TreatiseTreatise

Private Equity Funds: Formation and Operation (2nd Edition)

 by Stephanie R Breslow, Phyllis A Schwartz
 
 Copyright: 2016-2017
 Last Updated: November 2017

 Product Details >> 

Product Details

  • ISBN Number: 9781402427503
  • Page Count: 880
  • Number of Volumes: 1
  •  

Private Equity Funds: Formation and Operation examines the various fund types, including PIPEs, SPACs, mezzanine funds, and credit opportunity funds, and is designed to provide a comprehensive understanding of how private equity funds work and are regulated.

The book provides guidance on every decision that has to be made in creating a new fund, including:

  • Choosing the right organizational options for funds and their sponsors
  • Structuring and implementing ownership and compensation arrangements that work best for each fund
  • Negotiating terms between fund sponsors and investors, including fund size, the investment program, capital commitments and contributions, distributions, and related documentation
  • Hiring and retaining the best fund talent
  • Qualifying for the Securities Act’s private placement exemption, the IAA’s exclusion from registration as an investment adviser, and other exemptive relief

Written by expert private equity fund specialists from Schulte Roth & Zabel LLP, Private Equity Funds advises on how to:

  • Structure beneficial seed capital transactions with strategic investors
  • Accrue the benefit of allowing principals and employees to participate in the income streams as equity owners or profit-sharing participants in a fund sponsor’s management entities
  • Avoid potential liability as a result of developing an excessively specific investment program as a fund manager
Packed with sample agreements and opinion letters, Private Equity Funds allows attorneys advising funds to capitalize on opportunities while staying clear of costly trouble.
  Table of Contents
  Introduction
Chapter 1: Introduction to Private Equity Funds
  • § 1:1 : A Brief History of Private Equity1-3
    • § 1:1.1 : Post World War II: American Research and Development1-3
    • § 1:1.2 : Small Business Administration1-4
    • § 1:1.3 : The Seventies: Favorable Legislation1-6
    • § 1:1.4 : The Eighties: Leveraged Buyouts1-7
    • § 1:1.5 : The Nineties: Technology Industry1-8
    • § 1:1.6 : The New Millennium: Securitization Market1-10
    • § 1:1.7 : The Subprime Mortgage Crisis1-11
    • § 1:1.8 : The European Sovereign Debt Crisis1-13
    • § 1:1.9 : The Investment Climate1-14
  • § 1:2 : What Is a Private Equity Fund?1-15
    • § 1:2.1 : Overview1-15
    • § 1:2.2 : Typical Investments1-15
      • [A] : Diversified Portfolio1-15
      • [B] : Deal Structures1-16
      • [C] : Types of Investments1-17
    • § 1:2.3 : Organizational Structure1-17
    • § 1:2.4 : Private Placements1-18
    • § 1:2.5 : Key Players1-18
      • [A] : Fund Sponsors1-18
      • [B] : Investors1-20
      • [C] : Professional Advisors1-21
      • [D] : Placement Agents1-21
  • § 1:3 : Types of Funds1-22
    • § 1:3.1 : Buyout Funds1-22
      • [A] : Typical Investments1-22
      • [B] : Distinguishing Organizational Features1-22
      • [C] : Activist Funds1-23
    • § 1:3.2 : Venture Capital Funds1-23
      • [A] : Typical Investments1-23
      • [B] : Distinguishing Organizational Features1-24
    • § 1:3.3 : Mezzanine and Credit Opportunity Funds1-25
      • [A] : Typical Investments1-25
        • [A][1] : Mezzanine Funds1-25
        • [A][2] : Credit Opportunity Funds1-26
      • [B] : Distinguishing Organizational Features1-26
    • § 1:3.4 : Distressed Debt Funds1-27
      • [A] : Typical Investments1-27
      • [B] : Distinguishing Organizational Features1-27
    • § 1:3.5 : Real Estate Funds1-28
      • [A] : Typical Investments1-28
      • [B] : Distinguishing Organizational Features1-28
    • § 1:3.6 : Funds of Funds1-29
      • [A] : Typical Investments1-29
      • [B] : Distinguishing Organizational Features1-30
    • § 1:3.7 : Structured Product Funds1-30
      • [A] : Typical Investments1-30
      • [B] : Distinguishing Organizational Features1-31
    • § 1:3.8 : “Club” or “Pledge” Funds1-32
      • [A] : Typical Investments1-32
  • § 1:4 : Other Investment Strategies in Private Equity1-33
    • § 1:4.1 : Private Investments in Public Equity (PIPEs)1-33
    • § 1:4.2 : Special Purpose Acquisition Company (SPAC)1-34
      • [A] : Investment Advantages1-34
      • [B] : Structural Considerations1-35
      • [C] : Investment Risks1-36
    • § 1:4.3 : Mezzanine and Credit Opportunity Funds1-37
    • § 1:4.4 : Sovereign Wealth Funds (SWFs)1-37
      • [A] : Foreign Policy Concerns with SWFs1-38
    • § 1:4.5 : Secondaries1-39
    • § 1:4.6 : Distressed Funds1-41
    • § 1:4.7 : Seed Capital Funds1-42
    • § 1:4.8 : Permanent Capital1-42
    • § 1:4.9 : Status of Existing and New Deals Post Financial Crisis1-43
      • [A] : Existing Deals1-43
      • [B] : New Deals1-44
  • § 1:5 : Current Trends in Fundraising1-45
    • § 1:5.1 : Overview1-45
