Private Equity Waterfall and Carried Interest Provisions: Economic and Tax Implications for Investors and Sponsors

Structuring Distribution Waterfalls, Carried Interest Clawbacks and Allocations; Carried Interest Sharing at the Fund Sponsor Level; Related Planning and Drafting to Address Tax Consequences

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Wednesday, March 22, 2017
Recorded event now available


This CLE webinar will analyze various methods of structuring waterfall provisions in private equity funds and carried interest distributions to fund managers and among their personnel, as well as related clawback and allocation provisions. The program will also examine the tax implications of such provisions.

Description

Waterfall provisions governing distributions are one of the most critical components of the relationship between a private equity fund sponsor and its investors. These provisions affect the amount and timing of the return of investor capital, the return on investor capital and the sponsor’s receipt of carried interest distributions. There are several variations that can significantly affect the economic results for investors and the sponsor.

In addition to variations in distribution waterfalls, other important considerations in drafting fund economic provisions include: (1) the tax implications of the distribution waterfall and the income and loss allocations; (2) tax distribution provisions to address phantom income; and (3) clawbacks that allow investors to recoup carried interest distributions to the sponsor under certain circumstances.

All of these considerations have corresponding implications at the fund sponsor level. Sharing of carried interest among sponsor personnel is a key aspect of incentive compensation arrangements for fund managers. Variations in these sharing arrangements require careful drafting and planning.

Listen as our authoritative panel discusses structuring waterfall provisions, carried interest distributions, carried interest sharing options at the sponsor level, clawbacks and allocation provisions for private equity funds and their sponsors, as well as the tax implications of such provisions.

Outline

  1. Typical waterfall variations and their economic implications for investors and the sponsor
  2. Carried interest clawbacks
  3. Carried interest sharing arrangements at the general partner level
  4. Tax ramifications, allocation provisions and tax distributions

Benefits

The panel will review these and other key issues:

  • What are the typical approaches for structuring a private equity fund distribution waterfall?
  • How do these variations affect the timing of carried interest distributions to the sponsor?
  • What are some of the approaches to sharing carried interest at the sponsor level?
  • How can counsel address phantom income concerns for the sponsor?

This is an encore presentation with live Q&A.

Learning Objectives

After completing this course, you will be able to:

  • Indicate typical approaches to structure a private equity fund waterfall
  • Discern tax and economic implications of private equity fund waterfall for investors and sponsor
  • Recognize approaches to sharing carried interest at the sponsor level
  • Identify tax ramifications of clawback and allocation provisions for private equity funds and their sponsors

Faculty

Chris P. Kallos, Partner
Kirkland & Ellis, Chicago

Mr. Kallos is a corporate partner who is recognized internationally as one of the top attorneys in the area of private investment fund formation and management. As a leader of the firm’s Private Funds Group, he has been instrumental over the course of two decades in developing the firm’s industry-leading global practice. Mr. Kallos leads fund formation matters for large and middle-market buyout, growth equity, debt, secondary, venture, technology, real estate and other funds, and advises his private equity clients on a wide variety of related matters. He is a frequent speaker and panel moderator in the U.S. and internationally on private equity fund-related matters.

Daniel P. Meehan, Partner
Kirkland & Ellis, Chicago

Mr. Meehan is a tax partner in the Chicago office of Kirkland & Ellis LLP. His practice focuses on the tax aspects of forming private equity funds, credit and other debt funds, hedge funds and venture capital funds, the tax issues specific to both fund sponsors and investors, and the tax aspects of private equity transactions, mergers and acquisitions. He has extensive experience advising clients with respect to the tax aspects of partnerships, LLCs and S corporations, as well as nonqualified and equity-based compensation arrangements.


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