IFM40242 - Eligibility criteria: category A investors: examples

Examples illustrating aspects of the operation of the category A investor rules are set out below.

Example 1: a company considering becoming a QAHC is wholly owned by a partnership (P1). That partnership is not a CIS or an alternative investment fund. The partnership is itself wholly owned by other partnerships which are CISs, as follows:

• 40 percent is owned by P2, a fund which is widely owned and GDO compliant;

• 35 percent is owned by P3, a fund which is not GDO compliant, but which has a large number of individual investors, all with relatively small shares of the total;

• 25 percent is owned by P4, a fund which is not GDO compliant, which is owned 50/50 by two pension funds.

P1 is not a CIS or an alternative investment fund. Regardless of its ownership, it cannot therefore be a transparent qualifying fund, as it is not a ‘fund’ within the definition of PARA 9(10). In consequence, PARA 6(1) provides that its transparency is to be respected in determining the relevant interests in the potential QAHC, so it is effectively ignored. P2 is a transparent qualifying fund, as it is GDO compliant partnership which is a fund. P3 is a transparent qualifying fund, as it is a partnership which is not close and is a fund. P4 is also a transparent qualifying fund, since although it is close and not GDO compliant, it is a fund which is more than 70 percent owned by category A investors.

The potential QAHC is therefore wholly owned by P2, P3 and P4, all of which are category A investors. The total of the relevant interests of non-category A investors is zero.

Example 2: as above, but P1 is a CIS which is not GDO compliant

Since it is a fund within the meaning of PARA 9(10), P1 is now capable of being a transparent qualifying fund if it is either non-close, or at least 70 percent owned by category A investors.

In considering the closeness or otherwise of P1, the transparency of P2, P3 and P4 is respected – their status as transparent qualifying funds, which effectively causes them to be treated as persons in their own right for the purposes of the QAHC relevant interest tests, has no bearing on the closeness test. The rule in PARA 9(5)(b) which provides that a non-corporate fund is to be treated as a company with share capital in analysing closeness applies only to the fund the closeness of which is being tested, not funds which own interests in that fund. 25 percent of P1 is therefore seen as owned by the pension fund investors in P4, but on the assumption that the ownership of P2 and P3 is sufficiently diverse that no other three ultimate investors own another 25 percent between them, P1 will not be close. P1 will therefore be a transparent qualifying fund, and a category A investor in its own right. The potential QAHC will be wholly owned by a category A investor.

It is therefore not necessary to apply the 70 percent test to P1, but if that test were applied, P1 would not fall to be treated as a qualifying fund by reason of it. P2 would be treated for these purposes as an opaque category A investor by reason of its GDO compliance (see PARA 9(8)(b), but P3 and P4 would be treated as transparent. The individual investors in P3 would therefore be treated as owners of P1, with the consequence that 35 percent of P1 would be regarded as owned by non-category A investors.

Note also that if the various ownership interests were such that P1 failed to be a transparent qualifying fund, that would not cause it to be a non-category A investor. Its transparency would then be respected, and an analysis of the entities above it in the ownership structure similar to that in Example 1 above would be needed.

Example 3: as Example 2, but P3 is a corporate fund, not a partnership

On this fact pattern, P1 will be close. Between them, P3 and the two pension funds owning P4 own 60 percent of it, so P1 is under the control of five or fewer participators. However, as a non-close CIS, P3 is a qualifying fund and so a category A investor. So, for the purposes of the 70 percent test, P1 is therefore treated as wholly owned by category A investors: P2, P3 and the pension fund investors in P4.

P1 is therefore a transparent qualifying fund, and the sole person regarded as having relevant interests in the potential QAHC.

Example 4: as Example 2, but each of P1, P2, P3 and P4 have a carried interest limited partnership as a member. The maximum entitlement of each LP is 20 percent. The carried interest partnerships give rise to ‘investment management profit sharing arrangements’ as defined in PARA 5(6).

P1 remains non-GDO compliant.

In considering whether P1 is close, the rights of the partners in the various limited partnerships are not aggregated with one another due to TCGA92/SCH5AAA/PARA46(2)(d), imported by PARA 9(5).

The assumption in PARA 5(5) that ‘investment management profit sharing arrangements’ (applied within the closeness calculation by PARA 9(5)(4)) are to be treated as delivering their maximum proportional entitlement at all times should be applied to adjust the proportionate shares of others with interests in the funds as well as the shares of participants in those arrangements. The interests of P2, P3 and P4 are therefore reduced to 32 percent, 28 percent and 20 percent respectively.

As before, P2, P3 and P4 are treated as transparent in applying the closeness test. The two pension fund investors in P4 now only own 16 percent of P1, rather than the previous 25 percent, since the carried interest partners in P4 are treated as owning 20 percent of P4’s reduced interest at all times. The overall closeness analysis will depend on the number and entitlements of the various carried interest holders. Although very unlikely in practice, if each carried interest partnership had a single member, the carry partner in P2 would own 6.4 percent of P1, the carry partner in P3 would own 5.6 percent of P1 and the carry partner in P4 would own 4 percent of P1. The two pension funds and the three carry partners would therefore own 32 percent of P1 between them: not enough to make it close, assuming no other single investor had more than a total 4 percent interest in P1 such that they would replace one of those five participators in the calculation. However, the carry partnership in P1 must also be considered.

If P1’s carried interest partnership also only had a single member, that member would hold a 20 percent interest in P1. That would also need to be taken into account. Its 20 percent must be aggregated with the other four biggest participators: the two pension funds, and the carry partners in P2 and P3. Their total interest would be 48 percent: P1 would still not be close in the absence of another substantial investor in any of the funds.

As in Example 2, regardless of the number of individuals who are members of each carry partnership, P1 would not meet the criterion of being 70 percent owned by category A investors. The carried interest partnerships in P1 and P4 increase the non-category A ownership proportion to a total of 52 percent (i.e., 20 percent for P1’s carry partnership, 28 percent for P3 and 4 percent for P4’s carry partnership).