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

Description

Waterfall provisions governing distributions are a critical component of the relationship between a private equity fund sponsor and its investors. These provisions impact the amount and timing of the return of investor capital, the return on investor capital, and the sponsor's receipt of carried interest distributions. Several variations can significantly affect the financial results for investors and the sponsor.

Other important considerations in drafting fund economic provisions include: (1) the tax implications of the distribution waterfall and 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.

These considerations have corresponding implications at the fund sponsor level. Sharing of carried interest among sponsor personnel is a crucial 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, and clawbacks and allocation provisions for private equity funds and their sponsors, as well as the tax implications.