    • § 1:5.2 : Other Sources of Capital; Co-Investors1-45
    • § 1:5.3 : Fund Terms—Bargaining Power of Limited Partners1-46
    • § 1:5.4 : Fundraising Periods1-49
  • § 1:6 : Industry Convergence1-49
    • § 1:6.1 : Blurring the Line Between Private Equity and Hedge Funds1-49
      • [A] : Strategic Differences1-50
      • [B] : Erosion of Differences Between Private Equity and Hedge Funds1-50
      • [C] : Advantages of Convergence1-51
      • [D] : Convergence Concerns1-52
        • [D][1] : Valuation of Fund Assets and Computation of Compensation1-52
        • [D][2] : Cultural Clash1-53
        • [D][3] : Marketing Issues1-53
        • [D][4] : Investor Expectations1-53
    • § 1:6.2 : Hybrid Funds1-55
    • § 1:6.3 : Private Equity Funds Versus Mutual Funds1-57
Chapter 2: Hybrid Funds
  • § 2:1 : Overview2-1
  • § 2:2 : Types of Strategies That Involve Hybrid Terms2-2
    • § 2:2.1 : Primary Drivers: Liquidity and Valuation of Assets2-2
    • § 2:2.2 : Distressed Investing2-2
      • [A] : Investment Valuation and Liquidity2-2
        • [A][1] : Closings and Capital Calls2-3
        • [A][2] : Investment Period and Fund Term2-3
        • [A][3] : Waterfall and Management Fees2-4
        • [A][4] : ERISA2-4
        • [A][5] : Confidentiality2-4
        • [A][6] : Multi-Vehicle Option2-5
    • § 2:2.3 : Activist Investing2-5
      • [A] : Investment Liquidity2-5
        • [A][1] : Closings2-5
        • [A][2] : Transparency2-5
        • [A][3] : Co-Investments2-6
        • [A][4] : Investment Period and Term2-6
        • [A][5] : Multi-Vehicle Option2-6
    • § 2:2.4 : Credit Funds2-6
    • § 2:2.5 : Other Liquid/Illiquid Investment Mandates2-7
    • § 2:2.6 : Funds of One2-8
  • § 2:3 : Regulatory Aspects2-8
Chapter 3: Co-Investing with Private Equity Funds
  • § 3:1 : Overview3-1
  • § 3:2 : Defining Co-Investments3-2
  • § 3:3 : Sources of Co-Investment Capital3-3
  • § 3:4 : Co-Investment Funds3-4
  • § 3:5 : Side Letters3-4
  • § 3:6 : Allocation of Investment Opportunities and Conflicts of Interest3-5
  • § 3:7 : Co-Investing by Sponsors3-5
  • § 3:8 : Structures of Co-Investments3-6
  • § 3:9 : Terms of Co-Investments3-6
    • § 3:9.1 : General3-6
    • § 3:9.2 : Follow-On Investments3-6
    • § 3:9.3 : Management Fees/Carried Interest3-7
    • § 3:9.4 : Expenses and Other Co-Investor Rights3-7
      • [A] : Expenses3-7
      • [B] : Rights Granted to Co-Investors3-7
  • § 3:10 : Regulatory Issues3-8
Chapter 4: Terms of Private Equity Funds
  • § 4:1 : Overview4-6
    • § 4:1.1 : Fund Size4-7
    • § 4:1.2 : Fund Investment Strategy4-8
    • § 4:1.3 : Fund Maturity4-8
    • § 4:1.4 : Single Fund or Cluster of Parallel Funds4-9
    • § 4:1.5 : Fund Jurisdiction4-9
    • § 4:1.6 : Fund Manager Experience4-9
    • § 4:1.7 : Investor Fund Term Negotiation Objectives4-10
  • § 4:2 : Fund Size4-12
    • § 4:2.1 : Excessively Small Funds4-12
    • § 4:2.2 : Excessively Large Funds4-13
    • § 4:2.3 : Fund Size Caps or Floors4-13
  • § 4:3 : Investment Programs4-14
    • § 4:3.1 : Fund Investment Approach Stated in Offering Memorandum4-15
    • § 4:3.2 : Investment Guidelines and Restrictions4-17
  • § 4:4 : Life of a Fund4-19
    • § 4:4.1 : Marketing Period4-20
      • [A] : First-Time Funds4-20
      • [B] : Development of Fund Terms and Initial Offering Materials4-21
      • [C] : Warehousing Investments4-22
      • [D] : Closings4-23
      • [E] : Admission of Subsequent Investors4-24
    • § 4:4.2 : Investment Period4-25
      • [A] : Recall of Capital4-26
      • [B] : Management Fees and Expenses4-26
      • [C] : Post-Investment Period Investments4-27
      • [D] : Investment Period Extensions4-27
    • § 4:4.3 : Holding Period4-28
  • § 4:5 : Capital Commitments and Capital Contributions4-28
    • § 4:5.1 : Capital Commitments4-28
    • § 4:5.2 : Capital Contributions4-29
    • § 4:5.3 : General Partner Commitment4-29
      • [A] : Incremental Liability Exposure4-30
      • [B] : Sponsor Commitments4-30
    • § 4:5.4 : Drawdowns and Notices4-31
      • [A] : Draw Period4-31
      • [B] : Capital Call Notice4-32
      • [C] : Capital Contribution Notice4-32
    • § 4:5.5 : Minimum Commitment4-33
    • § 4:5.6 : Defaults on Capital Contributions4-34
      • [A] : Remedies4-34
      • [B] : Defaulting Partner’s Interest4-35
      • [C] : Investor Default Due to Loss of Confidence in Fund Sponsor4-36
      • [D] : Consequences of Investor Default4-37
      • [E] : Trends in Investor Defaults4-37
    • § 4:5.7 : Transfers4-38
    • § 4:5.8 : Follow-On and Pending Investments4-41
      • [A] : Follow-On Investments4-41
      • [B] : Pending Investments4-42
      • [C] : Drawing Capital for Follow-On and Pending Investments4-42
    • § 4:5.9 : Recall and Reinvestment; Limited Partner Clawback4-43
      • [A] : Reinvestment and Recall of Capital4-43
      • [B] : Investor Clawback4-44
  • § 4:6 : Closings4-45
    • § 4:6.1 : Initial Closing; Offering Period4-45
  • § 4:7 : Distributions4-46
    • § 4:7.1 : Timing of Distributions4-46
