Investment Funds 2025 Comparisons

Limited Partnerships

By far the most common vehicle used for alternative investment funds is the limited liability partnership (technically referred to in South Africa as an “en commandite” partnership). The main advantages of the limited liability partnership are limited liability for investors; ease of establishment; contractual flexibility to accommodate agreed commercial terms; and tax transparency in the sense that partners account for taxes levied on the income and gains of the partnership based on their proportionate interest in distributions. Investors familiar with the terms of limited liability partnerships governed by English common law will find broadly similar terms and mechanisms in South African limited liability partnership agreements, including many of the terms relating to transparency, alignment and governance promoted by the Institutional Limited Partners Association (ILPA).

Other Vehicles

Other vehicles, seen less frequently but which are sometimes appropriate, for example where investors include domestic taxpayers, are companies and trusts. Companies that house alternative investment funds do not enjoy any special legal dispensation and are subject to ordinary company law requirements in South Africa.

Vehicles Used to House Fund Managers

Fund managers and advisers are usually housed in companies since that is the vehicle most commonly used to comply with financial services provider (FSP) licensing requirements in South Africa.

Where carried interest arrangements have been agreed, the related distributions are often made by the limited liability partnership housing the fund to a separate limited liability partnership that acts as general partner to the partnership housing the fund. Key persons and other stakeholders would share in the carried interest by being limited partners in such general partner partnership. Where no carried interest arrangement is in place, the manager typically charges performance fees.

Limited Partnerships

There are no registration requirements for partnerships. A limited liability partnership is typically established by agreement between the general partner (typically controlled by the fund manager or an affiliate), the fund manager and the one or more initial investors (as first limited partner). Additional investors join the partnership as limited partners by signing deeds of adherence. The general partner appoints the fund manager by concluding a management agreement with the manager on behalf of the partnership. Negotiations on contractual terms between the manager and the initial investors can be lengthy. As can be expected, managers with a track record of success find it easier to raise funds and negotiate terms.

FSP Licence

The fund manager may only act as such from the date on which it is licensed as a financial services provider by the Financial Sector Conduct Authority. The applicable category of licence, namely that of a discretionary asset manager (category II), requires operations and staff based in South Africa and can take between three to six months to obtain. A workaround is available where the fund manager may be appointed as a juristic representative of an existing licence holder, on the basis that the fund manager must still meet almost all of the requirements for licensing and that the licence holder will be liable for the actions of the representative. 

Personnel

In addition, it will be necessary to find directors to act on the board of the company serving as general partner, and often independent members to serve on the manager’s investment committee. In addition, the largest investors will seek to nominate representatives to the advisory committee of the fund.

There is no legislation in South Africa that governs limited liability partnerships. The issue is governed by the common law. It is, however, well-established that the liability of limited partners to the partnership and to creditors of the partnership will be limited to the amount each limited partner has agreed to commit to the partnership. Accordingly, should the partnership be unable to pay its debts, the general partner may call upon limited partners to contribute undrawn commitments and the general partner may realise (or creditors may attach) the assets of the partnership.

Limited partners may lose the benefit of limited liability if they actively participate in the management of the partnership or otherwise represent to creditors of the partnership that they will support the partnership.

The general partner of the partnership will have unlimited liability to the creditors of the partnership for the unpaid debts of the partnership.

There are no regulated disclosure or reporting requirements placed on the general partner of limited liability partnerships. Fund managers are required, as part of the general compliance obligations under their FSP licences, to make available information relating to their type of licence, conflicts of interest management policy and the process to be followed by clients to lay complaints.

However, current practice is for a fund to make available to new investors:

• a private placement memorandum setting out information about the fund manager, the proposed investment strategy to be followed by the fund and the key contractual terms;
• the partnership agreement, deed of adherence and the fund management agreement;
• the names of existing investors;
• existing side letters; and
• financial and valuation information about the fund and its investments.

In addition, funds typically report to investors on a quarterly, semi-annual and annual basis (such reporting is partly driven by regulatory requirements applicable where pension funds have made investments). Such reporting would typically include:

• reporting on drawdowns, investments made and fees and expenses paid;
• portfolio investment valuations;
• manager comments on the outlook for the fund;
• audited financial statements relating to the fund, and auditor certification of assets held and the calculation of fees paid or carried interest distributed; and
• reporting on environmental, social and governance matters, including employment in portfolio companies.

Typical investors in a South African alternative fund include:

• development finance institutions, aid agencies and other government investors mostly based outside South Africa;
• South African pension funds;
• South African insurance companies that invest on account of shareholders or on behalf of policy holders (including financial institutions or retail investors that, if they invested directly, may not meet minimum commitment requirements);

• fund of funds;
• family offices; and
• corporate investors.

