Portugal Golden Visa investment funds operate differently from traditional investments like stocks or bonds. These private equity funds are governed by a legal document called the Limited Partnership Agreement (LPA), which defines the fund’s structure, fees, investment timeline, and profit-sharing mechanisms. In this guide, we break down the key elements of an LPA, the typical investment phases, investor categories, fee structures, capital distribution methods, and crucial risks to consider before investing.

1. Understanding the Limited Partnership Agreement (LPA)

The LPA is the binding contract between the fund’s investors (limited partners) and the fund manager (general partner). It sets forth:

• The Fund’s Term and Key Periods: When you can subscribe, how long the fund will invest, and when it begins to return capital.
• Fee Arrangements: How subscription fees, management fees, and performance fees (carried interest) are applied.
• Distribution Rules: The order in which capital and profits are returned to investors.
• Investor Rights and Obligations: Voting rights, transfer restrictions, and reporting requirements.

Before investing, it is essential to review the LPA carefully to understand your financial commitments and the timing and method of capital returns.

2. Key Investment Periods

Private equity funds typically operate within three main phases:

• Subscription Period:
  This is the window during which investors can commit and pay in their capital. Although this period commonly lasts for up to two years from the fund’s creation, it may begin simultaneously with the investment period in some funds.

• Investment Period:
  During this phase, the fund deploys the committed capital into targeted investments. This period usually represents about 50% of the overall fund duration—often around four to five years—but it can sometimes be extended. An extended investment period can delay full exit opportunities, potentially leading to distributions or even an extension of the fund’s maturity.

• Divestment (Exit) Period:
  After the investment period, the fund begins to exit its investments, returning capital to investors. Although the fund is designed to distribute capital through exits (and many funds do not recycle capital), significant capital distributions may occur well before the fund’s final maturity. Some distributions are made as capital reductions, while others are paid as dividends.

Note: The timing of when capital distribution IRR (Internal Rate of Return) begins to count can vary—it might be calculated from the moment your capital is paid in or only after the initial investment, or investment period commences. This detail can materially affect the returns you ultimately receive.

3. Types of Private Equity Funds

There are generally two main types of private equity funds:

• Buyout Funds:
  These funds acquire controlling stakes in mature companies, often using leverage (borrowed money) to finance acquisitions. Buyout funds focus on restructuring or optimizing operations to improve profitability before selling the companies at a higher value.

• Growth Funds:
  Growth funds invest in companies that are at an early or expansion stage. They typically use less leverage and target businesses with strong growth potential, accepting higher risk in exchange for the possibility of higher returns.

Each type carries its own risk-return profile. Funds may also mix strategies or invest in a combination of equity and debt instruments.

4. Investor Categories and Their Implications

PE funds often accept capital from a variety of investors and classify them into different categories. Commonly, you may encounter the following:

• Institutional Investors:
  These include pension funds, insurance companies, and banks. They typically invest on a deferred basis (via capital calls) and often negotiate more favorable fee arrangements.

• Individual Investors (Golden Visa Participants):
  These investors are required to pay their full subscribed capital upfront. In many funds, Golden Visa investors are charged higher subscription fees—typically between 2% and 3%—which means that a portion of your capital is deducted before it is invested.

• Fund Manager (Carry Class):
  The fund manager’s capital is often segregated into a distinct category. The manager’s carried interest (performance fee) is only paid after investors have received a return of their contributed capital plus a preferred return (hurdle rate).

Because institutional investors usually benefit from lower fees and deferred payment conditions, they may achieve higher net returns than individual investors if fee structures differ. It is essential to verify whether the fund applies a uniform fee structure to all investor categories. When fees vary, the advertised target IRR for the fund’s NAV may not reflect the net return for each investor category. In other words, while the overall fund might target a certain IRR, Golden Visa investors could see lower net returns after their higher fees are taken into account.

