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Buyout Fund - Combination of U.S. taxable investors, U.S. tax-exempt investors and non-U.S. investors
If a buyout target is a flow through entity, a fund should assess its investor pool and determine the most appropriate acquisition structure to house the buyout target.
A two-tier holding company structure (i.e., an acquisition company owned by a fund and the management team, and an acquisition subsidiary typically wholly-owned by the acquisition company) is a common structure used by funds to acquire a buyout target.
For example, UBTI-sensitive investors and ECI-sensitive investors generally would not wish to hold their investment in the buyout target through flow-through acquisition vehicles, whereas U.S. taxable investors typically do not wish to invest in underlying investments through entities treated as corporations for U.S. tax purposes because of the U.S. tax leakage associated with those entities.
U.S. taxable investors, U.S. tax-exempt investors that are not sensitive to UBTI, and non-U.S. investors that are not sensitive to ECI, would invest in the buyout target through a flow-through acquisition vehicle structure. In the alternative investment structure, the UBTI-sensitive investors and the ECI-sensitive investors would become shareholders of the "blocker" entity, and their income would generally consist of dividends and gains from the blocker entity.
U.S. tax-exempt investors should not be subject to U.S. tax on these dividends and gains as long as investors do not use debt proceeds to capitalize their interest in the blocker entity. Dividends derived by non-U.S. investors from the blocker entity generally should not be treated as ECI (althoughdividends would be subject to U.S. withholding tax), and gains derived by these investors also should not be treated as ECI if the blocker entity is not a USRPI.
U.S. tax-exempt investors and non-U.S. investors should be aware that the use of a blocker entity in a structure will result in a layer of U.S. tax leakage because the blocker entity will be subject to U.S. tax. Investors must therefore take this tax leakage into consideration when determining whether to invest through a blocker structure. A common technique to mitigate this tax leakage is to insert shareholder loans and/or third-party loans at the level of the blocker entity. If a loan is from a non-U.S. investor in the blocker entity, the loan could be structured so that interest payments to thenon-U.S. investor are treated as ‘portfolio interest’ and exempt from U.S. withholding tax.
If a buyout target is a flow through entity, a fund should assess its investor pool and determine the most appropriate acquisition structure to house the buyout target.
A two-tier holding company structure (i.e., an acquisition company owned by a fund and the management team, and an acquisition subsidiary typically wholly-owned by the acquisition company) is a common structure used by funds to acquire a buyout target.
For example, UBTI-sensitive investors and ECI-sensitive investors generally would not wish to hold their investment in the buyout target through flow-through acquisition vehicles, whereas U.S. taxable investors typically do not wish to invest in underlying investments through entities treated as corporations for U.S. tax purposes because of the U.S. tax leakage associated with those entities.
U.S. taxable investors, U.S. tax-exempt investors that are not sensitive to UBTI, and non-U.S. investors that are not sensitive to ECI, would invest in the buyout target through a flow-through acquisition vehicle structure. In the alternative investment structure, the UBTI-sensitive investors and the ECI-sensitive investors would become shareholders of the "blocker" entity, and their income would generally consist of dividends and gains from the blocker entity.
U.S. tax-exempt investors should not be subject to U.S. tax on these dividends and gains as long as investors do not use debt proceeds to capitalize their interest in the blocker entity. Dividends derived by non-U.S. investors from the blocker entity generally should not be treated as ECI (althoughdividends would be subject to U.S. withholding tax), and gains derived by these investors also should not be treated as ECI if the blocker entity is not a USRPI.
U.S. tax-exempt investors and non-U.S. investors should be aware that the use of a blocker entity in a structure will result in a layer of U.S. tax leakage because the blocker entity will be subject to U.S. tax. Investors must therefore take this tax leakage into consideration when determining whether to invest through a blocker structure. A common technique to mitigate this tax leakage is to insert shareholder loans and/or third-party loans at the level of the blocker entity. If a loan is from a non-U.S. investor in the blocker entity, the loan could be structured so that interest payments to thenon-U.S. investor are treated as ‘portfolio interest’ and exempt from U.S. withholding tax.
