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

Distributions, Clawbacks, and Allocations; Carried Interest Sharing; Drafting to Address Tax Consequences

Note: CPE credit is not offered on this program

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

Conducted on Wednesday, September 2, 2020

Recorded event now available

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Program Materials

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 and related clawback and allocation provisions. The program will also examine the tax implications of such provisions.

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.

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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 impact 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?

Faculty

Stults, David
David H. Stults
Partner
Kirkland & Ellis

Mr. Stults concentrates his practice on representing domestic and international private fund sponsors in connection...  |  Read More

Virmani, Aalok
Aalok Virmani
Partner
Kirkland & Ellis

Mr. Virmani's practice focuses on the tax aspects of forming and investing in private equity funds, hedge funds and...  |  Read More

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