5. Fee Structures and Their Impact on Returns

Fees in a private equity fund are charged to the fund itself, thereby reducing the net return available to investors. Typical fees include:

• Subscription Fee:
  Typically ranging between 2% and 3% for Golden Visa investors, the subscription fee may be structured in different ways that can significantly affect your return. It can either be deducted directly from your initial capital or charged as an additional premium on top of your capital. Furthermore, this fee may either be counted as part of your subscribed capital or excluded from it.

For example, suppose you invest €100,000 and the fee is 3%. In one scenario—if the fee is deducted from your capital and included in the subscribed amount—you would effectively invest €97,000 in the fund. In another scenario—if the fee is charged as an additional premium and not included in the subscribed capital—you would invest €100,000 while paying an extra €3,000, resulting in a total outlay of €103,000. In the first case, the subscribed capital might be considered either €97,000 or €100,000, while in the latter scenario only €100,000 counts toward the subscribed capital requirement.

• Management Fee:
  Usually around 2% per year, the management fee may be charged on the total subscribed capital or on the invested capital (i.e., after returns are generated). A fee based on invested capital is generally more favorable for investors because it adjusts as capital is deployed and returns begin to accrue.
  
  
• Performance Fee (Carried Interest):
  The performance fee is the fund manager’s share of profits and is paid only after investors have received a full return of their capital plus a predetermined preferred return (the hurdle rate). Importantly, the hurdle rate is calculated on a net basis—meaning that the fund manager does not receive any carried interest until you have been made whole and have achieved the net preferred return.

Investor Category Considerations:

It is crucial to verify whether the fee structure is applied uniformly across all investor categories. In many funds, institutional investors may benefit from lower fees compared to individual (Golden Visa) investors. If different investor categories face different fee arrangements, the net IRR achieved by each group may vary even though the overall fund’s target IRR is based on the fund’s net asset value. In other words, if the fund advertises a target IRR, the actual net return for Golden Visa investors could be lower than that target if they incur higher fees. Investors should be aware of these differences when comparing fund performance across investor categories.

6. Valuation of Participation Units

Participation Units represent your stake in the fund’s capital. These units are typically valued on a regular basis—usually every six months—using a fair value method. Valuation methods may include:

• Acquisition Cost:
  Used for assets acquired recently.
• Discounted Cash Flow:
  Estimates future cash flows and discounts them to present value.
• Comparable Multiples:
  Based on valuations of similar companies.
• Market Prices:
  For instruments traded on organized markets.

The periodic valuation determines the Net Asset Value (NAV) of the fund, which is crucial for calculating performance and distribution returns. Note that some funds maintain a fixed unit price during the subscription period, while others may reprice units after certain intervals based on updated valuations.

7. The Capital Waterfall

When it comes to distributing capital and profits, most private equity funds follow a structured “capital waterfall” model, which typically involves:

• Return of Capital:
  All investors receive back the total capital they have paid up (their Commitment).

• Hurdle Rate (Preferred Return):
  Investors receive a preferred return — commonly ranges between 3% to 8% per annum — on their invested capital. This preferred return is calculated on a net basis, meaning investors must first be paid back their full capital plus this preferred return before any performance fees are allocated to the fund manager.

• Catch-Up Phase:
  After the hurdle is met, additional profits are allocated to the fund manager (the carry class) until a predetermined share (typically around 20% of net profits) is reached.

• Final Split:
  Remaining profits are then split between investors and the fund manager, usually in a set ratio (for example, 80% to investors and 20% to the manager).

A critical detail in this process is whether the return of capital is calculated on the gross invested amount or on the net amount after fees, such as the subscription fee. This distinction can have a significant impact on your net returns.

It is also important to note when the hurdle rate begins to accrue. In some funds, the hurdle may start accruing immediately as capital is paid in on a pro‑rata basis, while in others it may only begin at the time of the first investment or at the formal start of the investment period. Reviewing the LPA carefully is essential to understand these nuances, as they directly affect the timing and amount of distributions you may ultimately receive.

You can learn more about distributions here.

