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Tax Implications of Private Equity Waterfall and Carried Interest Provisions

Gain a better understanding of sponsor's "carried interest" and explore how preferred returns are commonly calculated.

A key aspect of a private equity fund is the sponsor promote or carried interest, which is simply the sponsor's disproportionate share of profits in a deal above a predetermined (or preferred) return threshold. Relative to amounts invested, once the preferred return threshold has been met, residual cash flow distributions typically favor the sponsor. In general, the sponsor's carry is calculated on either a 'deal by deal or a whole fund basis. However, within this simple binary choice, there are myriad variations, any one of which can significantly alter the returns to sponsors and investors. This topic will define the sponsor's carried interest, and explore the variations for structuring the carried interest, as well as how preferred returns are commonly calculated. In addition, this material will address different structures and related security arrangements of sponsor clawbacks, which protect investors from sponsors receiving carry they have not earned. Finally, this information will address other tax considerations that pervade all fund agreements and can impact sponsor and fund returns, such as fee waiver and tax distributions.

Runtime: 102 minutes
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Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Agenda

Waterfall Structures

  • Whole Fund vs. Deal by Deal
  • Preferred Return - IRR vs. Absolute Dollar Threshold vs. Capital Plus Preferred Return
  • Look-Backs and Catch-up Provisions

Clawbacks

  • Contribution vs. Reverse Waterfall Methods
  • After-Tax Calculation
  • Interim Clawbacks
  • Security for Clawback: Escrow or Guarantee

Other Tax Considerations

  • Fee Waiver
  • Capital Accounts
  • Tax Distributions
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Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Credits

OnDemand Webinar

This course was last revised on December 4, 2019.

Call 1-866-352-9540 for further credit information.

  • Enrolled Agents 2.0
     
  • This program qualifies for 2.0 hours of Continuing Education Credit for enrolled agents under Treasury Department Circular #230 Section 10.6(g).
     

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

Audio & Reference Manual

  • Arizona CLE 1.5
     
  • CA MCLE 1.5
     
  • CT CLE 1.5
     
  • HI CLE 1.5
     
  • IL CLE 1.5
     
  • ME CLE 1.5
     
  • MT CLE 1.75
     
  • NJ CLE 2.0
     
  • NV CLE 1.5
     
  • NY CLE 2.0
     
  • VT CLE 1.5
     
  • WA CLE 1.75
     
  • WV MCLE 2.0
     
The CLE Code is ONLY a requirement when applying for CLE Credit in California (for participatory credit), Kansas, New Jersey or New York. Other states do not need to supply the CLE Code to apply for CLE credit.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

MP3 Download

  • Arizona CLE 1.5
     
  • CA MCLE 1.5
     
  • CT CLE 1.5
     
  • HI CLE 1.5
     
  • IL CLE 1.5
     
  • ME CLE 1.5
     
  • MT CLE 1.75
     
  • NJ CLE 2.0
     
  • NV CLE 1.5
     
  • NY CLE 2.0
     
  • VT CLE 1.5
     
  • WA CLE 1.75
     
  • WV MCLE 2.0
     
The CLE Code is ONLY a requirement when applying for CLE Credit in California (for participatory credit), Kansas, New Jersey or New York. Other states do not need to supply the CLE Code to apply for CLE credit.

This program does NOT qualify, nor meet the National Standard for NASBA accreditation.

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More Program Information

Why Lorman?

Over 32 years and 1.4 million customers worth of experience providing continuing education. Our passion is providing you world-class training to help you succeed in business and as a professional.

Faculty

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Tom Geraghty

DLA Piper LLP (US)

  • Partner, DLA Piper LLP (US) – Chicago
  • Extensive experience in advising fund sponsors, investment advisors and investors who seek to identify and implement tax-efficient structures worldwide in order to enhance after-tax yields
  • Has counseled on investments for U.S. and non-U.S. investors across a broad base of asset classes, including real estate, infrastructure and debt and equities
  • Recently presented on related topics, including (i) "Partnerships in M&A Transactions: Positioning for the New IRS Partnership Audit Rules," Grant Thornton online webinar, February 2018; and (ii) “Private Equity Transactions & Other Advanced Tax Considerations After Tax Reform,” ACG Chicago, September 2018.
  • Most recent publication is Selected Tax Issues in Rep and Warranty Insurance Deals, (co-author) Tax Notes, January 8, 2018
  • J.D. degree, Yale Law School
  • Can be contacted at 312-368-7075 or [email protected]
Nathaniel Marrs

Nathaniel Marrs

DLA Piper LLP (US)

  • Partner and co-head of investment funds practice, DLA Piper LLP (US)
  • Represents domestic and international fund sponsors in a variety of corporate transactions, including fund formations and investments, investment management M&A transactions, and GP/management company formations
  • Publications include English and U.S. Private Equity Funds: Key Features, 7 Sep 2018, along with a number of other articles for PREA, the Real Estate Finance Journal, and Financial Times
  • Regular speaker at Northwestern Law School and Northwestern Kellogg School of Management
  • Regularly recognized by Legal 500
  • J.D. degree, University of Michigan; M.B.A. degree, The University of Chicago Booth School of Business; B.A. degree, summa cum laude, University of Michigan
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Product ID: 406723
Published 2019
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