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Securities Regulation > Private Equity > Flashcards

Private Equity Flashcards

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SIE Exam flashcards
1
Q

Types of Funds

A
  1. Open-End Fund
  2. Closed-End Fund
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2
Q

Open-End Fund

A
  • No limit to number of shares that they can issue
  • Don’t trade on open market
  • Shares can only be sold back to the company that issued them
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3
Q

Closed-End Fund

A
  • Only a set number of shares issued
  • Purpose is to pay distributions to their investors, which may include earnings, capital gains, and return of principal
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4
Q

Hedge Funds

A

Pursue a wide variety of complex strategies

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5
Q

Private Equity

A
  • A private pool of capital formed to make privately negotiated investments
  • Make controlling investments in established companies
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6
Q

Venture Capital

A
  • Early-stage and growth-stage investments
  • Smaller stakes of business (less than 10% of business)
  • Existing management stays in place
  • High-risk, minority investments
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7
Q

General Business Model of Investment Fund

Purpose

A
  • Make money
  • Investors put money in to get money out
  • GP is in business to make money for investors and get a share of profits
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8
Q

General Business Model of Investment Fund

Why pool money one vehicle?

A

Diversification: get to buy more businesses

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9
Q

General Business Model of Investment Fund

Investments

A

To make more value:

  • Merge
  • Place new executives in place
  • Leverage
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10
Q

General Business Model of Investment Fund

Jurisdiction

A
  • Delaware: typically selected, viewed as familiar/safe by LPs, specialized courts, sophisticated courts, sophisticated common law, lower administrative costs
  • Cayman Islands, Luxemburg, Mauritius
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11
Q

General Business Model of Investment Fund

Type of Entity

Limited Partnerships

A
  • Classification as a partnership generally allows – - Fund not to be subject to US federal income tax
  • Traditional and most common vehicle for establishing a Fund
  • Most developed statutory and case law
  • Investors are most familiar with them
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12
Q

General Business Model of Investment Fund

Type of Entity

Limited Liability Companies

A
  • Permits great flexibility in structure Fund
  • Offers familiar corporate governance forms
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13
Q

General Business Model of Investment Fund

Investors

A
  • US Corporate Pension Plans
  • Sovereign Wealth Funds
  • US Insured Depository Institutions & Bank Holding Companies
  • Funds of Funds
  • Individual Investors & Family Offices
  • US Governmental Plans
  • Life Insurance Companies
  • Private Foundations & Endowments
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14
Q

General Business Model of Investment Fund

Structure

Limited Partners

A
  • Investors
  • Generally, not involved in Fund’s investment decisions or other day-to-day activities
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15
Q

General Business Model of Investment Fund

Structure

General Partner

A
  • Generally, makes all final decisions concerning Fund’s operations and purchase and sale of Fund’s investments
  • Shell company usually
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16
Q

General Business Model of Investment Fund

Structure

Manager

A
  • Administers and advises Fund
  • Seeks out and structures investment to be made by the Fund
  • Recommends strategies for realizing and existing those investments
  • Receives a management fee paid by the Fund
17
Q

General Business Model of Investment Fund

Parallel Funds

A

Co-invest and divest alongside Main Fund at same time and on same terms based on their respective committed capital

18
Q

General Business Model of Investment Fund

Fund of Funds

A
  • Funds that invest primarily or exclusively in other private equate funds
  • Providing investors with a diversified portfolio and access to Funds to which they otherwise might not have had access
19
Q

Economics

Management Fee

A

2% of committed capital, Aggregate Commitments (only in first year)

20
Q

Economics

Carried Interest/Performance Fee

A
  • Payment to the GP out of the profits earned by the Fund
  • Usually 20%
21
Q

Economics

American Waterfall

A
  • Deal-by-deal basis
  • GP is not required to wait until LP have received a return of all capital they have contributed to the Fund before receiving any Carried Interest
  • GP received Carried Interest out of proceed from sale of each investment once the capital invested in such disposed of investment is returned
22
Q

Economics

European Waterfall

A
  • Payment of Carried Interest only after all contributed capital is returned
23
Q

Economics

Flow-Through Tax Treatment

A
  • If fund that is treated as a partnership for US income tax purposes, each investor subject to US tax will be required to take into account its distributive share of all items of the Fund’s income, gain, loss, deductions and credits whether or not such investor receives a distribution
24
Q

Waterfall Mechanics

Return of Capital

A
  • LPs get back their capital contribution for “Realized Investments”
25
Q

Waterfall Mechanics

Preferred Return

A
  • LPs receive 8% preferred return
  • Very common to require a specified return or yield to be achieved on the LP’s capital contribution before GP is permitted to take Carried Interest
26
Q

Waterfall Mechanics

Catch-Up

A
  • GP catches up to the 8% preferred return
27
Q

Waterfall Mechanics

Carried Interest Split

A
  • 80% to LPs and 20% to GPs
28
Q

Core Documents

A
  • Private Placement Memorandum (PPM)
  • Fund Agreement/LPA
  • Subscription Agreement
  • Side Letters
29
Q

Core Documents

Private Placement Memorandum (PPM)

A

Generally primary information and disclosure document that is made available to prospective investors

30
Q

Core Documents

Private Placement Memorandum (PPM)

A

Business Description: investment strategy and process, market commentary and description of sponsor

31
Q

Core Documents

Private Placement Memorandum (PPM)

A

Legal Description: summarize terms in Fund’s principal governing documents and include a description of relevant conflict of interest considerations, risk factors, and other legal disclosures

32
Q

Core Documents

Private Placement Memorandum (PPM)

A

Track Record: illustrate the sponsor’s investment policies and strategy with a “track record”

33
Q

Core Documents

Fund Agreement/LPA

A
  • Most comprehensive and most negotiated governing Fund document
  • Contains majority of the governance and contractual terms to which the parties agree
  • Waterfall included in this document
34
Q

Core Documents

Subscription Agreement

A
  • Document pursuant to which each investor subscribes for its interest in, and makes its capital commitment to the Fund
  • Memorializes each investor’s interest in the securities they are purchasing in the Fund
  • Make representations concerning:
    1. Tax
    2. Securities law and AML matters
35
Q

Core Documents

Side Letters

A
  • Used to commonly address the specific issues of an investor between LP and GP
  • Many institutional investors now have a list of personalized “standard” side letter request that they make in respect of all their Fund investments

Securities Regulation (2 decks)

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