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Private Equity Fund Formation in 2014 Navigating Broker-Dealer Developments, SEC Focus on Fund Expenses,
Tax Issues, Fundraising and the EU's AIFM Directive
Today’s faculty features:
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WEDNESDAY, NOVEMBER 12, 2014
Presenting a live 90-minute webinar with interactive Q&A
Adam D. Gale, Partner, Mintz Levin Cohn Ferris Glovsky and Popeo, New York
Edouard S. Markson, Partner, Chadbourne & Parke, New York
Scott W. Naidech, Partner, Chadbourne & Parke, New York
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FOR LIVE EVENT ONLY
MINTZ LEVIN Mintz Levin Cohn Ferris Glovsky and Popeo PC
Strafford Webinar:
Private Equity Fund Formation
in 2014
Scott Naidech, Chadbourne & Parke LLP
Adam Gale, Mintz Levin
Edouard S. Markson, Chadbourne & Parke LLP
November 12, 2014
MINTZ LEVIN Mintz Levin Cohn Ferris Glovsky and Popeo PC
Goals of Presentation
• Describe significant changes impacting private equity fundraising in 2014
• Describe recent market trends, including structural changes taking place in
the market
• Highlight changes in “market” terms and regulatory and other market
impacts
• Summarize certain new regulatory issues impacting PE funds (including
AIFMD, broker-dealer issues, SEC guidance on fees and expenses, state
adviser registration and cyber-security)
• Certain tax considerations after Sun Capital
1. What do we mean by “Private Funds”?
• Any (i) “blind pool” vehicle (ii) invested by a sponsor (iii) who
often receives a management fee and profit participation (known
as a carried interest or performance fee) (iv) offered to qualified
high net worth investors only
• For purposes of this presentation, “Private Funds” means
“Private Equity Funds”. For example, Venture Capital Funds,
Growth Equity Funds, Buyout Funds, Real Estate Funds,
Distressed Debt Funds, Mezzanine Funds, etc., investing in
illiquid securities
6
2. Key incentives for raising a Private Fund?
• Key Economic Incentives for Sponsor Raising a Fund: Access to
private capital from alternative sources; Carried Interest and
Management Fee
• Key Economic Incentives for a Limited Partner Investing in a
Fund: Access to a diversified pool of investments in a targeted
geographic region and/or industry being managed by a specified
team of experts
7
3. Recent changes in key incentives…
• Ten years ago, most fund negotiations focused on economics;
five years ago…governance; in 2014…back to
economics…plus…
SEC new focus on private equity funds.
• Impacts on incentives altering the standard “2 and 20” model –
fundraising pressures/competition for capital/LP leverage
• Volume: currently over 2,000 Private Equity and Real Estate
Funds looking to raise capital, seeking almost $750 billion
• Total amount of probable commitments from this pool: only $250
to $300 billion/year (most of which will go to large multi-billion
funds)
• Conclusion: less than one-half of fundraises will successfully
raise their target amounts.
8
9
Competition for LP Dollars at Historical Levels
The fundraising environment in 2014 will remain difficult but on track to raise most capital since 2008.