There is growing appetite among pension funds and insurers for exposure to the infrastructure sector, and alternative funds are often well-suited for this type of investment exposure.

Public Investment Corporation

An important domestic investor is the Public Investment Corporation (PIC), which is the principal asset manager for South Africa’s public sector (including the Government Employees Pension Fund) and has, as an additional mandate, the obligation to contribute to economic development. The PIC is wholly owned by the South African government. Where the PIC has invested in an alternative investment fund, it is often one of the largest investors.

Foreign investors

As indicated in 1.1 State of the Market, investors from outside South Africa make up a large portion of the investor base. Three factors limit the overall attractiveness of private equity fund investments to foreign investors:

• South African private equity funds typically invest predominantly in South Africa and are therefore exposed to macroeconomic factors in South Africa.
• Given that both portfolio investments and manager hurdle rates are determined in South African rands, investment is often only suitable for investors willing to take exchange rate risk on the rand.
• Total commitments to individual funds are relatively small and funds are typically required to limit concentration risk, with the result that the investment universe of most funds will be limited to portfolio companies in the small and mid-market capitalisation range.     

See 2.1.1 Types of Investors in Alternative Funds, which applies equally here.

Investments by alternative investment funds are typically housed in intermediate holding companies which, in turn, invest in portfolio companies.

It is often the case that fund investments are made alongside co-investors, which may consist, for example, of investors in the fund seeking to enlarge their exposure to a particular portfolio company, other funds managed by the same manager, the management of the target portfolio company, and others.

CISCA and Companies Act

From a regulatory perspective, in order to avoid the application of relevant prohibitions, investors in alternative investment funds should exclude “members of the public” as defined in CISCA and investments for a fund should not be raised pursuant to an “offer to the public” as defined in the Companies Act. This means, for example, that alternative investment funds may not be marketed by means of advertisements or any media campaigns, and that managers should not mention by name any funds that are open for investment on websites or in the press.

Funds and fund managers must also take care to ensure that the absolute number of investors remains fairly small, with preferably fewer than 20 investors.

Other Considerations

As a matter of practice, individuals are not permitted to invest directly in such funds so as to avoid complexities that may arise on death or divorce.

Retail investors are only permitted to invest if they do so through endowments offered by insurance companies.

Since private equity funds typically operate on a commitment basis, institutional investors are screened to ensure that they are likely to be able to meet drawdown requests.

Limited partnerships are not currently subject to any regulatory oversight.

Fund managers are typically required to hold licences under the Financial Advisory and Intermediary Services Act as discretionary asset managers (named category II FSPs).

As “accountable institutions” under the Financial Intelligence Centre Act, fund managers are subject to stringent “know your client” requirements, and must obtain verified information identifying investors and their beneficial owners so as to comply with the applicable AML requirements.

South African pension funds may only invest subject to prudential investment requirements set out in Regulation 28 of the regulations to the Pension Funds Act and the conditions made thereunder, which, inter alia, limits the maximum exposure of a pension fund to private equity funds to 15% of its assets.

South African insurers may only invest in an alternative investment fund if the investment will not detract from the insurer meeting financial soundness requirements, and must take care that it has sufficient contractual entitlement to transfer its investment to third-party buyers, such that the investment will not be classified as an “encumbrance”. 

When making investments outside South Africa, an alternative investment fund will be required to comply with the applicable exchange control requirements.

Fund managers, administrators and custodians who render services from South Africa require licences as financial services providers or nominee companies.

The FSCA issues category I licences to foreign financial services providers, which would enable them to, for example, canvass for business in South Africa, even though they have no operations locally.

For discretionary asset manager or category II licences – applicable to local fund managers – the regulator typically requires the applicant to have operations and staff in South Africa, and for the senior members of staff choosing investments to do so from South African offices.

There is no Companies Act requirement that directors to South African companies be South African citizens or have residence rights, but a company without any locally resident directors may find it difficult to meet the AML requirements of local banks and other financial service providers.   

The prudential investment requirements for pension funds require that the manager of a private equity fund hold a category II licence as a discretionary financial service provider. As indicated in 2.3.2 Requirements for Non-Local Service Providers, the regulator typically requires the applicant to have operations and staff in South Africa and for members of staff choosing investments to do so from the South African offices.

Alternative investment funds housed in limited partnerships do not require registration and are not regulated by any government authority.

Fund managers and other financial services providers to funds are required to obtain licences as financial services providers, which can take three to six months, all going well.

It is common practice for fund managers to sound out investor interest before announcing a new fund, or to announce an intention to create a new fund publicly. It is important in that context that the fund does not yet exist and that no public offer is made to anyone that is capable of acceptance for purposes of investment.