Despite apparent stability amid surface change in the last half of the twentieth century, 3 deeper and more destabilizing changes were already underway...
The first, indexation, reflects the slow but steady victory of a simple set of financial ideas – few investors can “beat the market,” and few among those who cannot can identify those who can, so that buying a full array of available stocks generally earns the highest risk-adjusted return, particularly net of investment costs, such as advisory fees.
The second, private equity, similarly reflects a slow spread of a seemingly simple set of ideas – that the traditional form of dispersed ownership could be bettered, at least for some companies, through a different set of institutional arrangements, prominently including a fund concentrating ownership among a relatively small number of sophisticated investors and concentrating control with a professional management firm, coupled with a commitment by the firm to return all invested capital to fund investors on a five or ten year cycle.
The third mega-trend, globalization, is broader and more general, consisting of the opening up of worldwide trade. Changes in international law have led to many economic effects, including a radical reordering of production and restructuring of multinational companies, extended supply chains, and extensive use of joint ventures and outsourcing arrangements.
The first, indexation, reflects the slow but steady victory of a simple set of financial ideas – few investors can “beat the market,” and few among those who cannot can identify those who can, so that buying a full array of available stocks generally earns the highest risk-adjusted return, particularly net of investment costs, such as advisory fees.
The second, private equity, similarly reflects a slow spread of a seemingly simple set of ideas – that the traditional form of dispersed ownership could be bettered, at least for some companies, through a different set of institutional arrangements, prominently including a fund concentrating ownership among a relatively small number of sophisticated investors and concentrating control with a professional management firm, coupled with a commitment by the firm to return all invested capital to fund investors on a five or ten year cycle.
The third mega-trend, globalization, is broader and more general, consisting of the opening up of worldwide trade. Changes in international law have led to many economic effects, including a radical reordering of production and restructuring of multinational companies, extended supply chains, and extensive use of joint ventures and outsourcing arrangements.
Performance Fees
The general partners of funds are entitled to an incentive return of normally up to 20% of the total returns of a fund’s capital,depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable.
Performance fees, categorized as performance allocations, are accounted for as an equity method investment, and effectively, the performance fees for any period are based upon an assumedliquidation of the funds’ assets at the reporting date, and distribution of the net proceeds in accordance with the funds’ allocation provisions.
Performance fees, categorized as incentive fees, which are not accounted as an equity method investment, are deferred until fees are probable to not be significantly reversed. Incentive fees are performance fees structured as a contractual fee arrangement rather than a capital allocation.
The majority of performance fees arecomprised of performance allocations.
The general partners of funds are entitled to an incentive return of normally up to 20% of the total returns of a fund’s capital,depending upon performance of the underlying funds and subject to preferred returns and high water marks, as applicable.
Performance fees, categorized as performance allocations, are accounted for as an equity method investment, and effectively, the performance fees for any period are based upon an assumedliquidation of the funds’ assets at the reporting date, and distribution of the net proceeds in accordance with the funds’ allocation provisions.
Performance fees, categorized as incentive fees, which are not accounted as an equity method investment, are deferred until fees are probable to not be significantly reversed. Incentive fees are performance fees structured as a contractual fee arrangement rather than a capital allocation.
The majority of performance fees arecomprised of performance allocations.
The actions of the Fed and U.S. Treasury may be leading investors to aggressively pursue high returns in today’s low-return world, replacing risk aversion with risk tolerance.
Since many investors have concluded over the last 20 years that they can’t achieve the returns they want or need in traditional stocks and bonds, capital has flooded into alternative assets, complicating life for investors there, too.
Although no markets are starved for capital these days, investors are looking for alternative “alpha” markets where investment skill or manager's skill can add to returns, hopefully without a commensurate increase in overall risk.
