regulations before knowing how to start a private equity fund in Canada.
Canadian law on securities
Under the different securities regulator of each Canadian province, every firm engaged in the business of trading or advising of investment funds must be registered.
Private equity managers or the private equity fund itself must be registered as a:
- Dealer: if engaged in the business of trading in securities
- Adviser: if engaged in the business of advising others on investing in, buying, or selling securities
- Manager: for those managing the business, operations, or the affairs of an investment fund
Whenever applicable, registration may be a combination of any of these titles.
To know more about what is asset management and what asset management lawyers help clients with, consult with an asset management lawyer near your area. Contact any of the best investment funds and asset management lawyers in Canada.
Limitations on Limited Partners’ Involvement
While the General Partner has unlimited liabilities under Canadian laws, the Limited Partners must not be involved in the management of the partnership’s business to maintain their limited liability status.
Representatives of the various Limited Partners may form part of the advisory committee of the fund. Still, they are usually not involved in any decision-making to prevent risking the limited liability status of the Limited Partners.
Misrepresentations
As with any other contracts, any misrepresentations will result in liabilities and any other remedies as provided by the Canadian province’s law on securities. This especially applies to any representation in the prospectus, the offering memorandum, or the private placement memorandum.
In all dealings of the General Partners, they are required to disclose all relevant information to the prospective Limited Partners (and the same goes for the Limited Partners). This includes any information disclosed during the due diligence stage, drafting of the Limited Partnership agreement, or any other documentation necessary for the investment deal.
Interested to learn more about how to start a private equity fund in Canada? Talk to any of the Lexpert-Ranked private equity lawyers in Canada.