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Private Equity Funds: Business Structure and Operations

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


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“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


Best Practices for Organizing and Managing a Fund

With nearly $7 trillion invested in more than 20,000 funds, investor interest in the private equity industry has returned, despite the economic turmoil of recent years. Still, guidance about the organization and administration of these funds is tough to find. This 1,400+ page online and traditional print resource, will equip corporate lawyers, investment professionals, and tax practitioners and with best practices to manage these funds effectively.
 
Timely updates, ongoing analysis, and model documents. Online, eBook, and traditional print looseleaf formats with updates are available. All updates are included with an annual subscription.
 
Private Equity Funds: Business Structure and Operations 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.
 
What’s New?
Private Equity Funds: Business Structure and Operations remains current to reflect the aftermath of the financial crisis of 2007 to 2009. The authors also focus on cyber risk and the compliance obligations of investment advisers.
 
Chapters Include:
An Introduction to Private Equity Funds
Key Economic Terms: Carried Interest, Management Fees and Other Income
General Structural Issues For Domestic Funds
General Structural Issues For the General Partner and The Manager
Taxation of the Private Equity Fund and the Investors
Taxation of the General Partner
Miscellaneous Tax-Related Topics
Regulatory Issues Affecting The Private Fund and the Manager
Implementing the Economic Bargain: The Private Equity Fund Limited Partnership Agreement
Implementing the Economic Bargain: The Limited Liability Company Agreement for the General Partner
APPENDIX A:  Summary of Principal Terms
APPENDIX B:  Certificate of Limited Partnership
APPENDIX C:  Short-Form Partnership Agreement
APPENDIX D(1):  Amended and Restated Agreement of Limited Partnership (Basic)
APPENDIX D(2):  Amended and Restated Agreement of Limited Partnership
APPENDIX E:  Investment Management Agreement
APPENDIX F:  Certificate of Formation for Limited Liability Company
APPENDIX G:  Short Form Limited Liability Company Agreement
APPENDIX H(1):  Limited Liability Company Agreement for General Partner
APPENDIX H(2):  Limited Liability Company Agreement for General Partner
APPENDIX J(1):  Subscription Agreement (A Section 3(c)(1) Fund)
APPENDIX J(2):  Subscription Agreement (A Section 3(c)(7) Fund)
APPENDIX J(3a):  Request for Taxpayer Identification Number and Certification
APPENDIX J(3b): Instructions for Form W-8BEN
APPENDIX K:  Clawback Guaranty
APPENDIX L:  Legal Opinion
APPENDIX M:  Form of Anti-Money Laundering Compliance Policy
APPENDIX M(1):  Form of Anti-Money Laundering Policy
APPENDIX N:  Limited Partnership Agreement for Hedge Fund
APPENDIX O:  Declaration of Trust
APPENDIX P:  Investment Advisory Agreement
APPENDIX Q:  Pledge Fund
APPENDIX R: New Issue Questionnaire
APPENDIX S: Form of Confirmation Letter
APPENDIX T:  Amended and Restated Certificate of Limited Partnership
APPENDIX U: Amended and Restated Agreement of Limited Partnership
APPENDIX V: Amendment to Amended and Restated Agreement of Limited Partnership
APPENDIX W: Amended and Restated Agreement of Limited Partnership of Mezzanine Partners
APPENDIX X: Rule 506 Questionnaire

Book #00651; looseleaf, one volume, 1,424 pages; 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
  • Edition: 0
  • 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.

CHAPTER 1
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 Strategy
[2] Organizational Structure
[3] Key Economic Terms
[4] Fund Size
[5] Typical Investors
[6] Leverage
[7] Transfer; Redemption
[8] Reinvestment
[9] Additional Investors
§ 1.06 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
§ 1.07 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
§ 1.08 Captive and Semi-Captive Funds
§ 1.09 Hybrid Funds
§ 1.10 Pledge Funds
§ 1.11 Mezzanine Funds
§ 1.12 Impact Funds

CHAPTER 2
Key Economic Terms: Carried Interest, Management Fees and Other Income

§ 2.01 Overview of the Typical Private Equity Fund
[1] Economic Expectations
[2] Lifecycle of the Typical Private Equity Fund
§ 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] Clawback Approaches
[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

CHAPTER 3
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

CHAPTER 4
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

CHAPTER 5
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

CHAPTER 6
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] Proposed Regulations
§ 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] Carried Interest Legislation

CHAPTER 7
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 and the Common Reporting Standard
[1] General
[2] Determining FATCA and CRS Status and Registration Requirements
[3] Diligence and Information Reporting
[4] Withholding
[5] Practical Implications

CHAPTER 8
Regulation of Private Funds Under the U.S. Securities Laws

§ 8.01 Introduction
§ 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 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
§ 8.06 FINRA Restrictions on Participating in Public Offerings
[1] Approach to Regulation of “New Issues”

CHAPTER 9
Regulation of Managers Under the U.S. Securities Laws
§ 9.01 The Investment Advisers Act

