A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FISCAL AND OPERATIONAL ISSUES

• Operational aspects Once the GP has clearly defined his cash need, then he determines, often via his fund administrator, the amount to be drawn to each LP and a capital call notice is sent to each LP defining the amount drawn, the payment date and the reason of the call (investments, expenses, etc.). Generally, this notice is sent to LPs ten to twenty days prior the payment date. • Penalties Once a LP makes a commitment to a fund, he cannot withdraw or otherwise discontinue his participation without incurring heavy penalties. A typical penalty for missing a capital account deadline consists in diluting the tardy partner’s capital account. Subsequent defaults result in additional cuts and may even result in the total elimination of the partner’s capital account. Funds usually have provisions for taking legal action against defaulting partners. While these are rarely invoked, pressure from remaining LPs has forced GPs to initiate such proceedings in some cases. C apital distributions As a reminder, capital distributions are the returns received by an investor in a private eq- uity fund, that is to say the income and capital realised from investments less expenses and liabilities. Once a LP has had his cost of investment returned, further distributions are actual profit. As already mentioned, the partnership agreement determines the timing of distribu- tions to the LPs and how profits are divided among LPs and the GP. The challenge for any GP consists in maximising cash-to-cash returns: 1. To increase the IRR (and then his performance fees); 2. To return capital to investors as quickly as possible to maximise reinvestment opportunities. • Distribution in kind Distribution in kind can mainly happen when an investment has resulted in an IPO. An LP may receive his return in the form of stock or securities instead of cash. This can be controversial, as the stock may not be liquid and LPs can be left with shares that are worth a fraction of the amount they would have received in cash. There can also be restrictions in the United States regarding the period when an LP is authorised to sell the stock (Rule 144). In that case, the share value may have decreased by the time the LP is legally allowed to sell it. ■ • Operational aspects Once the GP has realised an underlying asset, he determines, often via his fund administra- tor, the amount to be paid back to each LP. A distribution call notice is sent to each LP defin- ing the amount paid, the payment date, as well as the allocation between return of capital and profit. Generally, this notice is sent to LPs three to five days prior the payment date. R eporting The GP, often via his fund administrator, holds for each LP a capital account which gathers and summarises all the calls paid and distributions received by this latter. He also holds quarterly the current position of each LP within the partnership, the percentage of holding and the remaining commitment.

3.2

A thorough understanding of PE | page 61