Choosing between the two
A client asked us the other day: “should the fund be registered as a Venture Capital fund or a Private Equity (PE) fund?”
The client wanted to know where to register the fund (domestically or overseas).
The client also wanted to know if it fits the portfolio companies.
Based on those questions, we have created this educative comparison-bar.
VCs and PEs in a nutshell
Fundamentally speaking, both funds invest in companies at different stages so both are treated as such.
In a nutshell, a VC invests in technological companies, such as startups or accelerators.
A PE invests in traditional companies, such as oil refineries or real estate.
Naturally, overlapping can occur.
It still is easy to distinguish between the two:
VCs invest in early-stage companies.
PEs invest in mature companies.
The stakes are also different: VCs look for up to 20% stake (equity) in the company.
PEs are more interested in buyouts, mergers and acquisitions.
Taxation – it’s not that simple
In terms of taxes, VCs are taxed more leniently.
Plans such as the 12J in South Africa or the Micro Invest in Malta provide a great solution for investors.
PEs are a little different.
Since PEs are treated similarly to hedge funds, in some jurisdictions, running a PE is essentially tax-free.
It still means that partners are taxed individually as if it were for capital gains.
Not a bad trade-off though.
VCs push for IPOs and exits.
PEs push for creating subsidiaries and selling companies part-by-part for greater gain.
Both invest in different stages of the company’s life-cycle.