The Law of Private Investment Funds

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Buyers faced the dilemma of balancing pressure to invest against the risk of overpaying for assets and not generating sufficient returns. Notwithstanding the political headwinds, the performance in UK private equity was strong in Political uncertainty only increased caution in the UK private equity market in The continuing aftershocks of the Brexit referendum, followed by the UK general election result, lowered confidence in the prospect of investing in the UK. The UK is a free market economy, which is particularly welcoming to businesses.

It has a well-established legal system and enduring political stability offers reliability and comfort to investors. It is yet unclear how this landscape will be affected, or even reshaped by Brexit. The Government may enact measures to offset some of the perceived pitfalls of Brexit or implement other measures to strengthen London as a business hub. It will be crucial that stability continues and that the UK remains able to attract and retain talent.

Have new structures increasingly developed e. Topco is commonly owned by the PE fund and management, as majority and minority shareholders, respectively. Topco would frequently take the form of an offshore vehicle, commonly UK tax resident. For inbound investments, Bidco is typically a private limited liability company resident for tax purposes in the UK. The jurisdiction of incorporation of Bidco can vary based on the desired corporate flexibility and may be onshore or offshore — many PE investments prefer non-English incorporated companies as there is a 0.

There are a number of factors which affect the acquisition structure adopted in PE transactions.


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In recent times, we have seen investors taking a more proactive approach in seeking to influence the choice of structure, particularly given increasing public scrutiny of the use of offshore jurisdictions. PE investors typically use small proportions of equity finance to subscribe for ordinary or preferred ordinary shares in Topco.

The balance is generally invested as shareholder loans often structured as payment-in-kind loan notes issued by Topco , preference shares or offshore hybrid instruments such as Luxembourg-preferred equity certificates. In some buyouts, key senior management with sufficient funds to do so may also be permitted or, in most instances, required to invest in the institutional strip.

United Kingdom: Private Equity 2018

Senior management are usually expected to make sufficient financial investment in the target group to ensure their interests remain aligned with the PE investor and that they remain incentivised to create further value — the amount of this investment typically varies depending on whether the deal is the first investment by management or a secondary buyout. Other key personnel may be invited to participate in management incentive plans or to become additional employee shareholders.

The carried interest limited partnership is, in turn, often a special limited partner in the fund limited partnership. It is typically calculated on a whole-of-fund basis i. Participants based or working in the UK will also wish to ensure that the carried interest is respected as such and is not recharacterised as income-based or otherwise as a disguised investment management fee see section 9 below.

Management incentivisation, structural subordination of equity and investor financing, ease of return of funds to investors, and tax considerations see question 9. Vesting may be straight-line or stepped and full vesting may typically occur after a period of between three and five years, although the lengthening of investment holding periods is likely to stretch vesting. Generally in the UK, it is relatively rare for private investors to take minority positions. However, where they have, the structuring considerations are generally the same — there may just be competing structuring interests between the minority private equity investor and the controlling investor.

Are such arrangements required to be made publicly available in your jurisdiction? In addition, the constitutional documents may include governance arrangements, particularly with regard to the transfer of shares. If a private equity investor takes a minority position, what veto rights would they typically enjoy?

PE investors normally enjoy significant veto rights over major corporate, commercial and financial matters, although thresholds are commonly set to ensure that day-to-day decisions can be taken by management. These veto rights are sometimes split between director veto rights and shareholder veto rights. If so, how are these typically addressed? Veto rights will generally be respected by English courts, but may be found to be void if they constitute an unlawful fetter on any statutory powers of an English company or are contrary to public policy.

Generally, appropriate structures can be put in place to ensure that customary veto rights are effective. Such an agreement may also obligate the shareholders to procure that certain actions are taken or not taken by the relevant target group companies. Unless voluntarily assumed by a PE sponsor, the PE investor itself is not subject to fiduciary or other duties under English company law to the minority shareholders but see question 3.

Board nominees generally owe duties to the company, but may, in limited circumstances, owe duties to shareholders for example, regarding information disclosure. Certain duties may also be owed if: i the portfolio company is insolvent or verging on insolvency; or ii if a specific special relationship for example, principal and agent is established between the nominee directors and the shareholders. Shareholders may be entitled to i bring derivative actions on behalf of the company against the nominee directors often as a last resort , or ii commence an unfair prejudice petition if the affairs of a UK company are being, or have been, conducted in a manner that is unfairly prejudicial to shareholders generally or to one or more shareholders — both are relatively rare especially in a PE context.

However, if the group structure includes companies from other jurisdictions, the impact of the laws of those jurisdictions will need to be considered. What are the key potential risks and liabilities for i directors nominated by private equity investors to portfolio company boards, and ii private equity investors that nominate directors to boards of portfolio companies under corporate law and also more generally under other applicable laws see section 10 below?

PE investors must ensure that nominee directors are eligible to act as directors, including in particular that they are not disqualified by statute e. Such directors must be mindful that, although they are nominee directors, their duties are generally owed to the company itself and not to the party nominating them or other shareholders.

The CA s.

Coeli Private Equity

Where such a conflict exists, the duty to avoid conflicts of interest will not be infringed if the matter has been authorised by the directors, and, accordingly, appropriate authorisations should be put in place at the earliest opportunity. The constitutional documents of the company should be checked to ensure the directors are able to provide such authorisation. In addition to the duty under s. A director will not be in breach of the general duty under s.

The timing for transactions is largely affected by regulatory approvals mainly competition and sector-specific approvals and the preparation of financials particularly given the prevalence of locked-box-pricing mechanisms in PE transactions see question 6. Last Updated: 4 October Your LinkedIn Connections at Firm. How popular is Bermuda as a domicile for PE funds? What form of vehicle is typically used for Bermuda PE funds?

Looking at other vehicles, what are the advantages of a segregated account company? Are Bermuda PE funds or their non-resident investors liable for tax? How easy is it to form a Bermuda PE fund vehicle? How easy is it to convert an existing fund to a Bermuda vehicle, or to redomicile? How onerous are the approval and regulatory requirements?

What are the requirements with regards to local presence?

How has the relationship between general partners and limited partners evolved in recent years and what effect is this having? What are the particular benefits of a Bermuda law partnership? What trends have you seen recently with regards to PE fund structures in Bermuda and what do you expect for the future? Do you have a Question or Comment? Interested in the next Webinar on this Topic? Click here to register your Interest. Neil Henderson. Email Firm. View Website. Events from this Firm.


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    As mentioned, the regulations around private investment funds are much looser than for public funds. Private investment funds enjoy more freedom in how they handle everything from reporting to redemptions. This allows private investment funds to look at illiquid investments that a public fund would shun due to the difficulties of regular valuation and liquidation in the case of rising redemptions. Most importantly, there is no public reporting of positions for private investment funds, which allows them to avoid tipping their hand to the market and eroding the profitability of a stealthily built position.

    Private Funds Law Update |Investment Funds & Private Equity Lawyers | Reed Smith Law Firm

    In addition to investment flexibility, private investment funds can be vehicles of choice for handling significant family wealth. Extremely wealthy families can create private investment funds to invest the wealth with the family members as shareholders. Often a company serves as the initial structure for this arrangement, and it is repurposed to create a capital investment arm from the profits of the business.

    In this case, the family doesn't want or need outside capital, so there is no incentive to take the fund public.