8. How Funds Return Capital: Capital Reduction vs. Dividends

Funds may distribute capital in two primary ways:

• Capital Reduction:
  This method returns a portion of your invested capital by reducing the fund’s capital base. Such distributions are generally taxed as capital gains, which tend to have lower tax rates.

• Dividends:
  Distributions paid as dividends are treated as income and may be subject to higher tax rates. Although, in Portugal, dividends and capital gains from private equity funds are tax-exempt for non-residents, you may need to declare them in your country of residence.

9. Risks and What to Watch Out For

Investing in private equity funds carries unique risks that you should carefully consider:

• Exit Risk:
  Funds may face challenges in exiting investments before fund maturity. Extended investment periods or a high percentage of deferred capital calls can delay or reduce distributions.

• Leverage Risk:
  While leverage can enhance returns, particularly in buyout funds, it also increases risk. An inability to exit or poor performance under leveraged conditions can result in lower net returns.

• Fee Impact:
  Higher fees, especially those imposed on Golden Visa investors, may reduce your effective returns relative to institutional investors who typically pay lower fees. Ensure that you fully understand whether the fund’s advertised target IRR reflects net returns after all fees.

• Investment Alignment:
  Funds that mix institutional investors with individual investors may have differing priorities. Institutional investors often have greater weight in capital calls and decision-making, which may affect how distributions are allocated.

• Recycling of Capital:
  Most funds do not recycle capital—proceeds from divestments are distributed back to investors rather than reinvested. Although significant capital distributions can occur before maturity, this structure means you must rely on timely exits to realize returns.

• Complexity in Distribution Waterfall:
  The capital waterfall model can be complex. Differences in how funds define “return of capital” (for example, including or excluding subscription fees) can materially impact your net return. Read the LPA carefully to understand these nuances.

10. Beware of Shady Practices

Not all funds are equal. Some may present themselves as “Golden Visa funds” while engaging in questionable strategies—for example:

• Promises of Buy-backs: Funds cannot directly offer buy-back arrangements via put options. However, some external advisors set up funds for their own benefit, using fund managers as mere "rent-a-name" operators. In such cases, it may be unclear whether you're dealing with the fund manager or the advisor. These advisors sometimes offer supposed buy-back agreements, but they may lack the liquidity to honor them. Be aware that these agreements are parallel contracts, outside the scope of regulatory supervision, leaving you exposed to significant risk.

• Real Estate Loopholes: Although funds for Golden Visa purposes should not invest in real estate, some funds may invest in operating businesses (like hotels) that own real estate, blurring the line between operating income and property investment.

• Conflict of Interest Schemes: Beware of funds that use external advisors or create structures where the Fund lends money to companies owned by insiders, only to funnel cash back to them.

11. Final Recommendations

When evaluating a private equity fund, consider the following:

• Review the LPA Thoroughly:
  Understand the subscription, investment, and divestment periods, fee structures, and distribution waterfalls.
• Assess the Fee Structure:
  Verify if all investor categories share the same fees. If Golden Visa investors face higher fees, your net return may be lower than the fund’s advertised target IRR.
• Consider Exit Strategies:
  Evaluate the fund’s ability to divest investments before maturity and the methods of capital return (capital reduction versus dividends) and their tax implications.
• Examine Leverage Usage:
  Determine whether the fund uses leverage, especially if it is a buyout fund, as this can both amplify returns and increase risk.
• Select Experienced Fund Managers:
  Choose funds managed by experienced teams with a strong track record and robust governance. Avoid funds that rely primarily on Golden Visa investors for fundraising or that use external advisors in a way that might dilute investor returns.

12. Conclusion

Understanding the structure and key terms outlined in an LPA is essential to making an informed investment decision. By knowing how subscription periods, investment periods, and distribution waterfalls work—and how fees and investor categories affect your net return—you can better assess whether a private equity fund meets your financial goals.

We are here to help you navigate these complexities and provide independent advice to ensure your investment is aligned with your objectives. Always look beyond commercial presentations and carefully review the underlying legal documents before investing. Book a call with us to discuss how we can help you navigate the Golden Visa funds.