Black private equity funds – Assessing substance over form

Published in Accountancy South Africa  – read here.

The Role of Private Equity in B-BBEE Transformation

Private equity (PE) funds have long played a pivotal role in driving transformation, particularly through their structured investment approaches. In contrast, opaque structures which use Black PE funds to simply enhance Broad-Based Black Economic Empowerment (BEE) points, while limiting control and economic benefit to the existing owners, can scupper this goal. 

Understanding PE Fund Structures

Typically organised as either an en commandite partnership or a private company, traditional PE funds operate under a well-established model. 

In these partnerships, the Limited Partners (LPs)  contribute capital and remain passive,  sharing in the majority of returns. The General Partners (GPs), by contrast,  manage the fund, actively sourcing and exiting investments while contributing a smaller capital portion. 

The central objective of these funds and the partnerships that run them is to deploy capital efficiently, with the ultimate aim to create value and drive economic growth. PE funds leverage their investments to foster innovation, improve operations, and create jobs in the businesses they support. 

How bona fide black PE funds contribute to economic empowerment 

The BEE Codes of Good Practice outline a framework for recognising black ownership, and position bona fide black PE funds as vital catalysts for transformation. Appropriately structured, these funds can channel capital into black-owned and black-managed enterprises 

In the process, they generate employment opportunities and grow new black-owned businesses through strategic investments. 

Genuine black PE funds drive sustainable economic empowerment, align with the spirit of  BEE legislation and facilitate a more inclusive economy. 

Opaque BEE arrangements 

By contrast, some fund structures misrepresent real ownership and dilute the effectiveness of empowerment initiatives. These opaque arrangements include related-party transactions, where existing shareholders contribute capital but maintain behind-the-scenes control, leading to distorted perceptions of black ownership. 

Dishonest fund structures  may also foster superficial involvement by GPs. When GPs are included for compliance reasons but have no genuine management roles, it creates the illusion of black control, which  is misleading. 

This misdirection of economic benefits results in a structure that appears black-owned, while the actual economic gains predominantly flow to non-black LPs. The arrangement sometimes also involves opaque investment commitments, lacks transparency, and obscures true levels of control and economic exposure. 

Another legal – if disingenuous approach- is the token participation by black fund managers. When the engagement of black fund managers is minimal, it contradicts claims of substantial ownership and control. 

Lastly, these structures may include call options for existing shareholders. In practice, this provides the ability to return ownership to the original shareholders, thereby claiming transformation without real change. 

These manoeuvres not only undermine true economic empowerment but also risk eroding public trust in BEE initiatives. 

The role of chartered accountants in these scenarios 

Chartered accountants, particularly auditors, have a significant responsibility to ensure compliance and integrity in BEE transactions. Their contributions include exercising professional scepticism, and should involve verifying ownership structures to ensure they align with the BEE legislation. 

Auditors need to identify conflicts of interest where it is necessary. This means they should scrutinise related-party transactions and ensure these are disclosed transparently. In addition, auditors should confirm that transactions not only meet formal requirements but also the substantive goals of economic empowerment. 

When chartered accountants actively challenge arrangements that lack economic substance, they uphold the principle of ‘substance over form’. This vigilance is critical if we are to preserve the transformative intent of black private equity funds and ensure that BEE benefits translate into lasting empowerment and true nation-building efforts.