As indicated in 2.3.1 Regulatory Regime, from a regulatory perspective, investors in alternative investment funds should exclude “members of the public” as defined in CISCA, and investments for the fund should not be raised pursuant to an “offer to the public” as defined in the Companies Act. This means, for example, that alternative investment funds may not be marketed by means of advertisements or any media campaigns, and that managers should not mention by name any funds that are open for investment on websites or in the press. Funds and fund managers must also take care to ensure that the absolute number of investors remains fairly small.

Typically, funds are marketed to development finance institutions, government agencies, pension funds, insurers, universities, charitable foundations, corporate investors and family offices.

No authorisation or notification is required by any regulator prior to the marketing of alternative funds in South Africa.

Since a fund manager or other promotor can be challenged at any time as to whether they have marketed the alternative fund to the public, it is important for fund managers to preserve records of their interactions with potential investors, including correspondence, presentations and meetings, so as to be able to illustrate to the regulator, if challenged, that the fund was marketed on a private and confidential basis and to appropriate investors.

Investors in alternative investment funds do not enjoy any specific regulatory protections. The applicable regulator, the FSCA, would most often expect investors and/or creditors to exercise their contractual and/or creditor rights on a private basis through the courts or arbitration proceedings.

There are some examples where the FSCA has applied to court to place a private equity fund and a fund manager under curatorship on the basis that the fund constituted an unregistered and therefore unlawful collective investment scheme. The regulator would typically do so in the case of gross misconduct by the manager, such as theft or other behaviour involving dishonesty, and where the investors are regulated entities, such as pension funds.

Where it can be shown that the fund manager acted in contravention of any of the applicable financial sector laws, the regulator may exercise its powers to sanction the manager or to require the manager to remedy the position.

The FSCA expects knowledge of and strict compliance with applicable laws, including the various codes of conduct, conduct standards, board notices and guidance notices issued. The FSCA follows an enforcement approach to administering the applicable legislation.

That said, the FSCA is approachable in the sense that officials are open to email queries and face-to-face meetings (especially ahead of regulatory applications), and to discussing matters of regulatory uncertainty or matters where the FSCA seeks to take enforcement action.

Save for one or two outliers, collective investment schemes are invariably housed within unit trust schemes regulated by CISCA. Investors purchase units or participatory interests in portfolios that form part of large schemes created by agreement between an FSCA-approved management company and an FSCA-approved trustee (which is, in practice, a bank).

Each portfolio is ring-fenced from the other portfolios in the scheme and each portfolio has its own assets and liabilities.

The management company is the principal service provider to a portfolio and will either manage the assets and all administration itself, or outsource such functions to FSCA-approved asset managers and investment administrators. The trustee or custodian is responsible for the safe-keeping of the assets of the portfolio and for verifying that the portfolio is managed and administered in accordance with its deed and applicable law. 

The FSCA controls each aspect of the establishment of a scheme and a portfolio. It must approve the management company, the trustee, the deed, the name of the scheme, the name of each portfolio and the investment policy and other matters relating to each portfolio, as set out in the applicable supplementary deed.

Furthermore, it must approve any outsourcing by the management company and the terms of such outsourcing, whether in terms of an asset management agreement or an investment administration agreement.

Only South African companies qualify to be licensed as management companies, and the requirements include detailed consideration of the policies and processes to be employed by the management company, the qualifications, experience and adequacy of its personnel, whether its shareholders are considered fit and proper and have adequate access to financial resources to support it, etc.

Once the management company and a scheme have been approved (the approval of which can take six months to a year), the process to add further portfolios is relatively simple and inexpensive (and takes about two to three months).

The limited liability of investors in a collective investment scheme is not expressly addressed in the applicable legislation, but is a consequence of the fact that applicable portfolios are set up as unit trusts. There is no legal basis on which the beneficiaries of trusts are, on that fact alone, held liable under the common law for debts incurred by trustees in their capacity as such.

Detailed disclosure requirements are set out in Board Notice 92 of 2014, published by the predecessor of the FSCA. For example, a management company must publish certain minimum information in relation to each portfolio in its schemes and unit prices must also be published. All marketing material created by management companies for purposes of marketing portfolios must be filed with the FSCA. Additional classification and disclosure requirements are published by the industry body, ASISA, and must be adhered to by its members.

Retail investors and institutional investors, such as pension funds and insurance companies, are the major investors in collective investment schemes. Although no figures are published, it is likely that the investors in South African retail funds are mostly domestic investors.

Management companies often outsource the asset management function to discretionary asset managers holding a category II FSP licence and the investment administration and transfer agency functions to investment administrators holding a category I FSP licence.

Furthermore, many investors make use of investment platform providers which then invest investor funds in particular portfolios, and provide investors with reports on all of their various collective investment scheme investments. Such platforms, referred to as LISPs, hold category III FSP licences.

