Private Equity Funds: Business Structure and Operations

by James M. Schell, Kristine M. Koren, Pamela Lawrence Endreny

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I am not aware of any other publication that provides a comparable breadth of analysis of the relevant issues.
Millie Kim, General Counsel, Citigroup Global Investments

“The best guide to private equity funds. Insight and explanations for both fund sponsors and investors. The gold standard.”
Andrew Zalasin,General Partner and CFO: RRE Ventures

Every year, investors pour billions of dollars into private equity limited partnerships, yet details about the organization and administration of these funds are tough to find. Private Equity Funds: Business Structure and Operations book and CD is the first practical guide that gives attorneys, investment professionals, tax practitioners and corporate lawyers the tools and authoritative guidance they need to handle any aspect of a private investment fund. It covers a wide range of important issues, such as: the key economic differences between various types of funds; structuring the private equity fund to meet economic expectations and investment goals; securing maximum tax benefits for the sponsor of the fund; duties of the fund's General Partner and Investment Advisor; the major regulatory issues affecting the private equity fund; and much more. No matter which aspect of private equity funds you deal with, this is a reference book you will want close at hand.

Book #00651; looseleaf, one volume, 1,424 pages and one CD-ROM; published in 1999, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-088-3

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
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  • Page Count: 1424
  • ISBN: 978-1-58852-088-3
  • Pub#/SKU#: 651
  • Volume(s): 1

Author Image
  • James M. Schell

James M. Schell is a partner in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. He represents private investment funds, banks, insurance companies, investment banking firms and other financial institutions in a broad range of financing and investment transactions. Mr. Schell heads the interdisciplinary group at Skadden Arps, which focuses on private investment funds, including leveraged buyout, venture capital and hedge funds, as well as investment funds designed to invest in particular countries or regions such as China or Latin America.

Mr. Schells work also includes a substantial number of merchant banking and venture capital transactions in which financial institutions or private equity funds acquire significant equity stakes. These transactions involve a diverse mix of equity interests, ranging from convertible debt and preferred stock to warrants and common stock. Mr. Schell, who received his J.D. degree from Columbia University Law School, is a lecturer at the Institute of International Research and American College of Investment Counsel programs.

Author Image
  • Kristine M. Koren
Kristine M. Koren is a member of Skadden's Investment Management Group.  Her practice focuses primarily on the formation and operation of U.S. and offshore private investment funds, including private equity funds, hedge funds, funds of funds, venture capital funds and hybrids.  In addition to assisting fund sponsors with their organizational structures, Ms. Koren also regularly advises on the sale of investment adviser businesses.  She represents both sponsors and investors, and provides ongoing regulatory, transactional and compliance advice.  Although her practice emphasizes asset management, Ms. Koren also handles a wide variety of general securities and corporate matters.   Ms. Koren is a member of the New York City and New York State bar associations, as well as the American and Puerto Rican bar associations.  She speaks fluent Spanish and French, as well as English.

Author Image
  • Pamela Lawrence Endreny
Pamela Lawrence Endreny advises clients on a broad range of federal income tax matters, including mergers, acquisitions, joint ventures, spin-offs and restructurings.  She focuses in particular on the formation and operation of private equity and hedge funds and their investments as well as transactions involving investment advisors (including public offerings thereof).  She has significant experience advising clients on international acquisitions, restructurings, joint ventures, divestitures and financings.  She regularly represents companies and financial institutions in connection with capital markets and derivatives transactions. She also represents clients in obtaining private letter rulings from the Internal Revenue Service and in tax controversies with the IRS.

An Introduction to Private Equity Funds

§1.01 Overview
§1.02 Private Ordering of the Financial Intermediary Relationship
[1] Economic Expectations
[2] Markets
[3] Alignment of Interests
[4] Practical Considerations
§ 1.03  Venture Capital Funds
[1] Investment Strategy
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.04 Leveraged Buyout and Merchant Banking Funds
[1] Investment Strategy
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.05 Hedge Funds
[1] Investment Objective
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.06 Funds of Funds
[1] Investment Strategy
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.06A Real Estate Funds
[1] Investment Strategy
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.07 Captive and Semi-Captive Funds
§1.08 Hybrid Funds
§ 1.09 The Pledge Fund
§ 1.10 The Mezzanine Fund

Key Economic Terms: Carried Interest, Management Fees and Other Income

§ 2.01 Economic Expectations
§ 2.02  The Basic Carried Interest
[1] Size of the Carried Interest
[2] Fund Income Subject to the Carried Interest
§ 2.03 Preferred Returns
[1] General Partner Make-Ups
[2] Formulating Hurdle Rates and Preferred Returns
[3] Calculating Hurdle Rates and Preferred Returns
§ 2.04 Timing Issues and the Carried Interest
[1] General Timing Issues
[2] Clawbacks
[3] Security for the Clawback
§ 2.05 Management Fees
[1] Formulation and Size
[2] Base for Calculation
[3] Timing
[4] Source of Payment and Effect on Capital Commitments
§2.06 Transaction and Other Fee Income
[1] Approaches to Fee Income
[2] Techniques for Sharing
§ 2.07 Treatment of Private Equity Fund Expenses

