Private equity : legal considerations

Abstract

The 'private equity' model has established itself as an industry in its own right, involved in the raising of finance and 'adding value' to companies. The private equity industry has been hailed for boosting economic growth, reinvigorating and restructuring failing companies, and increasing employment in the jurisdictions it chooses to invest in. The success of private equity in foreign jurisdictions is attributed to the favourable legal and regulatory environment that determine the opportunities for private equity transactions to take place. The private equity model is largely absent and unknown to Malta. This dissertation shall therefore define the distinguishing features of the private equity model, as it has developed and is evolving in foreign jurisdictions, in order to provide a better understanding of the term 'private equity'. More importantly, this thesis shall deal with private equity from a Maltese legal perspective. This shall be done with the scope of determining whether the Maltese legal and regulatory framework adequately provide for the private equity model to be adopted in Malta. This dissertation shall analyse aspects of the Maltese legal and regulatory framework that may be attractive in drawing private equity firms and investors to Malta, as well as identify areas that are not private equity friendly, and put forward proposals for these to be amended, in order to attract this fruitful industry to Malta. The private equity model has been compared to a cycle involving three stages, that is, the fundraising stage, the investment of funds into portfolio companies, and the exit stage. The same conceptual approach shall be adopted as a structure for this dissertation. An outline of the features characterising the private equity industry shall set the context for a detailed analysis and discussion of the three stages comprising the life of a private equity investment. Features of the private equity model shall also be described and analysed in more detail throughout the thesis, in order to provide a better understanding of the industry at each level of the cycle, as well as to set the context for discussion. An analysis shall be made of the principal structures available under Maltese law as collective investment vehicles in order to determine whether such vehicles are suitable for the constitution of a private equity fund and whether they are conducive towards attracting the industry to Malta. This shall be followed by a discussion on the Professional Investor Fund regime under the Investment Services Rules in view of establishing a private equity fund in Malta in order to determine whether they provide the regulatory balance for private equity investors. The subsequent Chapter will analyse whether Maltese law permits private equity investors to determine the optimal capital structure of portfolio companies. The first part shall deal with Debt. Light shall be shed on the way the financial crisis is shaping the capital structure of private equity-backed companies and the way the Maltese legal framework may be improved to provide a more favourable environment during this challenging period. The provision of financial assistance shall be examined from a Maltese perspective, as one of the crucial ingredients of a successful private equity regime. The second part of the Chapter shall deal with Equity. The Chapter shall identify whether the Maltese legal framework provides sufficient flexibility for private equity investors to distinguish between the various stakeholders in an investee company. The most popular forms of exit routes shall be analysed from a Maltese legal and regulatory perspective in order to determine whether they afford private equity investors adequate exit opportunities. The concluding Chapter shall provide a comprehensive overview of the attractive features of the Maltese legal and regulatory framework, as well as the barriers preventing private equity transactions from taking place in Malta. The proposed amendments, as well as the manner in which these ought to be effected for the Maltese legal and regulatory framework to attract the private equity industry to Malta, shall be put forward. Finally, areas for further research on the subject matter shall be identified.