    • § 4:7.2 : Distributions In-Kind4-46
      • [A] : Marketable Securities4-47
      • [B] : Tax Advantages of Distributions In-Kind4-47
      • [C] : Sale of Securities Instead of Distributions In-Kind4-48
      • [D] : Residual Assets4-48
    • § 4:7.3 : Tax Distributions4-49
    • § 4:7.4 : Tax Withholding and Reporting of Beneficial Ownership4-50
  • § 4:8 : Fees and Allocations4-51
    • § 4:8.1 : Carried Interest4-51
      • [A] : Overview4-51
      • [B] : Deal-by-Deal Carry4-52
      • [C] : Deal-by-Deal with Loss Carryforward4-52
        • [C][1] : Principal Issues and Variations4-54
      • [D] : Back-End-Loaded Carry4-58
        • [D][1] : Delay in Receipt of Carry4-59
        • [D][2] : Advantages to Investor4-59
        • [D][3] : Advantages to Fund Sponsor4-60
        • [D][4] : Special Tax Distributions to General Partners4-61
      • [E] : Hybrid Carry Arrangements4-61
      • [F] : Waivers and Reductions of Carry4-62
      • [G] : General Partner Clawback4-63
        • [G][1] : Calculation of the Clawback4-64
        • [G][2] : When the Clawback Is Payable4-66
        • [G][3] : Who Is Liable for Repayments of the Clawback4-66
        • [G][4] : What Deductions May Be Taken in Calculating the Clawback4-69
        • [G][5] : What Security Is Given to Ensure Repayment4-70
      • [H] : Proposed Carried Interest Tax Legislation4-72
    • § 4:8.2 : Management Fees4-72
      • [A] : Overview4-72
      • [B] : How Management Fees Are Calculated4-73
        • [B][1] : Typical Structure4-73
        • [B][2] : Deviation from the Typical Market Structure4-73
        • [B][3] : Investor Scrutiny of Management Fees4-74
        • [B][4] : Net Invested Capital4-74
        • [B][5] : Different Management Fees for Different Investors4-74
      • [C] : Timing of Management Fee Payments4-75
      • [D] : Reduction to Management Fees4-75
        • [D][1] : Transaction Fees4-75
        • [D][2] : Waiver of Management Fees Relating to Payment of Placement Agent Fees4-78
      • [E] : Source of Payment for Management Fees4-79
    • § 4:8.3 : Other Fees4-79
      • [A] : Break-Up Fees4-80
      • [B] : Directors Fees4-80
      • [C] : Advisory and Similar Fees4-81
      • [D] : Acquisition/Disposition Fees4-82
      • [E] : Affiliate Service Fees4-82
  • § 4:9 : Expenses4-82
    • § 4:9.1 : Overview4-82
    • § 4:9.2 : Fund Expenses4-83
      • [A] : Types of Expenses Incurred by Funds4-83
        • [A][1] : Management Fees4-83
        • [A][2] : Costs in Acquiring, Holding, and Disposition of Investments4-83
        • [A][3] : Organizational Expenses4-84
        • [A][4] : Service Provider Costs4-85
        • [A][5] : Extraordinary Expenses4-85
        • [A][6] : Partner Meeting Expenses; Reporting4-85
        • [A][7] : Taxes4-86
      • [B] : Sources of Cash to Cover Expenses4-86
    • § 4:9.3 : Investment Manager Expenses4-86
      • [A] : Types of Expenses Incurred by the Investment Manager4-86
      • [B] : Sources of Cash to Cover Expenses4-87
    • § 4:9.4 : General Partner Expenses4-87
      • [A] : Types of Expenses Incurred by the General Partner4-87
      • [B] : Sources of Cash to Cover Expenses4-87
  • § 4:10 : Management Company; General Partner4-88
    • § 4:10.1 : In General4-88
    • § 4:10.2 : Duties and Powers of the General Partner4-88
    • § 4:10.3 : Duties and Powers of the Management Company4-93
    • § 4:10.4 : Restrictions on Fund Managers4-94
      • [A] : Time Commitment4-94
      • [B] : Allocation of Investment Opportunities and Aggregation of Trades4-95
      • [C] : Conflict Transactions4-96
      • [D] : Duty to Make Investment Opportunities Available to Funds; Deal Exclusivity4-97
      • [E] : Subsequent Funds4-98
      • [F] : Other Activities4-98
      • [G] : Non-Competition4-98
  • § 4:11 : Limited Partners4-99
    • § 4:11.1 : Limited Liability4-99
    • § 4:11.2 : No Participation in Management4-100
    • § 4:11.3 : Additional Limited Partners; Increased Commitments4-103
  • § 4:12 : Advisory Committee4-104
  • § 4:13 : Exculpation and Indemnification4-105
    • § 4:13.1 : Exculpation4-105
      • [A] : Misconduct4-106
      • [B] : Delaware Law4-106
      • [C] : Standard of Liability4-106
    • § 4:13.2 : Indemnification4-107
  • § 4:14 : Withdrawal of Interests4-108
    • § 4:14.1 : Mandatory Withdrawals4-108
    • § 4:14.2 : Optional Withdrawals4-109
    • § 4:14.3 : Rights Upon Withdrawal4-109
  • § 4:15 : Key Person Events4-110
    • § 4:15.1 : Nature of Key Person Events4-110
    • § 4:15.2 : Remedies Following Key Person Events4-111
      • [A] : Termination of Investment Period4-111
      • [B] : Dissolution of Fund4-111
      • [C] : Replacement of General Partner and Manager4-111
      • [D] : Required Vote and Treatment of Carry4-112
  • § 4:16 : Transferability of Interests4-112
    • § 4:16.1 : General Restrictions on Transfers4-112
    • § 4:16.2 : Typical Restrictions on Transferability4-113
      • [A] : General Partner Consent4-113
      • [B] : Transfers Between Unrelated Parties4-113
