These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”). 4. Funds located outside the territory of the United States, so-called offshore funds, do not follow any fixed structural or organizational pattern. Thus, while the blocker avoids the requirement for the investor to file U.S. income tax returns, the However, the blocker corporation will be fully subject to U.S. taxation, and any dividends may be subject to U.S. withholding taxes. Setting the scene. Funds located outside the territory of the United States, so-called offshore funds, do not follow any fixed structural or organizational pattern. The PEF then purchases LLC equity just as it would have in a “drop-down” transaction. ment fund structured as a private REIT, or a fund that owns its properties through a REIT subsidiary, may be used to ‚‚cleanse™™ UBTI because income from a REIT is distributed to its investors in the form of dividends.6 Another potential REIT structure, more useful for funds … Tax Considerations In Structuring US-Based Private Equity Funds By Patrick Fenn and David Goldstein Akin, Gump, Strauss, Hauer & Feld, L.L.P. The investors are usually the main beneficiaries of the Trust. fund or feeder as a … The fund sponsor can establish a blocker corporation to invest alongside the fund, and allocate the capital commitments of the U.S. tax-exempt investors, foreign tax-exempt investors, and foreign taxable investors (as necessary) to the blocker corporation, i.e. Due to the above concerns, private equity sponsors often use blockers to “block” UBTI or ECI for Tax- Sensitive Investors. Recording of a 90-minute premium CLE video webinar with Q&A PwC provides a full range of services to assist both start-up and institutional clients in establishing their funds and operations through any phase of the private equity investment lifecycle. The master-feeder structure allows investment managers to manage a larger pooled portfolio (i.e., the master fund) and provides investors with benefits such as tax gains, interest, income gains, and dividends – which are generated by the master fund. The Fund’s Net Asset Value (NAV) divided by the number of units outstanding determines the price of each unit of the Trust. When compared to the other commonly utilized alternative structures available — the private REIT and the more typical “standard” blocker structure — the tax savings a leveraged blocker structure potentially provides outweighs the additional cost and complexities, as illustrated in Table 1: A more detailed discussion on the different types of funds Private Equity Fund Structure. Private equity funds with a limited number of investors will often make use of offshore limited part-nerships. Co-investment structures for cross boarder teams/globally located teams. Leveraged Blocker is the most complex and expensive structure and is only recommended for large investments in U.S. real estate, involving several investors or a fund. Since inception, BC Partners has maintained a leading position in the buy-out market, consistently delivering superior returns to investors over our 35 year history. The limited partnership has, for the past thirty years, been the vehicle of choice for fund managers across private equity and venture capital (PE/VC) to aggregate and put to work the capital of their investors. Private Equity Houses raising funds in the upcoming 12 months are going to find it very different from a tax perspective as to the environment when they last went out fundraising. Private equity funds and hedge funds are private investment vehicles used to pool … Offshore legal and fund structure considerations. In another structure, a private equity fund buyer may be able to avoid the issue of double blocking by acquiring the blocked and unblocked portions of the portfolio company, effectively, as two separate investments. A Private Equity that is structured as a Unit Trust is a type of collective investment governed by a trust deed. Private equity fund sponsors often make an effort to structure an exit to include the sale of a fund Blocker by the blocked investors (rather than the Blocker selling its share of the underlying portfolio company) to avoid paying the corporate tax in the Blocker that would be owed on its share of the appreciation in the investment. Private equity fund sponsors often make an effort to structure an exit to include the sale of a fund Blocker by the blocked investors (rather than the Blocker selling its share of the underlying portfolio company) to avoid paying the corporate tax in the Blocker that would be owed on its share of the appreciation in the investment. As coinvestors, participants can play an active role as investors in the deal selection and portfolio construction process. The blocker then acquires an interest, directly or indirectly, in U.S. real estate. Also consider creating a foreign blocker corporation to minimize the tax burden from hedge fund and private equity fund investments. Private Equity Funds: Key Business, Legal and Tax Issues INTRODUCTION1 This outline discusses key business, legal and tax issues to be considered in the formation of a private equity fund (a “Fund”).2 The private equity business has a global reach, with Fund sponsors and investors active around the world. As a Tax Partner with one of the premier accounting, tax and advisory firms, EisnerAmper LLP, Jay provides services to hedge funds, private equity funds and other investment vehicles. The structure will comprise a master fund (an offshore vehicle which is either a limited partnership or a corporate vehicle which elects to be treated as a partnership for US tax purposes), which conducts the trading, and at least two feeder funds which invest all of their assets into the master fund. The blocker typically is organized as a U.S. entity, such as a Delaware corporation or a limited liability company that elects to be treated as a corporation for U.S. federal income tax purposes. 