General Structural Issues For Domestic Funds

§ 3.01 Limited Partnerships: Structural Features of the Traditional Choice
[1] Applicable State Law
[2] Multi-Tier Structures
[3] Formation of a Limited Partnership
[4] Limited Liability
[5] Fiduciary Relationships
[6] Establishment of Series Within a Limited Partnership
§ 3.02 Other Structural Terms
[1] Multiple Fund Entities
[2] Investment by the General Partner
[3] Single or Multiple Closings
[4] Hub and Spoke Structures
[5] Liquidating Trust

General Structural Issues For the General Partner and The Manager

§ 4.01 Structural Goals
§ 4.02 Structural Options
[1] Subchapter S Corporation
[2] Business Trusts
[3] Limited Partnerships
[4] Limited Liability Company
§ 4.03 Limited Liability Companies: The Preferred Choice
[1] Nomenclature
[2] Formation of a Limited Liability Company
[3] Limited Liability
[4] Fiduciary Relationships
§ 4.04  Other Structural terms
[1]  Management
[2] Investments
[3] Sharing the Carried Interest
[4] Dilution and Vesting
[5] Estate and Tax Planning Structures
[6] Going Concern Value

Taxation of the Private Equity Fund and the Investors

§ 5.01 Classification as a Partnership
[1] In General
[2] Publicly Traded Partnerships
[3] Alternatives to Funds
§ 5.02 Taxation of Limited Partners
[1] Acquisition of Fund Interest
[2] Partner’s Basis in Fund Interest
[3] Allocations and Capital Accounts
[4] Distributions by the Fund
§ 5.03 Special Issues for U.S. Taxable Partners
[1] Noncorporate Partners
[2] Corporate Partners
§ 5.04 Special Issues for U.S. Tax-Exempt Partners
[1] Debt-Financed Income
[2] Possible Unrelated Business Taxable Income Items
§ 5.05 Special Issues for Non-U.S. Partners
[1] In General
[2] Engaged in a U.S. Trade or Business
[3] Income Not Effectively Connected with a U.S. Trade or Business
[4] Foreign Account Tax Compliance Act

Taxation of the General Partner

§ 6.01 Receipt by the General Partner of an Interest in the Fund
[1] In General
[2] Capital vs. Profits Interest
§ 6.02 Receipt of a Capital Interest by the General Partner
[1] Recognition Event
[2] Valuation of Capital Interest
[3] Consequences to Other Partners
[4] Capital Interest Subject to Forfeiture
[5] Capital Interest Subject to Forfeiture
§ 6.03 Receipt of a Profits Interest
[1] Historical Perspective
[2] Campbell and Revenue Procedure 93-27
[3] Unvested Profits Interests and Revenue Procedure 2001-43
[4] Proposed Regulations
[5] Audit Guidelines for Partnerships
[6] Proposed Carried Interest Legislation

Miscellaneous Tax-Related Topics

§ 7.01 Partnership Exchange Funds in General
§ 7.02 Taxation of Exchange Funds
[1] Diversification Requirement
[2] Proposed Legislation
§ 7.03 Management Fees
§ 7.04 Structuring Foreign Investments by the Fund
[1] In General
[2] Controlled Foreign Corporations
[3] Income Tax Treaties
§ 7.05 Special Issues Relating to Hedge Funds
[1] General
[2] Parallel Funds
[3] Master-Feeder Funds
[4] Compensation of General Partner/Investment Advisor
§ 7.06 Guaranteed Payments and Funds
[1] General
[2] Preferred Returns and Guaranteed Payments
§ 7.07 The Foreign Account Tax Compliance Act
[1] General
[2] Withholding and Reporting Obligations
[3] Preliminary Guidance

Regulatory Issues Affecting The Private Fund and the Manager

PART I: Introduction

§ 8.01 Introduction

PART II: Regulatory Issues Affecting the Private Fund

§ 8.02 The Securities Act
[1] The Private Offering Exemption
[2] Regulation D
[3] Internet Offerings
§ 8.03 The Investment Company Act
[1] Definition of Investment Company
[2] Section (3)(c)(1) Companies
[3] Section 3(c)(7) Companies
[4] Knowledgeable Employees
[5] Gratuitous Transfers
[6] “Incubators”
§ 8.04 The Exchange Act Impact on Private Equity Funds
[1] Forward-Looking Statements
[2] Registration as a Municipal Advisor
§ 8.05 The Employee Retirement Income Security Act
[1] The Statutory Framework
[2] Avoiding Plan Assets
[3] Operating Companies
[4] Significant Participation
§ 8.06 Offshore Private Equity Funds
[1] Private United States Offerings
[2] Simultaneous Private United States Offerings and Public Offshore Offerings
[3] United States Persons
[4] Permissible Activities in the United States
[5] Internet Offerings
[6] Foreign Issuers and the Press: Rule 135e
§ 8.07 FINRA Restrictions on Participating in Public Offerings
[1] Approach to Regulation of “New Issues”
[2] Addressing “New Issues” in a Partnership Agreement
§ 8.08 Tax Shelter Regulations
§ 8.09 The Communications Act
[1] FCC Treatment of Limited Partners and LLC Members
[2] Communications Ownership Limits
[3] Attribution
[4] Insulation Provisions