[1] Definition of Investment Adviser
[2] Certain Exemptions and Exclusions from Registration
§ 9.02 Registering as an Investment Adviser
[1] SEC Registration and Filing Form ADV
[2] Brochure and Brochure Supplement
[3] Preemption of State Requirements
§ 9.03 Requirements Applicable to Registered Investment Advisers
[1] Updating Form ADV and SEC Reporting
[2] Delivery of Disclosure Document to Clients
[3] Performance-Based Compensation
[4] Advertising and Performance Information
[5] Advisory Contracts
[6] Compliance Programs
[7] Standards of Business Conduct
[8] Cybersecurity
[9] Recordkeeping
[10] SEC Examinations
§ 9.04 Agency Cross and Principal Transactions
[1] Agency Cross Transactions
[2] Principal Transactions
§ 9.05 Prohibition of Fraud under Rule 206(4)-8
§ 9.06 The Pay-to-Play Rules
§ 9.07 Custody of Client Assets
§ 9.08 Additional Considerations for Foreign Investment Advisers
§ 9.09 The Securities Exchange Act of 1934

[1] Broker-Dealer Status
[2] Receiving Transaction-Based Compensation Without a Broker Registration

CHAPTER 10
Other Applicable Regulatory Regimes
§ 10.01 Commodities and Futures Regulations
[1] Product and Entity Definitions Under the Derivatives Title; Cross-Border Application
[2] Commodity Pools
[3] Commodity Pool Operators and Commodity Trading Advisors
[4] Large Trader Reporting Obligations, Position Accountability Levels and Speculative Position Limits
[5] Additional Regulatory Considerations Under the Derivatives Title
§ 10.02 The Bank Holding Company Act
[1] In General
[2] The Volcker Rule
§ 10.03 The Employee Retirement Income Security Act
[1] The Statutory Framework
[2] Avoiding Plan Assets
[3] Operating Companies
[4] Significant Participation
§ 10.04 Gramm-Leach-Bliley Act
[1] In General
[2] Application of the FTC Regulations
[3] Obligations Under the FTC Regulations
[4] Compliance Procedures
§ 10.05 Anti-Money Laundering Compliance
§ 10.06 The Alternative Investment Fund Managers Directive

[1] Introduction
[2] AIFMD Implementation Process
[3] Marketing of Private Funds to EU Investors
[4] Use of a Marketing Passport by Non-EU AIFMs
[5] Authorization Requirements Under the AIFMD
[6] The EU European General Data Protection Regulation
§ 10.07 Shelter Regulations
§ 10.08 The Communications Act

[1] FCC Treatment of Limited Partners and LLC Members
[2] Communications Ownership Limits
[3] Attribution
[4] Insulation Provisions

CHAPTER 11
Implementing the Economic Bargain: The Private Equity Fund Limited Partnership Agreement
§ 11.01 Introduction

[1] Structure of Agreement
[2] Preamble and Recitals
[3] Definitions
[4] Definitional Standards
[5] Interpretation
[6] General Partner’s Standard of Care
§ 11.02 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
§ 11.03 Partners
[1] General and Limited Partners
[2] Liability of the General Partner
[3] Limited Liability of Limited Partners
[4] No Priority
[5] Partnership Property
[6] Withdrawing Limited Partner
§ 11.04 Capital Contributions; Capital Commitments
[1] Capital Contributions
[2] Return of Unutilized Contributions
[3] Excuse, Exclusion and Cancellation
[4] Defaulting Limited Partners
[5] Participation in New Issues
[6] Key Person Provisions
[7] Alternative Investment Vehicles
§ 11.05 Capital Accounts; Allocations
[1] Separate Capital Accounts
[2] Allocation to Capital Accounts
[3] Tax Allocations
[4] Determinations by General Partner
§ 11.06 Distributions
[1] No Right to Withdraw
[2] Ordinary Distributions
[3] Waived Management Fees
[4] General Partner Clawback
[5] Distributions in Kind
[6] Restrictions on Distributions
[7] Withholding
§ 11.07 Management
[1] Management by General Partner
[2] Investment Powers of the General Partner
[3] Limitations on the General Partner
[4] Borrowing and Guarantees
[5] Tax Matters Partner
[6] Other Activities of the General Partner and Related Persons
[7] Regulatory Covenants
[8] Advisory Board
§ 11.08 Expenses and Fees
§ 11.09 Books of Account, Records and Banking
§ 11.10 Transfers of Partnership Interests

[1] Transfer Restrictions
[2] Applicable Law Withdrawal
§ 11.11 Indemnification
§ 11.12 Duration and Termination of the Partnership

[1] Events of Termination
[2] Liquidation and Winding-Up
§ 11.13 Amendments
§ 11.14 Side Letters

[1] Negotiating Side Letters
[2] Election Process
[3] Regulatory Concerns
§ 11.15 Legal Opinions

CHAPTER 12
Implementing the Economic Bargain: The Limited Liability Company Agreement for the General Partner
§ 12.01 Introduction
§ 12.02 Definitions and Interpretation

[1] Structure of Agreement
[2] Definitions
[3] Interpretation
[4] Class A-1 Members’ Standard of Care
§ 12.03 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
§ 12.04 Members
[1] Class A and Class B Members
[2] Liability of the Members
[3] Limited Liability of Members
[4] No Priority
[5] Partnership Property
§ 12.05 Capital Contributions; Capital Commitments
[1] Capital Contributions
[2] Admission of Additional Members; Sharing Percentages
§ 12.06 Capital Accounts; Allocations
[1] Capital Accounts
[2] Allocation to Capital Accounts
[3] Tax Allocations
[4] Determinations by Class A-1 Members
§ 12.07 Distributions
[1] No Right to Withdraw
[2] Ordinary Distributions
[3] Distributions in Kind
[4] Restrictions on Distributions
[5] Withholding
§ 12.08 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
§ 12.09 Expenses and Fees; Books of Account, Records and Banking


APPENDICES
INDEX