Slide courtesy of Berchwood Partners
Source: Preqin
1433
946 950
1019 1033
877
417
688.0
319.5 295.8
329.3 381.1
437.3
236.0
0
200
400
600
800
1000
1200
1400
1600
2008 2009 2010 2011 2012 2013 H1 2014
Global Fundraising
Number of Funds Aggregrate Capital Raised (US$ BN)
10
Funds in the Market and Time to Achieve Final Close at Record Highs
GPs fundraising at start of 2014 is a record 2,077 funds targeting US$ 753 billion
Slide courtesy of Berchwood Partners
Source: Preqin
11.1 11.7
14.5
16.9
18.2
16.2
17.7 18.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2006 2007 2008 2009 2010 2011 2012 2013
Ave
rage
Tim
e Sp
ent
in M
arke
t (M
on
ths)
Year of Final Close
Average Time for Funds to Achieve a Final Close
1,304
1,624 1,561 1,619
1,845 1,940
2,077
705
888
699 607
758 797 753
0
500
1,000
1,500
2,000
2,500
January-08 January-09 January-10 January-11 January-12 January-13 January-14
Funds on Road Over Time
No. of Funds on the Road Aggregrate Target Capital (US$ BN)
21
30
44 45
39
20
167
211
221 222
169
90
0
50
100
150
200
250
$0
$20
$40
$60
$80
$100
2009 2010 2011 2012 2013 1H 2014
No
. of Fu
nd
s US$
Bill
ion
s
Total Capital Raised (US$B) No. of Funds
Overall Emerging Markets Fundraising
Slide courtesy of Berchwood Partners
Source: EMPEA
11
70%
59%
69%
62%
71% 76%
4%
4%
4% 12%
4%
7% 9%
23%
20%
12% 9%
5% 3%
3%
1%
1% 1%
1% 5%
6%
4%
4% 3%
11% 9% 5%
1%
9% 11%
2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 1 H 2 0 1 4
% O
F T
OT
AL
CA
PIT
AL
RA
ISE
D
Emerging Asia CEE & CIS Latin America MENA Sub-Saharan Africa Multi-Region
Breakdown of Private Equity Fundraising By Region
Slide courtesy of Berchwood Partners
Source: EMPEA
12
13
For Diversification and Higher Returns
Investors are increasingly looking to gain exposure to emerging markets
Slide courtesy of Berchwood Partners
Source: EMPEA, Preqin
8%
8%
6%
9%
14%
4%
10%
9%
12%
19%
11%
16%
11%
11%
18%
16%
18%
33%
30%
37%
38%
35%
-11%
-9%
-4%
-9%
-16%
-1%
-1%
-11%
-2%
-2%
-2%
-20% 0% 20% 40% 60%
Western Europe
United States
Russia/CIS
Central and Eastern Europe
India
Middle East and North Africa
Turkey
China
Brazil
Latin America (ex Brazil)
Southeast Asia
Sub-Saharan Africa
Proportion of Respondents
LPs' Planned Changes to their EM PE Investment Strategy Over the Next Two Years
Begin Expand Decrease or stop investing
Changes of key incentives…
• Larger managers compete for the same capital (from government
plan, pension plans, foreign institutions, sovereign wealth funds)
• Greater competition for capital/competitive fundraising
environment
• lower fees and carry, greater LP controls, higher customization
• More conservative fundraising efforts
• PF Funds hesitant to make large jumps in fund sizes from predecessor
funds
• Desire to hit fundraising targets and reduce fundraising period result in
lower fund targets
• Still, sponsors increase their negotiating leverage through certain
key differentiators, including higher performance, strategy
diversification, oversubscription, better terms
• SEC focus on marketing and interim valuations during fundraising
14
4. Who are the Sponsors of Private Funds?
• Private Equity International released the “PEI 300” in May 2014:
1. The Carlyle Group (Wash DC): raised $30.7 billion in capital for their Private
Funds over the last five years
2. Kohlberg Kravis Roberts (New York): $27.2 billion
3. The Blackstone Group (New York): $24.7 billion
4. Apollo Global Management (New York): $22.3 billion
5. TPG (Fort Worth, TX): raised $18.8 billion
6. CVC Capital Partners (London): $18.1 billion
7. General Atlantic (Greenwich, CT): $16.6 billion
8. Ares Management (Los Angeles): $14.1 billion
9. Clayton Dubilier & Rice (New York): $13.5 billion
10. Advent International (Boston): $13.2
15
Fee envy…
16
US Buyout
Fund I
US Buyout
Fund II
Asia
Fund
US Mezz
Fund
US Real
Estate Fund
GP GP GP GP GP
Investment Adviser
Sponsor
Each Fund pays a Management Fee to the Investment Adviser…can result in large aggregate fees that alter
incentives (from carried interest based to fee based); thus downward fee pressure
Each Fund pays a Carried Interest to the GP
(or an affiliated entity)
Carry
Management Fees
Fee anxiety…
17
Fund I ? ? ? ?
GP ? ? ? ?
