- Structuring Considerations in Private Equity
- Main Building Blocks and Vehicles of a PE Structure
- Using a Combination of Vehicles
- Alternative Private Equity Structures
In this chapter, we discuss:
- Structuring considerations in private equity
- Main building blocks of a private equity structure
- Domiciliation: whether to form the fund—onshore or offshore
- Plain-vanilla private equity structure
- Combination of structures, including master-feeder structures, structures involving blockers, and parallel structures
- How to treat private equity structures for accounting and reporting purposes
- Alternative private equity structures: fund lites
Any thorough discussion on private equity accounting and reporting should start by considering the relevant structure involved—whether at the fund level or at the underlying portfolio company’s level.
This chapter is by no means a comprehensive guide to private equity (PE) structures; it sets the scene for the accounting and reporting to take place. Accountants do need a reasonable understanding of the fund structure in order to account for it properly.
For some sponsors, a plain-vanilla structure works perfectly. For others, even a complex structure based on a combination of vehicles involving a number of jurisdictions might not be enough. In such cases, lawyers and tax advisers can provide tailored solutions to suit the sponsor’s specific requirements.
In the context of private equity accounting and reporting, when making decisions about the reporting of the fund, structure plays a part in how the information is channeled and then sliced and diced to come up with the most appropriate reporting. For instance, if you have a parallel structure, will you be reporting each parallel entity separately, or will you be reporting everything on an aggregated basis, as if the separate entities didn’t even exist and you had only one fund? Or will you use both methods?
Structuring Considerations in Private Equity
To understand how and why a private equity fund is structured in a certain way, you need to understand what drives the main participants. First, there are two main questions to be asked:
What do PE fund managers/general partners (GPs) want?
In a nutshell, what GPs want is:
- Good tax results
- Simple structure—does not always work, but aim to use as simple a structure as possible with entities in as few different jurisdictions as possible
- Ease in operating/administering
- Moderate regulation/reporting
- Onshore access—unless good reason to be offshore (for example, VAT issues, creaming, avoid remittance)
- Familiar to LPs
What do investors/limited partners (LPs) want?
In a nutshell, what LPs want is:
- No tax at fund level
- Familiarity with the vehicle
- Limited liability
- No additional regulatory or reporting issues
- Good reputation (offshore / onshore / EU?)
- Avoidance of U.S. issues (for example, UBTI / ERISA / ECI / FIRPTA / FATCA if possible)
Based on the above drivers for the main participants, I think it’s safe to say that most of the private equity structures are predominantly tax driven. Still, some other considerations deserve mentioning:
- Tax transparency of the fund—Limited partnerships, the most efficient and preferred legal form for PE funds, ticks that box.
- Limited liability for both manager and investors.
- Tax position (location and status) of the target investor base.
- Tax treatment of the fund’s target assets.
- Tax efficiency of the management fee and carried interest.
- Regulatory issues (whether the manager and/or the fund need to be authorized or regulated).
- Commercial alignment of interests between managers and investors.
- Location of the management team.
- Investor and tax authority attitudes toward certain jurisdictions.
- Familiarity with and confidence in certain vehicles and jurisdictions.
- Cost (to maintain the structure) and time and resources (to handle the complexity of the structure).