01/16/2017. Structure of a private equity or hedge fund, which shows the carried interest and management fee received by the fund's investment managers. Private equity is a US$4.3 trillion global industry. Similar limited partnership structures are used across other private capital asset classes, A blocker creates separation between the investment and the fund, which would be called a below-the-fund blocker, or between the tax exempt vehicle and the fund, which is called an above -the-fund blocker. indebtedness and cannot invest in flow-through operating entities, except through “blocker” structures, as discussed below. funds, hedge funds, private equity funds, and real estate funds. They can be formed below the fund (i.e., between the portfolio company and the fund) or above the fund (e.g., as feeder blockers). Most governmental plans take the position that, as governmental entities, There is no deadline for the liquidation of such funds and they can be managed more efficiently and offer greater returns for the investors. By Ian Gobin (pictured) & Philip Graham – 2020 is a presidential election year in the US. A Private Equity that is structured as a Unit Trust is a type of collective investment governed by a trust deed. The foreign and tax exempt investors can invest through the blocker corporation, and then they are no longer personally considered to be partners, as it is the domestic corporation that is the owner of equity in the fund. This can be accomplished in both a master-feeder fund and a mini-master fund, among other strategies, but these two are most common within the industry. Sponsors of India-focused private equity funds should note that establishing a . However, it also has struggled with several inefficiencies. Regarding the Cayman Islands specifically, the offshore limited partnership vehicle is very popular among U.S. investors who tend to already be familiar with Delaware limited partner- Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. The popularity of funds continues to grow, and as of December 31, 2015, it was estimated that $3.65 trillion1 was invested globally into private equity and $2.8 trillion2 was invested into hedge funds. The provision applies as of November 27, 2017, although the withholding tax obligation only applies after December 31, 2017. Rather, they vary widely in structure in accordance with the business aims of their participants. Fund managers of private equity fund structures that include investments engaged in a trade or business may want to consider reevaluating fund structures to protect ECI sensitive investors (e.g., increased use of blockers). Private equity fund managers have sought to work with a relatively limited number of investors to minimize shareholder reporting needs. Stiff Structure. The actual effective U.S. tax rate for a leveraged blocker structure … The term ‘private equity’ is defined by the British Private Equity and Venture Capital Association as ‘any medium to long term finance provided in return for an equity stake in potentially high growth unquoted companies’. He is a contributor to the Fund Formation and Incentives Report (SRZ in association with Private Equity International). The LPA traditionally outlines management fees for general partners of the fund. In the past, this investment model has been successful. capital private equity fund structure. Depending on the private equity fund´s structure, CFC tax returns may be required to be filed especially in the case of certain lower tier blocker corporations. Private Equity Fund Acquisition Structures for Buying a Blocker * If you would like to learn how Lexology can drive your content marketing strategy forward, please email [email protected]. Blocker entities allow the fund to invest in a corporate entity (the blocker) that, in turn, typically invests in a single operating LLC. by synthetic ownership structures or instruments1—so the use of the entity classification rules for this purpose cannot be judged apart from the judg-ments passed on those structures and instruments. Under that structure, the Fs create a new S corporation, contribute their T stock to the new corporation on a tax-deferred basis, make a “QSUB election” for T, and then convert T to an LLC. Total private operating companies 64.7 411,646,000 510,140,000 (1) Private Consumer Technology Company C is held by Subsidiary A, which is wholly owned by Private Equity, L.P. (2) A determination should be made as to whether contingent consideration is … Blocker Corporation Structures in Private Equity Funds: Tax and Other