Investment Adviser
Sponsor
For advisers with fewer funds under management, downward pressure on fees by the “market” means
smaller budget, leaner staff, harder to pay consultants and advisors…less overall fees to manage the team.
Carry
Management Fees
Zombies!
• Pressure on smaller and mid-sized managers to reduce fees and
fundraise
• Given the reduction in commitments and increased pressure, it is
possible that a significant portion of existing fund managers will
cease to continue meaningful operations, becoming so-called
“zombie funds”
• Governance provisions in some fund agreements may be
inadequate to handle orderly liquidations/terminations/Key
Person events/removal events (fund agreements often infer that
the team will remain in place to raise a subsequent fund)
• While the process may be clear, the cost of implementing may
discourage a single LP from pursuing.
• There may be little or no economic incentive for the GP to initiate the
process.
• SEC increased focus on zombie funds and zombie managers
18
Results…
• Overall result:
• increased LP leverage and lower capital commitments alter dynamics
of negotiation
• longer fundraising periods, or smaller funds/shorter investment
periods
• lower fees and carry
• greater LP participation in investment process
• co-investment rights
• deal-by-deal opt-outs and investment vetoes
• “Classes” of LPs: concern that larger LPs have leverage and can
therefore negotiate better terms in side letters, or in separate
parallel or co-investment funds
• SEC focus on marketing during fundraising periods, favortism,
and allocation of fees and expenses across managed funds
19
5. New SEC Areas of Focus: Private Equity
• Broken Windows Policy
• Drew Bowden Sunshine Speech (May 6, 2014)
• Inherent risks and temptations in private equity business model
• Observed violations and weaknesses
• Poor controls regarding collection of fees and allocation of expenses
• Hidden Fees
• Marketing and Valuation
• Need for thorough, detailed, and continuously adapting compliance
program
• Norm Champ Conflicts of Interest Speech (Sept 11, 2014)
• 50+% increase in SEC-registered private fund advisers since Dodd
Frank
• Tailor and adapt compliance policies and procedures
20
New SEC Areas of Focus: Private Equity (cont’d)
• Continuously review own business models to identify emerging conflict
and risks
• SEC Examination Priorities
• Valuations
• Zombie Funds
• Bowden Speech
• Expense Shifting
• Ancillary Revenue and Hidden Fees
• Co-Investments and Investment Opportunities
• Advertising and Fund Performance
• In re Williamson
• Broker-Dealer Issues
• David Blass/M&A Broker Letter
21
6. Other key terms being negotiated…
• Key Man
• New funds
• Established funds
• Removal Events
• For Cause/other than for Cause
• Mechanics and Voting
• Clawbacks
• Reporting
• ILPA forcing standardization
• Co-Investments
• Pipeline
• Disclosure
• Securities concerns
22
7. ILPA and Changes in Legal Terms
• Institutional Limited Partners Association (ILPA)
• Download ILPA Principals from www.ilpa.org
• Private Equity Principles 1.0 published in Sept 09
• Private Equity Principles 2.0 published in Jan 2011
• Goals: to establish “best practices” regarding fund partnerships
between GPs and LPs
• Three guiding principles:
• Alignment of Interests
• Governance
• Transparency
23
ILPA: a pretty good outline of issues and considerations…
• ILPA: Outlines Key Principles and Concepts, along with reporting
templates
• Economics:
• carried interest calculation and waterfall structures (deal-by-deal vs.
aggregate-return waterfall structures and considerations)
• Management fee considerations, along with GP Expenses and Fee
Income offsets
• Clawbacks: Principles 2.0 contains detailed Appendix on Carry Clawback
Best Practices (e.g., considerations such as a guarantee or escrow;
clarification that the GP clawback is net of taxes paid; other
considerations based on the waterfall structure)
• Governance:
• Key Man events considerations
• Investment Strategy considerations
• Conflicts of interest, fiduciary duties and LP Advisory Committee
(Appendix A)
24
…but not a checklist!