      • [C] : General Partner’s Discretion4-114
    • § 4:16.3 : Permitted Transfers4-115
    • § 4:16.4 : Rights of First Refusal4-116
    • § 4:16.5 : Pledges of Interests4-116
    • § 4:16.6 : Locating Buyers4-117
    • § 4:16.7 : Legal and Tax Issues4-117
  • § 4:17 : Valuation of Fund Assets4-119
    • § 4:17.1 : In General4-119
    • § 4:17.2 : Economic Features of Private Equity Funds Affected by Valuation of Assets4-119
      • [A] : Distribution Calculations4-119
      • [B] : Management Fee Calculations4-120
      • [C] : Distributions In-Kind4-120
    • § 4:17.3 : Determination of Values of Investments4-120
    • § 4:17.4 : Marketing Based on Valuation4-121
  • § 4:18 : Duration4-121
    • § 4:18.1 : Term of the Fund4-121
    • § 4:18.2 : Early Dissolution4-121
      • [A] : Overview4-121
      • [B] : “No Fault” Dissolutions4-122
    • § 4:18.3 : Liquidation and Winding Up of the Fund4-124
  • § 4:19 : Side Letters4-125
    • § 4:19.1 : In General4-125
    • § 4:19.2 : Legal and Regulatory Concerns Raised by Side Letters4-126
    • § 4:19.3 : Common Types of Side Letter Provisions4-128
      • [A] : Most Favored Nation Provisions4-128
      • [B] : Compensation Provisions4-129
      • [C] : Redemption Provisions4-130
      • [D] : Transfer Provisions4-130
      • [E] : Information Rights4-131
      • [F] : Investment Guidelines4-132
      • [G] : Requirement That Other Investors Sign Substantially Similar Subscription Documents4-133
      • [H] : Sovereign Immunity4-133
      • [I] : Capacity Rights4-134
      • [J] : Co-Investment Rights4-134
  • § 4:20 : Amendments4-134
  • § 4:21 : Certificates4-136
  • § 4:22 : Closing Process4-137
  • § 4:23 : Warehousing of Deals4-138
  • § 4:24 : Powers of Attorney4-139
  • § 4:25 : Governing Law4-140
  • § 4:26 : Submission to Jurisdiction4-141
  • § 4:27 : Arbitration/Mediation4-141
Chapter 5: Organizational Options for Funds and Their Sponsors
  • § 5:1 : Introduction5-2
  • § 5:2 : Limited Partnerships5-2
    • § 5:2.1 : Overview5-2
    • § 5:2.2 : Limited Liability Protection5-3
    • § 5:2.3 : Advantages of Limited Partnerships5-3
      • [A] : Tax Advantages5-3
      • [B] : Economic and Management Structural Flexibility5-5
      • [C] : Limited Partnership Agreement5-5
    • § 5:2.4 : Disadvantages of Limited Partnerships5-6
      • [A] : General Partner’s Unlimited Liability5-6
      • [B] : Negative Tax Consequences to General Partner5-6
      • [C] : Recharacterization As a General Partner5-6
    • § 5:2.5 : Other Issues5-7
      • [A] : General Partner’s Capital Contribution5-7
      • [B] : Characterization As a Publicly Traded Partnership5-7
    • § 5:2.6 : Forming the Limited Partnership5-8
      • [A] : Certificate of Limited Partnership5-8
      • [B] : Employer Identification Number5-8
      • [C] : Written Limited Partnership Agreement5-8
  • § 5:3 : Limited Liability Companies5-9
    • § 5:3.1 : Overview5-9
    • § 5:3.2 : Advantages of the LLC5-9
      • [A] : Limited Liability Protection and Tax Advantages5-9
      • [B] : Flexible Management Structure5-9
      • [C] : Flexible Economic Structure5-10
      • [D] : Single-Member LLCs5-10
    • § 5:3.3 : Disadvantages of the LLC5-10
      • [A] : Newly Recognized Entity5-10
      • [B] : Recharacterization As a Publicly Traded Partnership5-11
      • [C] : Tax Disadvantages5-11
      • [D] : Lack of International Recognition5-11
    • § 5:3.4 : Forming the LLC5-11
      • [A] : Certificate of Formation5-11
      • [B] : IRS Forms5-12
      • [C] : Operating Agreement5-12
  • § 5:4 : Subchapter S Corporations5-13
    • § 5:4.1 : Overview5-13
    • § 5:4.2 : Restrictions on Subchapter S Corporations5-13
    • § 5:4.3 : Forming the S Corporation5-14
  • § 5:5 : C Corporations5-14
    • § 5:5.1 : Overview5-14
    • § 5:5.2 : Double Taxation5-15
    • § 5:5.3 : Advantages of C Corporations5-15
    • § 5:5.4 : Management and Economic Structural Flexibility5-15
    • § 5:5.5 : Forming the C Corporation5-15
  • § 5:6 : Other Alternatives5-16
Chapter 6: Ownership and Compensation Arrangements for Fund Sponsors
  • § 6:1 : Overview6-2
  • § 6:2 : Background on Management Structures6-4
    • § 6:2.1 : Management Company6-5
    • § 6:2.2 : General Partner6-5
    • § 6:2.3 : Benefits of a Bifurcated Management Structure6-6
  • § 6:3 : Structuring the General Partner Entity and the Management Company6-7
  • § 6:4 : Structuring Ownership and Compensation Arrangements6-8
    • § 6:4.1 : General Considerations6-8
    • § 6:4.2 : Overview of Compensation Options6-9
      • [A] : Salaries and Bonuses6-9
      • [B] : Direct Employee Investment in the Fund Sponsor’s Funds6-9
      • [C] : Employee Funds Investing in the Fund Sponsor’s Funds6-10
      • [D] : Employee Funds That Invest Side-by-Side with the Fund Sponsor’s Funds6-11
      • [E] : Annual Co-Investment Vehicles6-12
      • [F] : Employees’ Securities Companies6-12
    • § 6:4.3 : Profit Sharing and Ownership in the Management Entities6-14
      • [A] : Ownership Interest in the Management Entities6-16