PART III: Regulatory Issues Affecting the Manager

§ 8.10 The Investment Advisers Act
[1] Definition of Investment Adviser
[2] Certain Exemptions and Exclusions from Registration
[3] Registering as an Investment Adviser
[4] Consequences of Registration as an Investment Adviser
[5] Agency Cross and Principal Transactions
[6] Rule 206-4(8) and the Offering Process
[7] The Pay-to-Play Rules
[8] Custody of Client Assets
[9] Additional Considerations for Foreign Investment Advisers
§ 8.11 The Securities Exchange Act of 1934
[1] Broker-Dealer Status
§ 8.12 Commodities and Futures Regulations
[1] Commodity Pools
[2] Commodity Pool Operators and Commodity Trading Advisors
[3] Large Trader Reporting Obligations, Position Accountability Levels and Speculative Position Limits
[4] Title VII of the Dodd-Frank Act
§ 8.13 The Bank Holding Company Act
[1] In General
[2] The Volcker Rule
§ 8.14 Gramm-Leach-Bliley Act
[1] In General
[2] Application of the FTC Regulations
[3] Obligations Under the FTC Regulations
[4] Compliance Procedures
§ 8.15  Anti-Money Laundering Compliance
[1] Components of an Effective AML Compliance Program
[2] Compliance with OFAC Laws
[3] AML Requirements and Subscription Documents
§ 8.16 EU Directive on Alternative Investment Fund Managers

Implementing the Economic Bargain: The Private Equity Fund Limited Partnership Agreement

§ 9.01 Definitions and Interpretation
[1] Structure of Agreement
[2] Definitions
[3] Interpretation
[4] General Partner’s Standard of Care
§ 9.02 Organization
[1] Continuation of Limited Partnership; Term
[2] Choice of Name
[3] Purpose
[4] Places of Business
[5] Registered Office and Agent
[6] Fiscal Year
[7] Powers
[8] Certificates and Other Filings
§ 9.03 Partners
[1] General and Limited Partners
[2] Liability of the General Partner
[3] Limited Liability of Limited partners
[4] Right to Hold Interest as a Non-Voting Interest
[5] No Priority
[6] Partnership Property
[7] Withdrawing Limited Partner
§ 9.04 Capital Contributions; Capital Commitments
[1]  Capital Contributions
[2] Return of Unutilized Contributions
[3] Excuse, Exclusions and Cancellation
[4] Defaulting Limited Partner
[5] Admission of Additional Limited Partners at Subsequent Closings
[6] Portfolio Investments in Media Companies
[7] Alternative Investment Structure
[8] New Issues
§ 9.05 Capital Accounts; Allocations
[1] Capital Accounts
[2] Allocation to Capital Accounts
[3] Tax Allocations
[4] Determinations by General Partner
§ 9.06 Distributions
[1] No Right to Withdraw
[2] Ordinary Distributions
[3] Distributions in Kind
[4] Restrictions on Distributions
[5] Withholding
§ 9.07 Management
[1] Management by General Partner
[2] Investment Powers of the General Partner
[3] Limitations on the General Partner
[4] Borrowing and Guarantees
[5] Third Party Reliance
[6] Tax Matters Partner
[7] Other Activities of the General Partner and Related Persons
[8] Regulatory Covenants
[9] Advisory Board
§ 9.08 Expense and Fees

Implementing the Economic Bargain: The Limited Liability Company Agreement for the General Partner

§ 10.01 Introduction
§ 10.02 Definitions and Interpretation
[1] Structure of Agreement
[2] Definitions
[3] Interpretation
[4] Class A-1 Members' Standard of Care
§ 10.03 Organization
[1] Continuation of Limited Liability Company: Term
[2] Choice of Name
[3] Purpose
[4] Places of Business
[5] Registered Office and Agent
[6] Fiscal Year
[7] Powers
[8] Certificate and Other Filings
§ 10.04 Members
[1] Class A and Class B Members
[2] Liability of the Members
[3] Limited Liability of Members
[4] No Priority
[5] Partnership Property
§ 10.05 Capital Contributions; Capital Commitments
[1] Capital Contributions
[2] Admission of Additional Members; Sharing Percentages
§ 10.06 Capital Accounts; Allocations
[1] Capital Accounts
[2] Allocation to Capital Accounts
[3] Tax Allocations
[4] Determinations by Class A-1 Members
§ 10.07 Distributions
[1] No Right to Withdraw
[2] Ordinary Distributions
[3] Distributions in Kind
[4] Restrictions on Distributions
[5] Withholding
§ 10.08 Management
[1] Management by Class A-1 Members
[2] Borrowing and Guarantees
[3] Tax Matters Partner
[4] Other Activities of the members and Related Persons
§ 10.09 Expense and Fees; Books of Account, Records and Banking