• Transparency
• Fee disclosures
• ILPA standardized templates
• Capital call and distribution notices
• Annual and quarterly reports
• Appendix C covers additional considerations on reporting
• Not a laundry list of must-haves
• ILPA: our terms are not to be applied as a “checklist”; each partnership
should be considered separately and holistically
• Goal is to provide terms and principles to be considered and that will result in
better investment returns and a more sustainable private equity industry
• Generally, considered more “pro-LP” and not the “market standard”; the ILPA
terms continue to be discussed, debated and augmented
25
1. AIFMD
2. Broker-Dealer Issues for PE Funds
3. SEC Guidance on Fees & Expenses, and Marketing
4. State Investment Adviser Exemptions
5. Cyber-Security
Regulatory Issues
26
• Applies if meet any of the following:
o Market to European Union investors (including UK)
o Fund vehicle is organized in EU
o Fund manager based in EU (including a branch office)
• Applies even if Non-EU Fund Manager and Non-EU Fund
• Applies to all types of private funds, including PE, VC and RE funds
• Need to consider AIFMD before any contact with any EU investor
• Transitional period ended on July 22, 2014, so fully in effect
1. AIFMD (Alternative Investment Fund Managers Directive)
27
• Any "collective investment undertaking" (i.e. pooled vehicle)
o Including "investment compartments" thereof
o Which raises capital from a number of investors
o With a view to investing in accordance with a defined investment policy
o Which is not a UCITS
• Includes entities established to hold a single asset
(except certain securitization SPVs)
• Co-investment vehicles – depends on jurisdiction
• Not include: family office vehicles (if no 3rd party investors); single
investor funds (under fund docs); holding companies
AIFMD: Definition of an AIF
28
• Marketing is the direct or indirect (by a third party) offering or
placement of an AIF at the initiative of AIF Manager
• Some jurisdictions (e.g., UK) - clarified that marketing only occurs
when send a PPM or subscription documents
• Other jurisdictions – marketing occurs when send any document (even
one page) that refers to a specific fund or funds
• Should be able to pre-market – send documents that discuss the fund
manager generally without referring to new funds, at least if already
have current PE funds
AIFMD: Definition of "Marketing"
29
• Criminal penalties
• Rescission of investor's subscription
– Potentially guaranteeing repayment of any loss of capital
• Financial penalties
• Suspension of marketing and management activities in jurisdiction
• Restriction of activities
AIFMD: Potential Sanctions
30
• Note – EU "Passport" not available to non-EU managers until late 2015
• Reverse Solicitation
• De Minimis Exemption
• Comply on Country-by-Country Basis with Country's NPPR
(National Private Placement Regime)
• Establish an EU Entity and Obtain EU Passport
AIFMD: Options for Non-EU Fund Managers of Non-EU Funds
31
• Potential investor requests (solicits) the fund manager to provide
information about investing in the manager's funds
• Request must occur before "marketing" by the fund manager
• Documentation – Recommended to obtain a written request from the
investor prior to discussing or sending documents as to specific funds
• A representation in subscription documents by itself is insufficient
• Use of template letter from investors may raise questions
• If can rely on reverse solicitation, do not need to comply with the
jurisdiction's NPPR
AIFMD: Reverse Solicitation
32
• AUM below €100 million (~US$135M), or
• AUM below €500 million (~US$690M),
- if no leverage and no redemptions allowed for 5 years
• Must count Fund Manager's total AUM for all funds, including funds
with no EU investors
• Still need to comply with each country's NPPR, but not with disclosure
obligations
AIFMD: De Minimis Exemption
33
• Each country has its own requirements
• Notification jurisdictions (e.g., UK) - only require notification to
regulator, and then can begin marketing immediately upon filing
• Approval jurisdictions (e.g., Germany) – must register with regulator
and wait to market until obtain approval
• Approval process can take several months
AIFMD: National Private Placement Regimes (NPPRs)
34
If neither nor de minimis nor reverse solicitation available, need to
comply with NPPR and meet other requirements:
• Include specific disclosures in PPM, such as relating to fund expenses
• Report to the country's regulator, including disclosure of remuneration
to fund manager's staff, and update report annually
• If acquiring control of an EU company:
- disclosure to the company, its shareholders and regulators
- comply with asset-stripping restrictions
• For some jurisdictions, need an EU depositary, minimum capital, so
that requirements are basically the same as for an EU manager
AIFMD: Disclosure and Other Requirements
35
• If will be soliciting a large number of EU investors in many EU
countries, consider establishing an EU entity
• Can then obtain an EU passport, and only need to register once
• But need to comply with further requirements, including restrictions on