    • § 6:4.4 : Allocating Economic Rights Among Interest Holders6-18
      • [A] : Carried Interest6-18
        • [A][1] : Allocation of Carried Interest6-18
        • [A][2] : Timing of Carried Interest Payments6-20
      • [B] : Investment Income6-22
      • [C] : Equity Income from the General Partner Entity6-23
  • § 6:5 : Drafting the Management Entity Operating Agreement6-24
    • § 6:5.1 : General Introduction6-24
    • § 6:5.2 : Naming the Company6-26
      • [A] : Choosing a Name6-26
      • [B] : Protecting a Name6-27
      • [C] : Statutory Requirements for a Name6-28
      • [D] : Purpose of the Company6-29
      • [E] : Descriptions of Rights and Obligations6-31
    • § 6:5.3 : Management Issues6-32
      • [A] : Management Generally6-32
      • [B] : Authority of the Managers6-33
      • [C] : Voting or Consent Rights6-35
      • [D] : Other Management Provisions6-39
      • [E] : Fiduciary Duties of Managers6-39
        • [E][1] : Duty of Managers Toward One Another6-39
        • [E][2] : Duties to Portfolio Companies6-41
      • [F] : Activities of the Managers6-43
      • [G] : Exculpation of Managers6-44
      • [H] : Expenses of the Management Entities6-45
    • § 6:5.4 : Capital Provisions6-46
      • [A] : General Overview6-46
      • [B] : Capital Commitments6-47
      • [C] : Capital Contributions6-48
      • [D] : Defaulting Equity Owners6-50
      • [E] : Clawback Obligation6-50
      • [F] : Reserves and Holdbacks6-52
    • § 6:5.5 : Restrictions on Economic Rights: Vesting, Dilution, and Sunset Provisions6-52
      • [A] : Vesting Arrangements6-53
      • [B] : Dilution6-54
      • [C] : Forfeiture of Economic Rights by Equity Owners6-55
        • [C][1] : Terms of Departure6-55
        • [C][2] : Sunset Provisions6-57
      • [D] : Restrictive Covenants6-58
  • § 6:6 : Structuring Ownership and Compensation Arrangements for the Management Company6-58
Chapter 7: Employment Matters
  • § 7:1 : Introduction7-1
  • § 7:2 : Recruitment and Interviewing7-2
    • § 7:2.1 : The Job Application7-2
    • § 7:2.2 : The Interviewing Phase7-2
    • § 7:2.3 : Background Check7-3
    • § 7:2.4 : Properly Classifying Potential Hires7-3
    • § 7:2.5 : Negotiating Employment Agreements7-4
      • [A] : Restrictive Covenants7-5
        • [A][1] : Confidentiality7-6
        • [A][2] : Non-Competition Clauses7-7
        • [A][3] : Forfeiture for Competition7-9
        • [A][4] : Non-Solicitation of Investors and Customers7-9
        • [A][5] : Non-Solicitation of Personnel7-9
        • [A][6] : Non-Disparagement7-10
        • [A][7] : Protecting Work Product and Prohibiting Track Record Portability7-11
        • [A][8] : Enforceability7-11
        • [A][9] : Lift-Outs7-11
  • § 7:3 : Employment Policies and Procedure7-11
    • § 7:3.1 : The Employee Handbook7-12
    • § 7:3.2 : Employee Training7-12
Chapter 8: Fund Documentation
  • § 8:1 : Starting the Process: The Preliminary Offering8-1
    • § 8:1.1 : Summary of Terms8-1
    • § 8:1.2 : The “Flip Book”8-2
    • § 8:1.3 : Due Diligence Questionnaire8-3
  • § 8:2 : Offering Memorandum8-3
  • § 8:3 : Limited Partnership Agreement8-4
    • § 8:3.1 : Terms of the Limited Partnership Agreement8-4
    • § 8:3.2 : Reviewing the Limited Partnership Agreement8-5
    • § 8:3.3 : Negotiating the Terms of the Limited Partnership Agreement8-5
  • § 8:4 : Ancillary Documents8-6
    • § 8:4.1 : Subscription Agreements8-7
    • § 8:4.2 : Investment Management Agreements8-8
    • § 8:4.3 : Administration Agreements8-9
    • § 8:4.4 : Legal Opinions8-10
Chapter 9: Adopting a Compliance Program
  • § 9:1 : Overview9-1
  • § 9:2 : Establishing a Compliance Program9-3
    • § 9:2.1 : Administering a Fund Sponsor’s Compliance Program9-3
    • § 9:2.2 : The Compliance Manual9-3
      • [A] : Overview9-3
      • [B] : General Drafting Considerations9-4
    • § 9:2.3 : Implementing the Firm’s Compliance Program9-6
    • § 9:2.4 : Reviewing and Updating the Compliance Manual9-7
Chapter 10: Securities Act of 1933
  • § 10:1 : Overview10-2
  • § 10:2 : Raising Capital in the United States10-3
    • § 10:2.1 : Section 4(a)(2) Private Placement Exemption10-3
    • § 10:2.2 : Regulation D10-4
      • [A] : The Regulation D Exemption10-4
      • [B] : Rule 506(b); Private Offerings Made without General Solicitation or General Advertising10-5
        • [B][1] : Rule 501(a): Accredited Investors10-5
        • [B][2] : Non-Accredited Investors; Information Requirements10-8
        • [B][3] : Rule 502(c): Prohibition on General Solicitation and Advertising10-9
        • [B][4] : Substantive Pre-Existing Relationship10-10
        • [B][5] : Establishing a Substantive Pre-Existing Relationship10-11
        • [B][6] : Communications with the Press and the Public10-12
        • [B][7] : Internet Communications10-13
        • [B][8] : Consequences of Making a General Solicitation or General Advertisement10-14
        • [B][9] : Practical Guidance Concerning the Rule 506(b) Offering Process10-15