Lastly, investors may make use of investment advisers, wealth managers or discretionary asset managers to assist them in choosing appropriate CIS portfolios in which to invest.

Often, all of these different service providers are part of the same group of companies, although that need not be the case.

Save for two exceptions, there are no restrictions on the types of investors that may invest in South Africa-domiciled collective investment schemes.

Investors in qualified investor hedge fund portfolios must invest not less than ZAR1 million in any one such portfolio and must show that the investor or its financial adviser has demonstrable knowledge and experience regarding the merits and risks of a hedge fund investment.

Foreign collective investment schemes that have been approved for marketing in South Africa by the FSCA are required to restrict their marketing in South Africa to the types of investors they are permitted to market to in their home jurisdiction. 

There are various types of collective investment scheme portfolios, each with their own prudential investment limitations prescribed by the FSCA. For example, the regulator distinguishes between portfolios forming part of collective investment schemes in securities that are “standard” portfolios, money market portfolios, feeder portfolios or fund of fund portfolios. In addition, the regulator recognises collective investment schemes in participation bonds (which effect loans secured by mortgage bonds over immovable property); collective investment schemes in property (which have been largely replaced by REITS); retail hedge funds and qualified investor hedge funds. 

In addition, for sub-classification purposes, the industry body, ASISA, prescribes requirements according to which portfolios classified by the regulator as “standard portfolios” of collective investment schemes in securities are to be sub-classified as, for example, “balanced funds”, equity funds, income funds, global funds, etc, all according to the nature of the underlying investments.

In broad terms, the purpose of the prudential investment requirements is to ensure that the level of investment risk is acceptable, and that appropriate valuations and investor liquidity can be maintained. Accordingly, concentration risk is limited, borrowings and the use of derivative instruments are restricted, as is investment in unlisted equity.

In principle, only hedge funds and collective investment schemes in property are permitted to make use of borrowings as part of a geared investment strategy.     

No foreign management companies or trustees are permitted to manage South African collective investment schemes. There are examples of where the FSCA has permitted outsourcing by a local management company to a foreign asset manager and a foreign investment administrator, but such examples are exceptions rather than the rule.

Foreign collective investment funds may receive approval for marketing to members of the public with the only requirement for a local presence being the appointment of a South African management company to serve as local representative; or the opening by the operator of the foreign fund of a local representative office that is funded with no less than ZAR2 million. In both instances the local representative or office will have liability to investors for breaches of any applicable laws.

The appointment of non-local asset managers to a South African collective investment scheme portfolio is subject to FSCA approval. We have experience of such outsourcing approval being granted to foreign managers without any South African licensing requirements, in the case where the investment policy of the portfolio required only foreign investments.

Where the foreign manager will assist in marketing the fund to investors in South Africa, it is advisable for the foreign manager to obtain a category I financial services provider licence.

It can take six months to a year for a management company to be approved and two to three months for a new portfolio to be approved as part of an existing scheme.

It can take two to three months for a new foreign collective investment scheme to be approved for marketing in South Africa.

There are no regulatory requirements that address the pre-marketing of retail funds. In practice, given that management companies are highly regulated, management companies would not issue public announcements relating to new funds prior to their approval by the regulator, but may sound out potential institutional investors to establish investor interest.

The requirements for the marketing of retail funds are primarily concerned with appropriate disclosures and documentation, which must all be in accordance with Board Notice 92 of 2014.

Only authorised financial services providers may give financial advice to investors relating to whether particular portfolios are suited to their circumstances.

Management companies are required to comply with KYC and AML requirements under the Financial Intelligence Centre Act prior to accepting any investment from an investor.

See 3.2.3 Restrictions on Investors.

Before marketing commences, the applicable collective investment scheme portfolio must have been approved by the FSCA, and all applicable marketing material must have been submitted to the FSCA and the FSCA must not have raised objections thereto.

Authorised financial services providers that have provided advice or other intermediary services to a client must retain records of such advice or service for a prescribed period of five years and must otherwise discharge their mandate to the client.

Management companies are required to issue periodic and annual audited reports to investors relating to the scheme and the investor’s investments in the portfolios and to publish unit prices.

Management companies have certain reporting duties to the South African Revenue Service relating to investors’ investments in portfolios and are required to withhold certain taxes from distributions to investors, as prescribed by the applicable tax laws.

The FSCA performs regular site visits to the offices of management companies and outsourced service providers in which an array of compliance matters are verified.

The FSCA often takes enforcement action against management companies for non-compliance, has issued large fines for material contraventions, and has sought the appointment of curators to take control of the business of a collective investment scheme.

Management companies have statutory liability to investors for losses suffered on account of a failure to comply with applicable laws.

Large losses suffered by investors on account of compliance failures are relatively rare in the collective investment scheme industry. 

See 2.3.11 Approach of the Regulator, which applies equally here.