how the fund manager pays its principals and employees
AIFMD: Establish an EU Entity
36
• Still a hot topic for SEC
- See April 2013 SEC Div. of Trading & Markets speech
• Investment Banking/Acquisition/Disposition Fees
o Fund manager (or affiliate) charges success fee to portfolio
company or to fund for identifying sellers or purchasers, or
structuring transactions
o Unless 100% of that success fee is offset against fund
management fees, then SEC suggesting that fund manager must
register as a B-D
o But SEC subsequently issued an M&A Brokers no-action letter,
setting forth an exception to the BD registration requirements
o Note that still need to comply with state (blue sky) BD laws
2. Broker-Dealer ("B-D") Issues
37
No BD registration if sale of company meets following requirements:
• Privately-held company (cannot be a shell company)
• Buyer must control the company (control presumed at 25% of voting
rights or, for LLCs, obtain 25% of capital upon dissolution)
• Buyer must "actively operate" the company (can be through power to
elect executive officers and annual budget approval, or serve as exec.)
• Broker may not: have ability to bind a party; directly or indirectly
provide financing; have custody of , or handle, funds or securities; form
a group of brokers; have been barred or suspended
• May not involve a public offering and securities must be restricted
• Broker must obtain consent if represents buyers and sellers
BD Issues: M&A Brokers No-Action Letter
38
• Personnel in Marketing Department
o Dedicated sales force, regardless of how compensated, "may
strongly indicate" B-D registration required
o For example, consider status of head of Investor Relations
• Paying Commissions to "Finders"
o Beware of potential consequences – Ranieri matter; rescission
Other BD Issues
39
• Use of "Operating Partners"
- Payment of Operating Partners directly by portfolio company or
fund without sufficient disclosure
- Operating Partner functions like other members of fund
manager team (but not paid by the fund manager)
- Payments not offset against management fees
• Shifting of Employees to "Consultants"
- Employees at fundraising stage, but then terminated and
rehired as consultants
3. SEC Guidance on Fees & Expenses, and Marketing
40
• Back office functions paid by fund without sufficient disclosure,
especially compliance, legal and accounting
• Charges to fund for automated creation of investor reports
• Accelerated Monitoring Fees to Portfolio Companies
- Portfolio company required to sign agreement for payment of
monitoring fee for a long period (e.g., 10 years)
- Upon merger or IPO, fee charged to terminate the monitoring
agreement, which is acceleration of all fees due for entire term
Other Fees & Expenses Issues
41
• IRRs in marketing materials that are gross numbers (without deduction
of fees and expenses) without disclosure
• Use of a valuation methodology different than as disclosed
• Changing valuation methodology period to period, to increase fund
valuation
• Use of projections instead of actual valuations, without disclosure
• Key members of management team resigning soon after fundraising
completed
SEC Guidance on Marketing Issues
42
• Fund managers who are exempt from SEC registration still need to
check the investment adviser registration requirements of the state of
their principal office and place of business
• Some states have added additional requirements to meet the state
exemption, following NASAA model rules:
o For 3(c)(1) funds:
- can only charge carried interest to investors that are Qualified Clients
under Adviser Act definition
- must include additional disclosures to investors
o Some states have different exemption for 3(c)(1) VC funds
o Must file Form ADV as Exempt Reporting Adviser
4. State Investment Adviser Registration Exemptions
43
• OCIE Cyber-Security Alert – April 2014:
o Consider cyber-security risks and how to detect unauthorized activity
o Responsible for third party vendors' cyber-security
o Principals should understand issues, not just IT personnel
o Recordkeeping of security processes
• Unclear whether should include disclosure of cybersecurity issues in
PPM, but risk factor probably useful
• Red Flags Rule applies to certain RIAs (need policies and procedures
to identify, detect and respond to Red Flags indicating possible identity
theft)
5. Cyber-Security
44
45
Sun Capital & Private Equity Funds
46
• A PE Fund's portfolio company (SBI) was in bankruptcy and stopped its contributions to a multiemployer pension plan (TPF)
• TPF demanded payment of SBI's withdrawal liability under ERISA
• TPF also asserted that the PE Fund was jointly and severally liable for the withdrawal liability under ERISA, on the basis that it was a "trade or business" that is "under common control" with the primary ERISA obligor (29 U.S.C. § 1301)
Sun Capital – Basic Facts
47
• No offices or employees
• Report only investment income
• Make investments with the aim of turning them around and selling them at a profit
• The Fund agreements vest the General Partner with authority to manage the Fund, which includes managing and supervising investments.