        • [B][10] : Rule 502(d): Limitations on Resale10-16
        • [B][11] : Attribution10-17
        • [B][12] : Integration of Multiple Private Offerings10-17
      • [C] : Rule 506(c); Private Offerings Made with General Solicitation or General Advertising10-18
        • [C][1] : Rule 506(c) “General Solicitation” Provisions10-18
        • [C][2] : Accredited Investor Verification Under Rule 506(c)10-19
        • [C][3] : Adoption of Rule 506(c) by Private Equity Managers10-20
        • [C][4] : Form D Filing Requirement10-22
        • [C][5] : Proposed Changes to Regulation D and Form D10-22
      • [D] : Rule 506(d); “Bad Actor” Disqualification10-23
        • [D][1] : Coverage of the “Bad Actor” Rule10-23
        • [D][2] : “Reasonable Care” Exception10-26
        • [D][3] : Extent of the “Affiliated Issuer” Definition10-27
  • § 10:3 : Raising Capital Outside of the United States10-27
    • § 10:3.1 : Regulation S10-27
  • § 10:4 : Consequences of a Failure to Comply with Private Placement Exemptions10-30
  • § 10:5 : Anti-Fraud Rules10-31
Chapter 11: Investment Company Act of 1940
  • § 11:1 : Overview11-2
  • § 11:2 : Section 3(c)(1) of the Investment Company Act11-3
    • § 11:2.1 : Public Versus Private Offering11-3
      • [A] : Offshore Funds11-4
    • § 11:2.2 : 100-Beneficial-Owner Limit11-4
      • [A] : Attribution11-5
        • [A][1] : Look Through11-5
        • [A][2] : Representations Required from Investors11-6
        • [A][3] : Funds of Funds; Larger Funds11-7
      • [B] : Integration of Section 3(c)(1) Funds11-8
  • § 11:3 : Section 3(c)(7) of the Investment Company Act11-9
    • § 11:3.1 : Qualified Purchasers11-10
      • [A] : Investments11-11
  • § 11:4 : Knowledgeable Employees11-12
    • § 11:4.1 : Overview11-12
    • § 11:4.2 : Alternatives for Employee Investment11-16
  • § 11:5 : Involuntary Transfers11-16
  • § 11:6 : Business Development Companies11-17
    • § 11:6.1 : Overview11-17
    • § 11:6.2 : BDC Structure11-18
    • § 11:6.3 : Advantages of a BDC11-19
    • § 11:6.4 : Taxation of BDCs11-20
  • § 11:7 : Consequences of Failure to Comply with Investment Company Act Exclusions or Exemptions11-20
Chapter 12: Investment Advisers Act of 1940
  • § 12:1 : Overview12-3
  • § 12:2 : Advisers Act Registration12-4
    • § 12:2.1 : In General (Investment Adviser Registration Requirements)12-4
    • § 12:2.2 : Registration of Investment Advisory Affiliates12-5
      • [A] : Fund General Partners, Managing Members, and Similar SPVs12-6
      • [B] : Umbrella Registration and Form ADV Separately Managed Account Disclosures12-6
    • § 12:2.3 : Registration Process—Form ADV12-8
    • § 12:2.4 : Consequences of Investment Advisers Act Registration12-10
      • [A] : Required Policies and Procedures12-10
      • [B] : SEC Examinations and Enforcement12-11
      • [C] : Performance-Based Compensation12-14
      • [D] : Section 207 of the Advisers Act12-18
      • [E] : Section 208 of the Advisers Act12-18
      • [F] : Form PF12-18
  • § 12:3 : Exemptions from Investment Advisers Act Registration12-21
    • § 12:3.1 : Exemption for Investment Advisers with Less Than $150 Million Regulatory AUM in the United States12-23
      • [A] : Determination of Regulatory AUM in the United States12-23
      • [B] : Frequency of Calculation of Private Fund Assets12-25
    • § 12:3.2 : Exemption for Advisers to Venture Capital Funds12-25
      • [A] : “Grandfather” Provision12-28
      • [B] : Application to Non-U.S. Advisers12-28
    • § 12:3.3 : Exemption for Foreign Private Advisers12-29
      • [A] : Counting Clients12-29
      • [B] : Counting Investors12-31
      • [C] : Meaning of “in the United States”12-32
      • [D] : Meaning of “Place of Business”12-32
  • § 12:4 : Exempt Reporting Advisers12-33
    • § 12:4.1 : Reporting Requirements12-33
  • § 12:5 : Substantive Provisions of the Advisers Act12-34
    • § 12:5.1 : Section 206: Anti-Fraud Provisions12-34
      • [A] : Generally12-34
      • [B] : Potential Conflicts of Interest12-38
    • § 12:5.2 : Code of Ethics12-40
      • [A] : Rule 204A-112-40
      • [B] : Personal Trading12-42
      • [C] : Gifts and Entertainment12-44
      • [D] : Outside Business Activities12-45
    • § 12:5.3 : Insider Trading12-46
      • [A] : General Overview12-46
      • [B] : Adopting Insider Trading Policies12-48
    • § 12:5.4 : Principal Transactions12-50
      • [A] : Cross Trading12-51
    • § 12:5.5 : Advertising Practices12-52
      • [A] : Testimonials12-53
      • [B] : Past Specific Recommendations12-54
    • § 12:5.6 : Performance Advertising12-56
      • [A] : Clover Capital No-Action Letter12-56
      • [B] : Model Performance12-57
      • [C] : Performance “Net of Fees” Requirement12-59
      • [D] : Performance Advertising Record-Keeping Requirement12-60
      • [E] : Performance Presentation Considerations for Private Equity Firms12-61
      • [F] : FINRA Rules Concerning Performance Advertising12-62
        • [F][1] : Related Performance12-63
        • [F][2] : Target Returns12-64