Considerations for Fund Investors Avoiding UBTI and ECI; Entry and Exit Strategies Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Private Equity Fund structure – Trust. To address these issues, a private equity fund can set up a U.S. feeder corporation known as a blocker corporation. Overview. Private Equity. Benefiting from a flexible tax and legal environment Luxembourg has been recognised for many years as a pre-eminent jurisdiction for structuring private equity funds and private equity deals. PE VAT implications. … Examining Private Equity and Hedge Fund Structures. Parallel Private Equity Fund vehicle – An alternative to Master/Feeder structure Published on October 17, 2016 October 17, 2016 • 20 Likes • 3 Comments (the_motley_fool) Aug 19, 2016 at 11:22AM. The blocker's after-tax income is then paid out to the fund. Most blocker corporations are C corporations domiciled in the United States, so taxable income from an equity investment in an LLC taxed as a partnership passes through on … The limited partnership has, for the past thirty years, been the vehicle of choice for fund managers across private equity and venture capital (PE/VC) to aggregate and put to work the capital of their investors. Rather, they vary widely in structure in accordance with the business aims of their participants. The most common way for fund structures to avoid ECI to its foreign investors is to create a foreign blocker vehicle. Moreover, while the whole point of blockers and other tiered structures, as well as some synthetic owner- Blocker Corporation Structures in Private Equity Funds: Tax and Other Considerations for Fund Investors Avoiding UBTI and ECI; Entry and Exit Strategies. • The formation of the general partner, the investment manager, and other control entities has also become more complex and therefore, more costly. Gain from the sale of a capital asset (“CG”) held by a private equity fund (“PE Fund”) for more than one year (“LTCG”) is normally taxed favorably to an individual who is a partner in the fund. Further, return of capital by non-German corporations is only recognized for German tax purposes, if it also was return of capital under The investors are usually the main beneficiaries of the Trust. Image source: Getty Images. A feeder fund … Then, the private equity firm will start a follow-on fund and repeat the cycle. relating to private investment funds, and his recent speaking engagements have addressed market terms and regulatory issues surrounding co- investments, market updates for private equity funds and trading compliance. A blocker structure prevents the flow-through of ECI to the investor. However, there is a way to remain an LLC while also ensuring that venture funds don't need to worry about UBTI. Russ' experience dates back to the early 1980s, where he was co head of at&t pension fund's private equity portfolio. The hybrid structure provides U.S. taxable investors with a “pass-through” investment structure, which resident investors, and as the vehicle is generally the most tax-efficient structure for them. structure is commonly used by private equity funds or hedge funds (“Funds”) to pool investment capital. Stiff Structure. Most blocker corporations are C corporations domiciled in the United States, so taxable income from an equity investment in an LLC taxed as a partnership passes through on a Schedule K-1 to the blocker corporation, taxes are paid at the corporate level at the current 21% federal income tax rate, and stockholders do not report income and are not taxed unless a taxable distribution is made by the blocker … A private real estate ... most common offshore fund structures are the leveraged blocker structure and the side-by- side structure. estate private equity fund structure provides better alignment of general and limited partner interests because the general part-ners have equity, sometimes significant ... structures (i.e., blockers) to minimize unrelated business income tax (UBIT) for tax-exempt investors and are developing With liquidity, the fund structure of private equity can be optimized. There is no deadline for the liquidation of such funds and they can be managed more efficiently and offer greater returns for the investors. The structure of a private equity fund generally involves several key entities, as follows: "!The investment fund, which is a pure pool of capital with no direct operations. The master feeder fund structure illustrated in the Diagram of Concept is a simple structure and ... blocker entity because it prevents income flow through treatment to the investors in the FF. a “parallel fund” or “alternative investment vehicle” structure The term 'private equity fund' commonly denotes a non-retail fund investing in illiquid assets and, whilst used most frequently in the context of a typical buyout fund, covers a range of funds including real estate ... structure chart. A real estate private equity fund that invests in properties in various states may trigger such obligations. This can be accomplished in both a master-feeder fund and a mini-master fund, among other strategies, but these two are most common within the industry. Although private equity funds are not required to have either an LPAC or an Advisory Board, each … This provision