• GP receives a 2% management fee from the Fund, plus a share of profits
• Subsidiary management companies provide management services to the Fund's portfolio companies for a fee.
• This fee results in an offset to the management fee owed by the Fund
• The employees of the management companies are actively involved in the operations and management of the portfolio companies' businesses.
Key Features of Sun Funds
48
• The Funds were in a "trade or business" under ERISA (and remanded for other issues) – but the business of SBI itself.
• Holding was based on the fact that the Funds were not merely passive investors (as mere investment is not a "trade or business"), but were, through agents, "actively," "extensively" and "intimately" involved in the management, operation and supervision of SBI.
• The court focused heavily on the management fee offset, characterizing it as the "economic benefit" that most clearly distinguished the Fund from an ordinary, passive investor.
– "It is one thing to manage one's investments in businesses. It is another to manage the businesses in which one invests"
– "Under Delaware law, it is clear that the GP of [the Fund], in providing management services to SBI, was acting as an agent of the Fund."
• The standard used by the court was not taken from tax precedent, but was held to be not inconsistent with such precedent, including the Supreme Court's decisions in Groetzinger (1987), Higgins (1941) and Whipple (1963).
The Sun Capital Holding
49
• The Sun Capital decision emphasized the fee offset arrangement as a key factor in its holding
• Practitioners have historically expressed concern that the offset arrangement gives rise to the characterization of the offending fees as having been received by the fund itself in respect of services performed "on behalf of" the fund
• For this reason, management fee offsets are commonly carved out of many LP covenants.
• But isn't this just an economic arrangement? How does it change the nature of the Fund's activities?
Management Fee Offset
50
• A Private Equity Fund that invests in securities of portfolio companies treated as corporations for U.S. tax purposes is not engaged in a trade or business, notwithstanding the substantial managerial activities that the GP/Manager may conduct.
• This is based on the fact that a PE Fund acquires portfolio companies as investments with a view to long-term appreciation, doesn’t execute enough trades to be a "trader," and doesn’t have the customers that are necessary for "dealer" status.
Traditional View
51
• Sponsor – Ordinary income on gains?
– §1221(a)(1)
– Investor vs. Trader vs. Dealer. "Promoter"?
• Tax-Exempt Investors – UBTI
– Statutory exemption (§512(b)(5))
• Significance of "customers" in both of these categories. Further guidance would likely be necessary
• Non-U.S. Investors – ECI
– Eligibility for trading safe harbor of §864?
• Management fee deductions?
– Possible pro-taxpayer overall result
What are the potential ramifications if a PE Fund is treated as engaged in a business for tax purposes?
52
• ECI/UBTI covenants and "opt-outs," availability of blocker/AIV structures – Typically, the covenants and the definition of "ECI"
carve out the activities of the Fund itself, as well as the management fee offset, which is typically contained in the Investment Advisory Agreement
• LP waiver of unapplied balance of fee offset – Usually elected upfront
– Does it really help?