        • [F][3] : Projected Returns12-64
        • [F][4] : Hypothetical and Backtested Performance12-65
        • [F][5] : Risk Factors12-65
        • [F][6] : 2017 Marketing and Advertising Guidance12-66
      • [G] : Track Record Portability12-67
        • [G][1] : Employee Track Record Portability12-67
        • [G][2] : Adviser Track Record Portability12-68
    • § 12:5.7 : Proxy Voting Procedures12-69
    • § 12:5.8 : Custody Rule12-70
    • § 12:5.9 : Fees and Expenses12-72
    • § 12:5.10 : Broker-Dealer Registration12-74
    • § 12:5.11 : Adviser Compliance Policies and Procedures12-75
    • § 12:5.12 : Business Continuity Planning12-76
    • § 12:5.13 : Cybersecurity12-77
  • § 12:6 : Offshore Advisers12-78
Chapter 13: Other Regulations Affecting Funds and Sponsors
  • § 13:1 : Broker-Dealer Regulation13-3
    • § 13:1.1 : Overview13-3
    • § 13:1.2 : Issuer Exemption13-5
    • § 13:1.3 : Broker Requirements13-6
    • § 13:1.4 : Third-Party Marketers13-7
      • [A] : Definition of “Third-Party Marketer”13-7
      • [B] : Payment of Third-Party Marketers13-7
      • [C] : Third-Party Marketers As Broker-Dealers13-7
        • [C][1] : Securities Act and Investment Company Act Registration Exemptions13-8
        • [C][2] : Anti-Money Laundering Compliance Obligation13-9
  • § 13:2 : Pay-to-Play Restrictions13-9
  • § 13:3 : Section 13(d) and Section 13(g) Filings13-12
    • § 13:3.1 : Schedule 13D13-13
    • § 13:3.2 : Schedule 13G13-14
    • § 13:3.3 : Section 13(d) Groups13-15
  • § 13:4 : Section 1613-16
    • § 13:4.1 : Section 16(a) Reporting13-17
    • § 13:4.2 : Section 16(b) Short-Swing Trades Liability13-20
    • § 13:4.3 : Section 16(c) Short Sales Against the Box13-21
  • § 13:5 : Rule 13(h)13-21
    • § 13:5.1 : Overview13-21
    • § 13:5.2 : Large Trader Defined13-22
    • § 13:5.3 : Threshold for Filing Form 13H13-24
    • § 13:5.4 : Disclosure Required by Form 13H13-25
    • § 13:5.5 : Large Trader Identification Number13-26
    • § 13:5.6 : Recordkeeping, Reporting, and Monitoring by Broker-Dealers13-26
    • § 13:5.7 : Unidentified Large Traders13-26
    • § 13:5.8 : Foreign Entities13-27
    • § 13:5.9 : Confidentiality13-27
  • § 13:6 : Section 13(f)13-27
  • § 13:7 : The Hart-Scott-Rodino Act13-29
    • § 13:7.1 : Overview13-29
    • § 13:7.2 : Exemptions13-30
      • [A] : Transactions Solely for Investment Purposes13-30
      • [B] : Acquisition of Non-Voting Securities13-32
      • [C] : Certain Acquisitions of Voting Securities by Institutional Investors13-32
      • [D] : Acquisitions of Voting Securities of Foreign Issuers13-32
    • § 13:7.3 : Aggregation of Funds Under Common Control13-32
  • § 13:8 : Resales of Privately Placed Securities13-33
    • § 13:8.1 : Overview13-33
    • § 13:8.2 : Exemptions from Registration13-34
      • [A] : Section 4(1) Exemption13-34
      • [B] : Rule 14413-35
      • [C] : Rule 144A13-36
      • [D] : Section 4(1-1/2) Exemption13-37
  • § 13:9 : Allocation of New Issues13-38
    • § 13:9.1 : FINRA Rule 513013-38
      • [A] : Overview13-38
      • [B] : Exemptions13-39
    • § 13:9.2 : FINRA Rule 513113-40
      • [A] : Overview13-40
      • [B] : Spinning Prohibition13-40
      • [C] : Exceptions13-41
    • § 13:9.3 : Applicability to Private Equity Firms and Funds13-41
    • § 13:9.4 : New Issue Certifications13-42
    • § 13:9.5 : Allocating Profits and Losses13-42
  • § 13:10 : Rule 105 Under Regulation M13-43
  • § 13:11 : Short Sale Regulation13-44
    • § 13:11.1 : U.S. Regulation13-44
      • [A] : Regulation SHO13-44
      • [B] : Dodd-Frank Act13-45
    • § 13:11.2 : International Regulation of Short Sales13-45
  • § 13:12 : Ownership Levels in Highly Sensitive Industries13-46
  • § 13:13 : Regulation of Commodity Pool Operators and Commodity Trading Advisors13-48
    • § 13:13.1 : Overview13-48
    • § 13:13.2 : Exclusions and Exemptions from CFTC Regulation13-50
      • [A] : CFTC Rule 4.713-50
      • [B] : Other Exemptions for CPOs and CTAs13-50
        • [B][1] : Exemptions for CPOs13-50
        • [B][2] : Exemptions for CTAs13-52
  • § 13:14 : Privacy Regulation13-53
    • § 13:14.1 : Overview13-53
    • § 13:14.2 : CFPB and FTC Regulation13-56
      • [A] : Financial Privacy Rule13-56
      • [B] : Safeguards Rule13-59
    • § 13:14.3 : Regulation S-P13-60
      • [A] : Practical Guidance13-61
    • § 13:14.4 : Other Privacy Regulations13-61
    • § 13:14.5 : Identity Theft Prevention Program13-64
  • § 13:15 : Foreign Corrupt Practices Act13-68
  • § 13:16 : Bank Regulations13-73
    • § 13:16.1 : Volcker Rule13-73
    • § 13:16.2 : Developments Regarding Private Equity Investments in U.S. Banks13-76
  • § 13:17 : Derivatives Regulation13-79
  • § 13:18 : Alternative Investment Fund Managers Directive13-80
Chapter 14: ERISA
  • § 14:1 : Overview14-2
    • § 14:1.1 : Substantive Requirements Under ERISA and the Internal Revenue Code14-3
    • § 14:1.2 : Exemptions14-3
      • [A] : Twenty-Five Percent Benefit Plan Investor Exemption14-3