Since many investors have concluded over the last 20 years that they can’t achieve the returns they want or need in traditional stocks and bonds, capital has flooded into alternative assets, complicating life for investors there, too.
Although no markets are starved for capital these days, investors are looking for alternative “alpha” markets where investment skill or manager's skill can add to returns, hopefully without a commensurate increase in overall risk.
Global investment firm The Carlyle Group is looking to raise as much as $27bn in what would represent the industry’s biggest ever buyout fund
Carlyle is in discussions with investors about the size of the fund, according to Bloomberg reports citing insiders, which could see the total change.
If the buyout group achieves its target amount, the fund would overtake Blackstone Group’s record $26bn pool in 2019, and would be 46 per cent larger than Carlyle’s last flagship vehicle from 2018.
It comes as global private equity firms are flush with cash from investors eyeing deals amid soaring company valuations.
Global PE firms raised a total of $514 billion in the first half of this year alone – up 70 percent on the same period in 2020, according to Preqin data.
The global PE market is forecast to keep on growing over the next few years, with Deloitte predicting worldwide PE assets under management will reach $5.8tn by 2025 in a recent report.
Just last week, US private equity firm Hellman & Friedman closed its largest ever flagship fund, at $24.4bn.
KKR & Co raised $18.5bn in May and Bain Capital’s North American flagship funds raised $11.8bn in April from employees and outside investors.
Carlyle is in discussions with investors about the size of the fund, according to Bloomberg reports citing insiders, which could see the total change.
If the buyout group achieves its target amount, the fund would overtake Blackstone Group’s record $26bn pool in 2019, and would be 46 per cent larger than Carlyle’s last flagship vehicle from 2018.
It comes as global private equity firms are flush with cash from investors eyeing deals amid soaring company valuations.
Global PE firms raised a total of $514 billion in the first half of this year alone – up 70 percent on the same period in 2020, according to Preqin data.
The global PE market is forecast to keep on growing over the next few years, with Deloitte predicting worldwide PE assets under management will reach $5.8tn by 2025 in a recent report.
Just last week, US private equity firm Hellman & Friedman closed its largest ever flagship fund, at $24.4bn.
KKR & Co raised $18.5bn in May and Bain Capital’s North American flagship funds raised $11.8bn in April from employees and outside investors.
Credit Fund Strategies
There are a wide variety of strategies included within credit funds group. At one end of the spectrum are higher-risk strategies such as distressed debt funds, which invest in the debt of companies in or near bankruptcy. At the other end of the spectrum are "safer" products such as senior loan funds, which as the name implies invest in senior secured loans of typically healthy companies. And then you have a range of strategies – mezzanine loan funds, opportunistic credit funds, CLO funds – that typically slot somewhere in between from a risk-return profile.
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There are a wide variety of strategies included within credit funds group. At one end of the spectrum are higher-risk strategies such as distressed debt funds, which invest in the debt of companies in or near bankruptcy. At the other end of the spectrum are "safer" products such as senior loan funds, which as the name implies invest in senior secured loans of typically healthy companies. And then you have a range of strategies – mezzanine loan funds, opportunistic credit funds, CLO funds – that typically slot somewhere in between from a risk-return profile.
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Secondaries market
“Investors are looking at this market where we provide liquidity to an otherwise long term illiquid asset class and this market has grown significantly. Twenty years ago this market was roughly 1.5 billion of volume annually. This year we expect the market to surpass 100 billion for the very first time. And so when you think about what this market really does it provides a service to investors that want to get out of a long term asset class.” Verdun Perry, the Blackstone global head of strategic partners , stated about the secondaries market.
#secondaries
“Investors are looking at this market where we provide liquidity to an otherwise long term illiquid asset class and this market has grown significantly. Twenty years ago this market was roughly 1.5 billion of volume annually. This year we expect the market to surpass 100 billion for the very first time. And so when you think about what this market really does it provides a service to investors that want to get out of a long term asset class.” Verdun Perry, the Blackstone global head of strategic partners , stated about the secondaries market.
#secondaries