global private equity investing conference structuring winning partnership terms and conditions
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Global Private Equity Investing Conference Structuring Winning Partnership Terms and Conditions. April 4, 2008 Glendale, AZ Heather M. Stone Partner; Head of Fund Formation. Structural Overview Partnerships Careful with other entities, particularly if you have non-U.S. activities (LLCs) - PowerPoint PPT PresentationTRANSCRIPT
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April 4, 2008
Glendale, AZ
Heather M. Stone
Partner; Head of Fund Formation
Global Private EquityInvesting Conference
Structuring Winning Partnership Terms and Conditions
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Structural Overview
Partnerships
Careful with other entities, particularly if you have non-U.S. activities (LLCs)
Multiple layers to accomplish multiple goals
Economics
Tax efficiency (U.S. and other)
Control
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Very Basic Organizational Framework
FundLimited Partnership
2% Contract
Management Company, LLC
General PartnerLP/LLC
Class B Non-Manager Partner/Member
GP/Manager
GP/Manager
GP/Manager
Advisory Committee
Limited Partner Limited Partner Limited Partner
Class A Non-Manager Partner/Member
Class A Non-Manager Partner/Member
Class A Non-ManagerPartner/Member
20% Carried 1% ($)
$ $ $
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Fund X G.P., LLC
Fund X Managers, L.P.
Fund X General Partner, L.P.
Consu lting Agreemen t
Fund X, LLC(Management Company)
$1 mm Class B LP Investmen t
Seed Investors
Fund X GP, L.P.
Class A LP Investmen t
90% of carry
remainder o f carry
General Partner
(contro l)
Class A LP Investmen t
Investmen t retu rn (net o f fees and
carry)
Investmen t Limited PartnerFeeder Partnership
General Partner
(Con tro l)
10% of carry
Fund X, L.P.
GP
Investmen t
carry
GeneralPartner
(Con tro l)
Institutional Limited Partners
Anchor LP(Class B LP)
Anchor 10% of
Total Fee
% of fee % o f carry
100% of fee
managemen t con tract
Individual Limited Partners
Investmen t return (net of fees and
carry)
Investmen t
Investmen t
Investmen t retu rn (net o f fees and
carry)
Fund X Organizational Structure
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What Are Key Terms?
Capital commitment of GP
Investment limitations
Restrictions on the GPs or Manager(s)
Management fee
Key man provisions
Clawbacks (GP, individual GPs/Managers and LPs)
Distribution waterfalls
No fault remedies, removal of GP
Confidentiality/FOIA
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Capital Commitment of the GPs
How much is it?
Increasing trend
How is it paid?
Cash or “other”?
As a GP or as an LP? Addressing risks and tax efficiency concerns
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Investment Limitations
Single company
Public securities – how defined?
“Foreign” – how defined?
Other pooled vehicles
Coordinate with preferred investment structures
Hostile deals
Reinvestment
Caps (during and after commitment period)
Impact of UBTI/ECI and other restrictions
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Restrictions on the GPs
Cross-fund investing
Co-investments
Conflicts generally
New fund restrictions
Any new funds?
new lines of business
Percent of commitments
coordinate with reserves, expenses, suspensions and terminations
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Management Fee
How much?
How calculated?
Defaults?
After end of investment period
Ramp ups and step downs
Offsets
Capital contributions, deferrals
Budgeted fees and budgets generally
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Key Man Provisions
Who are key? Individuals? Groups?
What is trigger?
Active involvement
Substantially all of business time
Criminal behavior – removal a cure?
Cease to be a member
Automatic, Advisory Board vote, LP vote, combination?
What is remedy?
Suspension
Termination
Impact on fees
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Clawbacks - GP Why necessary?
Amount
Net of taxes or tax distributions?
Carry forward and back?
Multi-tiered for preferred return?
Timing
Liquidation
Interim true-ups
Several vs. joint and several; caps
Escrows, guarantees, holdbacks
Not just an LP issue anymore
Departures, retention, etc.
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Clawbacks - LP
When appropriate?
Limits
Amount
Timing
after distribution is made
after fund has liquidated
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Distribution Waterfalls
Amount of carry – tiers in the marketplace
Preferred returns – true or vanishing?
When does GP get carry?
Commitments vs. contributions vs. other
Venture vs. buyout
Catch-ups
Hurdles
Coordinate with escrows, holdbacks, true-ups
Allocations of expenses
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No Fault Remedies – Removal of GP
Circumstances – geographic differences
Triggers – lower trigger for cause?
What is remedy?
Termination of investment period
Termination of fund
Removal?
Coordinate with
Key man provisions
Time commitment restrictions, etc.
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Confidentiality; FOIA
Where are we today?
Longer and more complicated side letters
Remedies for breach
Geographic differences
Start managing disclosure now
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Tips for Effective Fund Raising
START EARLY
IT TAKES LONGER THAN YOU THINK…
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Tips for Effective Fund Raising
Roles and responsibilities
Terms
Managing LP expectations
Companion funds
Managing the process
Timing
Avoid the traps for the unwary
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Roles and Responsibilities
Establish the team
Assign responsibilities
Terms
PPM
Contacts with LPs
Due diligence requests
Document comments
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Terms
Understand “market”
How does it relates to how you operate?
Review your positioning relative to market
Understand LP’s perspective
Determine what really matters
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Managing LP Expectations
Plan ahead
Establish method for allocations
Understand expectations
Pre-sell terms
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Friends, Family and Entrepreneur Funds
Purpose
Expand network of resources
Deal flow
Due diligence
Significant marketing effort to do correctly
Involves everyone in the firm
Split marketing among GP “sponsors”
Administratively time consuming
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Managing the Process
Database
Current investors
Prospects
Rank likely prospects
Maintain detailed notes of each contact
Allocation system
Summarize LP comments
Respond in a coordinated way
Don’t negotiate against yourself
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Timing Set realistic expectations
Allow 1-1/2 to 2 months from documents to close
Talk to investors before they read the documents
Keep promises to a minimum until you have reviewed points with counsel – don’t negotiate against yourself
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Timing
THE DAY AFTER CLOSING
START PLANNING FOR THE NEXT FUND…
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Traps for the Unwary Not being conservative – timing and performance
Not reporting performance consistently
Sweeping failures under the rug
Not disclosing all relevant information on valuations (assumptions, methodology, etc.)
Using performance data from a prior fund
Making off-the-cuff predictions
Publicity
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THANK YOU!
Heather M. Stone
Partner
Head of Fund Formation Group
Edwards Angell Palmer & Dodge LLP
(617) 951-3331
www.eapdlaw.com