has implications for sales of interests in private equity funds, portfolio companies in partnership form, and in some structures, sales of the interests in fund … Stiff Structure. However, this time it’s building up to be anything other than a normal election year. Economists generally forecast a period leading up to it which avoids any major US financial market upsets. Because of their broad diversity of structures and objectives, ready categorization The inves-tor puts money into a blocker corporation, which, in turn, invests in the company. The structure of a private equity fund generally involves several key entities, as follows: The investment fund, which is a pure pool of capital with no direct operations. Investors acquire interests in the investment fund, which makes the actual investments for their benefit (see Investment Fund). The general partner is the financial entity used to control and manage the fund, while the limited partners are the individual investors who receive their return as capital interest. Consider the following example of a manufacturing company that is partially owned by a … It’s important to note that, when conducting diversification tests of investment companies that invest in underlying hedge funds and private equity funds (e.g. Setting up an intermediate blocker entity allows a venture fund … Motley Fool Staff. Private Equity Fund structure – Trust. Blocker entities are a common part of private equity fund structures. This two-tiered investment structure of a feeder fund and a master fund is commonly used by hedge funds as a means of assembling a larger portfolio account by pooling investment capital. Blocker Corporation Structures in Private Equity Funds: Tax and Other Considerations for Fund Investors Avoiding UBTI and ECI; Entry and Exit Strategies Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's The U.S. blocker can be capitalized in part with debt and in part with equity. The most common way for fund structures to avoid ECI to its foreign investors is to create a foreign blocker vehicle. Introduction and Background During the private equity fund formation process, private equity professionals routinely ask questions regarding the role and composition of a limited partner advisory committee (the “LPAC”) and a private equity fund advisory board (the “Advisory Board”). The Master’s profits may be split on a pro rata basis among its Feeders in proportion to their investment. However, it also has struggled with several inefficiencies. The PEF then purchases LLC equity just as it would have in a “drop-down” transaction. Note: CPE credit is not offered on this program. Specifically, tax-exempt and foreign investors have historically been the key driver behind fund managers implementing this structure because of the tax benefits that have been afforded to those investors. References to “assets under management” or “AUM” are as defined in Apollo Global Management, Inc.’s latest earnings release. •Non-US and tax-exempt investors participate through Blocker, a feeder entity classified as a corporation for US tax purposes, which in turn invests as an LP in Fund •US taxable investors participate directly in Fund. As appeared in the Private Equity and Venture Capital 2002 edition of the International Financial Law Review. Fund managers can also enjoy redemption burdens that are lighter and such funds will not have funds liquidation problems. A: A “blocker” is a corporation that an investor (e.g., a private equity fund) sets up to invest in a company that is a pass-through for tax purposes, such as an LLC. In many cases, blockers are used to insulate foreign and tax-exempt investors … Carried interest structuring considerations. 1. that entails investing in non-public companies through privately-negotiated transactions and results in the private ownership of businesses. The use of real estate investment trusts ("REIT") in real estate private equity fund structures has long been advised as a prudent strategy. In the past, this investment model has been successful. Structuring Private Investment Funds ... • Types of Funds — Private Equity — Venture Capital — Hedge — Distressed Debt — Real Estate — LBO — Fund of funds . Some of the most active investors in private equity funds are governmental pension plans, such as those for states or municipalities. The U.S. blocker subsequently invests into the loan origination fund. Investors acquire interests in the investment fund, which makes the actual investments for their benefit (see German/US specific investor requirements in Private Equity and associated structuring advice. Debt-Financed: - Gain on sale A feeder fund is a structure used by hedge funds to allow U.S. and non-U.S. investors. Typically, these alternatives involve the use of blocker corporations either as feeder entities or as part of a parallel fund structure. There has been lots of scrutiny as everyone will be aware of multi-national corporations, how they pay tax, where they pay tax and on what basis. One of the first, truly pan-European buy-out firms, BC Partners has continually operated across Europe for over three decades, and for over a decade in North America. Our latest private equity fund, Fund IX, closed in 2017 with a record $24.7 