Common "Trade or Business" Provisions in Fund Documents
53
• Case decided under ERISA, not IRC
• Fund Sponsors should focus on covenants that go to this issue
• Courts can read PPMs and other marketing materials
• The court did not really address the "promoter"/"corporate developer" argument
– "Promoter" characterization would have a more significant impact on PE funds
– Possible change to taxation of carry without legislative action?
Key Takeaways
54
What is a partnership? Who gets what?
Section 761(a): Partnership
• “any business, financial operation, or venture”
Section 761(c): Partnership Agreement
• Includes original agreement and any modifications. • Modifications may be oral or written. Regs § 1.761-1(c)
Section 704(a): Effect of Partnership Agreement
• Generally determines partner’s share of partnership items
Section 704(b): Determination of Distributive Share
• “Partner’s interest in the partnership (determined by taking into account all facts and circumstances)” if no substantial economic effect
• “all agreements among the partners, or between one or more partners and the partnership, concerning affairs of the partnership and responsibilities of partners, whether oral or written, and whether or not embodied in a document referred to by the partners as a partnership agreement.” Regs 1.704-1(b)(2)(ii)(h)
55
Section 4.5. Related Investment Vehicles. (a) General. Notwithstanding
any other provision of this Agreement, the General Partner or any of its
Affiliates may establish one or more Related Investment Vehicles as
provided in this Section 4.5 which will be controlled and managed by the
General Partner or an Affiliate thereof. All references in this Section 4.5 to
the “limited partners” of a Related Investment Vehicle shall be deemed to
include all investors in a Related Investment Vehicle formed as a vehicle
other than a limited partnership. Notwithstanding any other provision of this
Agreement, in the event that the General Partner or an Affiliate thereof
forms one or more Related Investment Vehicles, the General Partner shall
have full authority, without the consent of any Person, including any other
Partner, to amend this Agreement as may be necessary or appropriate by
the General Partner to facilitate the formation and operation of such
Related Investment Vehicles and the investments contemplated by this
Section 4.5, and to interpret any provision of this Agreement, whether or
not so amended, solely to give effect to the intent of the provisions of this
Section 4.5. Accordingly, if any such Related Investment Vehicles are
formed, all references in this Agreement to the Partnership shall, where
appropriate, be deemed to include any such Related Investment Vehicles;
and, specifically, in all cases where the vote, waiver or consent of a Majority
(or other specified percentage) in Interest is required, such vote, waiver or
consent shall, subject to legal, tax, regulatory or other considerations, be
calculated as if the Partnership, any Parallel Funds and any Alternative
Investment Vehicles were one entity.
* * *
(h) Alternative Investment Vehicles
(i) Formation of Alternative Investment Vehicles for Particular
Investments. Notwithstanding any other provision of this Agreement
to the contrary, if at any time the General Partner determines that for
legal, tax, regulatory or other considerations certain or all of the
Partners should participate in a potential Portfolio Investment
through one or more alternative investment structures, the General
Partner may effect the making of all or any portion of such
investment outside of the Partnership by requiring certain or all
Partners, subject in all cases to Section 5.4, to be admitted as an
investor and to make capital contributions with respect to such
potential portfolio investment directly to such alternative investment
vehicle (each, an “Alternative Investment Vehicle”). Each Alternative
Investment Vehicle shall be governed by organizational documents
containing provisions substantially similar in all material respects to
those of the Partnership, with such differences as may be advisable by
reason of the legal, tax, regulatory or other considerations referred to
above and, if the General Partner requires an ERISA Partner to
invest in an Alternative Investment Vehicle, the Alternative
Investment Vehicle shall provide such an investor with the same
rights as provided under the Partnership.
What if the fund has AIV provisions like these?
(ii) Alternative Investment Conditions. Each Partner admitted
to and investing in an Alternative Investment Vehicle shall be
obligated to make contributions to such Alternative Investment
Vehicle in a manner similar to that provided by Section 5.2,
and each such Partner’s Unpaid Capital Commitment shall be
reduced by the amount of such contributions to the same
extent as if such contributions were made to the Partnership as
Capital Contributions. The investment results of an
Alternative Investment Vehicle shall be aggregated with the
investment results of the Partnership for purposes of
determining distributions and allocations by the Partnership
and such Alternative Investment Vehicle.