      • [B] : Operating Company Exemptions14-4
      • [C] : Other Plan Asset Rule Exemptions14-4
      • [D] : Qualified Professional Asset Manager Exemption14-5
  • § 14:2 : ERISA Requirements14-7
    • § 14:2.1 : Plans Covered by ERISA and the Plan Asset Regulation14-7
    • § 14:2.2 : Section 404—Fiduciary Duties14-8
      • [A] : Interpretational Issues14-11
    • § 14:2.3 : Section 406(a): Prohibited Transactions with Parties-in-Interest14-12
    • § 14:2.4 : Section 406(b): Prohibited Transactions Involving Self-Dealing14-13
    • § 14:2.5 : ERISA Liability14-14
  • § 14:3 : Exemptions from ERISA’s Plan Asset Rules14-14
    • § 14:3.1 : Limitation on Ownership by Benefit Plan Investors: Twenty-Five Percent Ownership Test14-15
      • [A] : Twenty-Five Percent Ownership Limit14-15
      • [B] : Determination of Twenty-Five Percent Ownership14-16
      • [C] : Fund of Funds Investing in Private Funds14-16
    • § 14:3.2 : Operating Companies14-17
      • [A] : Venture Capital Operating Companies14-18
      • [B] : Real Estate Operating Companies14-22
      • [C] : VCOC Status During a “Distribution Period”14-23
      • [D] : Practical Considerations14-24
        • [D][1] : Opinions and Certificates14-24
        • [D][2] : Fund Manager Representations14-24
        • [D][3] : Tracking Ownership by Benefit Plan Investors14-25
        • [D][4] : Valuation Difficulties14-25
        • [D][5] : Other Disclosures and Representations14-26
        • [D][6] : Special Considerations for Private Equity Funds of Funds14-26
Chapter 15: Anti-Money Laundering
  • § 15:1 : Overview15-1
  • § 15:2 : AML Regulation of Financial Institutions15-3
    • § 15:2.1 : The PATRIOT Act15-3
    • § 15:2.2 : Proposed AML Program Requirements for Unregistered Investment Companies15-4
    • § 15:2.3 : Proposed AML Rule for Registered Investment Advisers15-6
    • § 15:2.4 : OFAC Regulations15-7
    • § 15:2.5 : Practical Suggestions for AML Compliance15-8
      • [A] : Know Your Investor Procedures15-8
      • [B] : High Risk Investors15-9
      • [C] : Non-U.S. Shell Banks15-10
      • [D] : Suspicious Activity Monitoring and Reporting15-10
      • [E] : Delegation of AML Responsibilities15-11
    • § 15:2.6 : Other Regulations15-12
  • § 15:3 : The Money Laundering Control Act of 198615-12
  • § 15:4 : Conclusion15-13
Chapter 16: Seed Investors and Other Strategic Investors
  • § 16:1 : Overview16-2
  • § 16:2 : Seed Capital Transactions16-3
    • § 16:2.1 : The Benefits of the Seed Deal16-4
    • § 16:2.2 : Structural Components of a Seed Deal16-5
      • [A] : The Nature of the Seed Investment16-6
        • [A][1] : Investment in a Managed Account16-6
        • [A][2] : Investment in an Investment Fund16-7
        • [A][3] : Investment in a Satellite Fund16-7
        • [A][4] : Other Strategic Relationships16-8
        • [A][5] : Providing Operating Capital or Operational Support to the Fund Manager16-9
      • [B] : Economic Participation in the Fund Manager’s Business16-10
      • [C] : Management Rights of Seed Investors16-12
      • [D] : Investor Rights of Seed Investors16-14
      • [E] : Covenants and Representations in Seed Arrangements16-14
        • [E][1] : Arrangements That Benefit the Fund Sponsor16-15
        • [E][2] : Arrangements That Benefit the Seed Investor16-15
      • [F] : Regulatory Issues16-16
        • [F][1] : Conflicts of Interest16-16
        • [F][2] : Securities Exchange Act Requirements16-17
    • § 16:2.3 : Information Sharing16-18
    • § 16:2.4 : Parties Subject to Registration and Regulation16-18
  • § 16:3 : Later-Stage Strategic Acquisitions16-19
    • § 16:3.1 : Overview16-19
    • § 16:3.2 : Key Features of Strategic Acquisitions16-19
      • [A] : The Purchase Price16-20
      • [B] : Earnouts16-20
      • [C] : Control Issues16-21
      • [D] : Platform Issues16-22
      • [E] : Employees Who Are Not Selling Equity Owners16-23
  Appendices
Appendix A: Limited Partnership Agreement
Appendix B: Investment Management Agreement
Appendix C: Guarantee
Appendix D: Corporate Law: Fund Counsel’s Opinion Letter to Fund Limited Partners
Appendix E: Securities Law: Fund Counsel’s Opinion Letter to Fund Limited Partners
Appendix F: Tax Law: Fund Counsel’s Opinion Letter to Fund Limited Partners
Appendix G: Certificate of General Partner in Connection with Tax Law Opinion Letter from Fund’s Counsel
Appendix H: Delaware Limited Liability Company, Certificate of Formation
Appendix I: Delaware Limited Partnership, Certificate of Limited Partnership
Appendix J: Side Letter Agreement
Appendix K: Transfer Agreement
Appendix L: Term Sheet
Appendix M: Sample Amendment Procedure
Appendix N: Subsequent Closings Language
Appendix O: Miscellaneous Covenants for Partners of (General Partner/Manager)
Appendix P: Excerpts from a Subscription Agreement
Appendix Q: Comparison of Hedge Fund and Private Equity Terms
Appendix R: Institutional Limited Partners Association—Private Equity Principles
  Table of Authorities
  Index

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