billion of commitments. With liquidity, the fund structure of private equity can be optimized. It's common for private equity funds to require an annual fee of … Getting What You Pay For Private equity funds should be familiar They can be single or multipurpose. Basic Fund Structure w/ Permanent Blocker Feeder. Why put a blocker … "Preparing for FATCA: An in-depth discussion of the issues, timeline and action plan for funds" was first published in PEI's The Private Equity CFO & COO Digest 2013. Although buyout funds have begun to use parallel AIVs more frequently, many funds traditionally have used subsidiary AIVs to deal with the UBTI/ECI issue of investing in an operating LLC. Fund ECI and the Use of Blockers – Private Equity AIV Another common structure for private equity – alternative investment vehicles (AIVs) Non-ECI generating investments made through “main” fund ECI investments made through AIV Blocker interposed between Non-US investors and AIV (typically, but not always, onshore) Getting What You Pay For Private equity funds should be familiar real estate private equity fund, which is the subject of this white paper). However, it also has struggled with several inefficiencies. Blockers often show up in the investment fund context, although they are helpful in other contexts as well. 2 T he taxation of private equity funds … UBTI impact on real estate private equity funds. • Organizational expenses of private equity funds have risen significantly in recent years due to increasingly complex fund structures and increases in the costs of preparing marketing documents. The industry has grown exponentially over the past 30 years. The blockers shield tax-exempt investors from directly incurring UBTI in respect of operating partnerships (and some debt-financed UBTI as well depending on the structure) and shield non-U.S. persons from directly incurring ECI, in each case, together with the associated filing obligation. As of March 2021. Private equity has been a cornerstone of Apollo’s business since its founding in 1990. Fund Blocker Corporation Structures Where a private equity fund invests in a flow-through portfolio company engaged in a U.S. business (i.e., a portfolio company organized as a partnership or LLC), certain tax-sensitive fund LPs — virtually all non-U.S. LPs and many U.S. tax-exempt LPs — All private funds are required to pay … In forming a US-based private equity fund, the fund sponsor must address tax and other Impact of the location of; fund manager/advisor and the impact on PE houses and key executives. Although income from unrelated trades or businesses is generally taxable, there are several categories of income, and related deductions, which are excluded. A master-feeder structure is a device commonly used by hedge funds to pool taxable and tax-exempt capital raised from investors in the United States and overseas into a master fund. The Fund’s Net Asset Value (NAV) divided by the number of units outstanding determines the price of each unit of the Trust. Under that structure, the Fs create a new S corporation, contribute their T stock to the new corporation on a tax-deferred basis, make a “QSUB election” for T, and then convert T to an LLC. Similar limited partnership structures are used across other private capital asset classes, Although we know that using debt “leverage” is common in M&A transactions, the best way to understand why private equity groups (PEGs) use debt in the first place is to look at an example of what leverage does to investment returns.. Let’s say you raise a $50 million fund from a couple of your drinking buddies. Although these structures prevent investors from incurring the bad income, they do interpose an additional tax at the corporate blocker level. For most funds, an offshore master-feeder structure set up in a tax neutral jurisdiction In the past, this investment model has been successful. This article by partners Brenda Coleman, Andrew Howard and Leo Arnaboldi was published by Tax Journal on November 7, 2018.. As with the feeder, the blocker captures and pays U.S. corporate tax on any operating business income from the LLC. Managers can also utilize a U.S. corporation blocker, owned by the Cayman fund, through which the non-U.S. and tax-exempt investors invest. 7 Fund Characteristics (cont’d) ... Fund Blocker often desired . USRPHC. The structure is very similar to US Blocker structure, but, in addition, the foreign person loans part of the investment to the U.S. Many ... usually operationalised through the use of ‘blocker’ structures, where an entity taxed Fund managers of private equity fund structures that include investments engaged in a trade or business may want to consider reevaluating fund structures to protect ECI sensitive investors (e.g., increased use of blockers). based fund sponsors. Closed-end investment funds (private equity, buy-out, venture capital, real estate, natural resources and energy) differ structurally from the traditional open-end (e.g., hedge fund) model in a number of significant ways. Because of their broad diversity of structures and objectives, ready categorization And the side-by- side structure redemption burdens that are lighter and such and! 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