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What about these?
Section 3.4 Alternative Investment Structure.
* * *
(e) Notwithstanding any provision in this Agreement to the contrary, the economic
provisions of this Agreement and the partnership or similar agreement or instrument
governing each Alternative Investment Vehicle are intended to be, and hereby shall
be, integrated in all material respects and effected in such a manner as to cause each
Limited Partner individually, and the General Partner and its affiliated entities that
may be utilized to effectuate this Section 3.4, collectively, to receive
if (i) all capital contributions to the
Partnership Group were made to, and all distributions from the Partnership Group
were made by, the Partnership, (ii) all Partnership Group investments were initially
acquired by, and were at all times held by, the Partnership, (iii) all Partnership Group
expenses (including management fees incurred or paid by any Alternative Investment
Vehicle) were incurred and paid solely by the Partnership, and (iv) all Partnership
Group management fee offsets, reductions and waivers were with respect to the
Partnership.
"Partnership Group" means (i) the Partnership and (ii) all Alternative Investment
Vehicles.
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Or maybe these?
The General Partner acknowledges and agrees that the aggregate amount (the “Final Carried Interest
Amount ”) that it is entitled to receive as a “carried interest” from each Investor with respect to all Investments
shall not exceed 20% of (i) the aggregate amount (the “Maximum Distributable Amount”) derived by adding
together such Investor’s Percentage of each distribution pursuant to Sections 6.02 and 10.04 (and taking into
account any prior distributions pursuant to Section 6.04) and the analogous provisions of any agreement relating
to each Parallel Investment minus (ii) the Investor’s Aggregate Contributed Amount”).
* * *
If, after giving effect to the final allocations and distributions pursuant to Section 10.04 and the analogous
provisions of any agreement relating to each Parallel Investment, either (1) the General Partner shall have
received Carried Interest with respect to any Investor in excess of the Final Carried Interest Amount with respect
to such Investor (“Excess Carried Interest”) or (2) such Investor shall have failed to have received a Priority
Return, the General Partner shall repay to the Partnership, for distribution, subject to the Act, to such Investor,
an amount equal to the lesser of (i) such Excess Carried Interest and (ii) the amount necessary for such Investor
to receive a Priority Return.
All securities of a Portfolio Company of the same
class or series that are acquired at the same price
pursuant to a single investment opportunity under
this Agreement shall be treated as a single
“Investment,” regardless of whether such securities
are acquired (i) by the Partnership directly, (ii) by
the Partnership through a separate Partnership
Investment Vehicle, or (iii) by a Parallel Investor as
a Parallel Investment.
Scott W. Naidech: Scott is a Partner at Chadbourne & Parke LLP. He
represents domestic and international sponsors (with a particular focus on Latin
America and other emerging markets) in the structuring, establishment and
operation of their private equity funds. He has formed buyout, growth capital,
real estate, energy, infrastructure, mezzanine and venture capital funds, among
others, ranging in size from $50 million to over $16 billion of committed capital.
He also advises clients on leveraged buyouts, acquisitions, recapitalizations and
divestitures, and general corporate matters. He is recognized in Best Lawyers in
America and The Legal 500 for his work in private funds law. He can be
reached at [email protected].
Edouard S. Markson: Ted is a tax lawyer at Chadbourne & Parke LLP with
extensive experience in financing transactions, mergers and acquisitions, and
joint ventures. He has represented a wide variety of private equity funds in tax
structuring related to both fund formation and transactional matters. He can be
reached at [email protected].
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Adam Gale: Adam is a Partner in the New York office and Co-Chair of
the Investment Funds Group of Mintz Levin Cohn Ferris Glovsky and
Popeo P.C. He forms and structures, and provides regulatory and
compliance advice to, private equity funds, real estate funds, hedge
funds, and registered funds. He also provides regulatory advice to
broker-dealers and banks. Adam represents both well-established and
start-up entities. Adam also represents a number of major institutional
investors in their investments into private funds, as well as family
offices. He can be reached at: [email protected].
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