Negotiating co-investment and side car arrangements

Transcription

1 Negotiating co-investment and side car arrangements Dale Gabbert Matthew Pitman James Cofer (Seward & Kissel) David Mulle (Seward & Kissel)

2 Introduction What is co-investment? Typical structure Commercial Position What do investors look for? Regulatory Position UK and the US Tax Position UK and the US 1 / B_LIVE_EMEA1: v1

3 Typical Structure Carry Vehicle Limited Partners [3 rd Party Investors] Carry Vehicle [Performance Fee] [Performance Fee] General Partner Main Fund Co-Investment Vehicle General Partner Manager Manager [Management Fee] SPV Key: Portfolio Investor Vehicles Manager Vehicles Asset Holding Arrangements 2 / B_LIVE_EMEA1: v1

4 What will investors look for? Co-investment offer Co-investment right / MFN treatment on co-investments Disclosure on when co-investments are offered Allocation Fees 3 / B_LIVE_EMEA1: v1

5 What will investors look for? Co-investment terms Level of deal disclosure / diligence (confirmation of the structure). Debt enforcement parri-passu with the Fund. Co-investment agreement? Control active / passive? Cross- default? Parity with the Fund (appropriate disclosures). Fees and expenses (including Placement Fees). Governance. Reporting & Disclosure. 4 / B_LIVE_EMEA1: v1

6 Regulatory Position AIFMD Article 4(1)(a): AIFs means collective investment undertakings, including investment compartments thereof, which: (i) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and (ii) [are not UCITS funds] CIS - s.235 FSMA: In this Part collective investment scheme means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income 5 / B_LIVE_EMEA1: v1

7 Possible Solutions - AIFMD Threshold Issues: Collective investment undertaking? Raising capital? From a number of investors? Exemptions Size Holding Company Joint Venture PERG Chapter 16 Acquisition Vehicle - PERG Chapter 16 Structuring Non-EU structure 6 / B_LIVE_EMEA1: v1

8 Possible Solutions - CIS Threshold Issue: Day-to-day control? Exemptions Groups Debt issues Commercial purposes relating to an existing business Corporates Structuring Non-UK operator Authorised operator 7 / B_LIVE_EMEA1: v1

9 Regulatory Issues Alarm Bells Structures which feature: EU Jurisdictions (note not just management) Passive investors Limited Partnerships or LLPs 8 / B_LIVE_EMEA1: v1

10 UK Tax Considerations Rules of Carried Interest have been tightened Base cost shift eliminated Mix and match allocation provisions prohibited Only genuine capital gain qualifies for CGT treatment (at 28%) 9 / B_LIVE_EMEA1: v1

11 US Structuring Issues - Fund Hedge fund model vs PE model drives some of the tax structuring Open end vs closed end Public securities vs private Perpetual vs limited life Most sidecar vehicles will be investors for U.S. tax purposes rather than traders which means that any fees paid by US taxable investors are subject to deduction limitations To avoid this limitation, the performance compensation needs to be structured as an allocation rather than a fee Performance compensation can either be a waterfall (PE style) or annual income allocation (HF style) Waterfall doesn't work well with open-end fund or perpetual fund and HF style allocation doesn't work well with a closed end fund 10 / B_LIVE_EMEA1: v1

12 US Structuring Issues - Investments The types of investments in sidecar vehicles create unique issues These investments are often private companies that may have a partnership or LLC structure In addition, sidecar vehicles tend to take larger stakes in investments which raises specific issues 11 / B_LIVE_EMEA1: v1

13 US Specific Investment Issues U.S. Partnerships Potential for net income tax in U.S. at rates of up to 54.5% on periodic income and on sale Consider blocker structure or conversion to corporation U.S. Real Property Holding Corporation U.S. corporation with more than 50% of its assets consisting of U.S. real property If corporation is private or public and holding is greater than 5%, U.S. net income tax is imposed on a disposition 12 / B_LIVE_EMEA1: v1

14 US Specific Investment Issues (cont d) Portfolio Interest Interest on U.S. debt instruments is usually exempt from U.S. withholding tax But not if holder of debt owns 10% or more of the voting stock of the obligor Consider use of non-voting stock above 9.9% Other issues State income tax issues Taxable Canadian property (ownership above 25% of certain Canadian corporations and trusts) 13 / B_LIVE_EMEA1: v1

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