A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FISCAL AND OPERATIONAL ISSUES

P ortfolio C ompany I nformation The following information should be disclosed for portfolio company investments at the time of the initial investment: • Company name; • Brief company description; • Company contact and location details; • Summary investment thesis; • Names of key managers; • Names of co-investors if any; • Date of investments/additional investments/exits; • Industry and sub-sector; • Financial figures (EBITDA, balance sheet, current valuation, etc.); • Potentially, GP comments on coming events. This information should be updated yearly with material changes. Both managers and investors may desire to disclose/receive information other than finan- cial information concerning the portfolio companies. Finally, an important element to be taken into account in the reporting of information to in- vestors is the impact of local laws (such as Freedom of Information Acts regarding the right of access to information held by public authorities) requests. As seen in the Main concepts of private equity chapter (1.1.3.) – Distribution subsection, private equity vehicles proposed to non in-house investors do have performance fees paid to investment managers or GPs that are, in most of the structures, based on an allocation of profits and losses between shares of the LPs and shares held by the GP or a carried vehicle. Whereas hedge funds use performance fees with hurdle rates and high watermark levels, private equity funds have waterfall distributions with hurdle rates based on IRR or annual performance rates, with claw backs and sometimes with escrow accounts. Detailed provisions for waterfall distributions are described in the fund PPM as already mentioned and are in principle easy to understand. However, in practice, the calculation of special provisions such as preferred return, catch-up and claw back clauses, reserve accounts, etc. is often very complex. GPs, auditors and administrative agents often face a number of issues regarding the calculation/application of wordings created by legal advis- ers wanting to keep the maximum flexibility level in the interpretation of the process. The main issue faced when calculating the carried deals with the choice of the IRR that should be applied are as follows: • Which formula? • Which components? • IRR of the vehicle or IRR per project? • IRR computation and IFRS/functional currency? Waterfall distribution

3.2.7

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