April 4, 2008

Glendale, AZ

Heather M. Stone

Partner; Head of Fund Formation

Global Private EquityInvesting Conference

Structuring Winning Partnership Terms and Conditions

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

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% ($)

$ $ $

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

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

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

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

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

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

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

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.

Clawbacks - LP

When appropriate?

Limits

Amount

Timing

after distribution is made

after fund has liquidated

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

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.

Confidentiality; FOIA

Where are we today?

Longer and more complicated side letters

Remedies for breach

Geographic differences

Start managing disclosure now

Tips for Effective Fund Raising

START EARLY

IT TAKES LONGER THAN YOU THINK…

Tips for Effective Fund Raising

Roles and responsibilities

Terms

Managing LP expectations

Companion funds

Managing the process

Timing

Avoid the traps for the unwary

Roles and Responsibilities

Establish the team

Assign responsibilities

Terms

PPM

Contacts with LPs

Due diligence requests

Document comments

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

Managing LP Expectations

Plan ahead

Establish method for allocations

Understand expectations

Pre-sell terms

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

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

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

Timing

THE DAY AFTER CLOSING

START PLANNING FOR THE NEXT FUND…

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

THANK YOU!

Heather M. Stone

Partner

Head of Fund Formation Group

Edwards Angell Palmer & Dodge LLP

hstone@eapdlaw.com

(617) 951-3331

www.eapdlaw.com