advanced private equity fund formation: key business ...€¦ · 1 presentation slides ... goldman...

www.debevoise.com

Advanced PrivateEquity Fund

Formation: KeyBusiness, Legal and

Tax Issues

17 March 2015

Advanced Private Equity Fund Formation: Key Business, Legal and Tax Issues

Executive Summary

www.debevoise.com

Executive summary

1 PRESENTATION SLIDES

2 SPEAKERS BIOGRAPHIES

3 ABOUT OUR LONDON OFFICE

4 PRIVATE EQUITY IN EUROPE

5 CLIENT UPDATE: More UK Tax? Additional Guidance on the Disguised

Investment Management Fee Rules

6 CLIENT UPDATE: Are Your Carry and Co-Invest Returns Safe from UK Income

Tax? (Sadly Your Management Fee Probably Isn’t.)

7 CLIENT UPDATE: Volcker Rule FAQ Expands Ability of Non-U.S. Banks to Invest

in Private Funds

8 CLIENT UPDATE: UK Tax on Management Fees, Co-Invest and Carry: Is

Anything Safe?

2

Chambers General Counsel SeminarAdvanced Private Equity Fund Formation:Key Business, Legal and Tax Issues

John AndersonPark Square Capital Geoffrey Kittredge

Debevoise & Plimpton

Joseph BlumGlobal Infrastructure

Partners

Zack WilsonImpax AssetManagement

Richard WardDebevoise & Plimpton

3

Current trends in fund terms:

• Management fees and discounts/offsets

• Carried interest and clawbacks

• Deal flow co-investment and expenseallocations

• Increased investor due diligence

4

Separate accounts and othernon-traditional fundraisings

• Managed / Separate Accounts

– Bespoke terms for investors

• Deal by deal fundraising and co-investmentclubs

5

Regulatory developments

• The Volcker Rule: An Update

• AIFMD: Practical implications

6

Areas of focus by tax authorities

• Disguised management fees

• BEPS


Speaker Biographies

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Speakers Biographies

John AndersonGeneral CounselPark Square Capital

John Anderson is General Counsel at Park Square Capital, LLP.Prior to joining Park Square in 2014, John was an InternationalCounsel at Debevoise & Plimpton LLP in London. John receivedhis BA from the University of California at Berkeley, and his JDfrom Yale Law School.

Joseph BlumGeneral Counsel &Chief Compliance OfficerGlobal Infrastructure Partners

Joe Blum joined Global Infrastructure Partners (GIP) in 2007 as aPartner and serves as General Counsel and Chief ComplianceOfficer. He is also a member of the Investment and OperatingCommittees and manages the London office, where he is based. AtGIP, Joe is responsible globally for all legal and regulatory matters,including appointing and supervising outside counsel ontransactions and litigation matters; structuring and negotiatingGIP’s investment funds; and ensuring compliance with SEC, FCA,ASIC and other regulatory bodies. Prior to joining GIP, Joe spent21 years at Latham & Watkins where he was Co-Head of theProject Development and Finance Group in London. During hiscareer, Joe represented sponsors, financial institutions andgovernments in structuring complex project development andfinance transactions, joint ventures and privatizations in theenergy, transport and water sectors. He has worked oninfrastructure transactions throughout the Middle East, Europe,the former Soviet Union, Africa and the United States. From 1997to 2002, he served as a member of Latham’s Executive ChairsCommittee and was the Managing Partner of the London Office.Earlier in his career, Joe served as Special Assistant to the Directorof the Federal Bureau of Investigation in Washington, D.C. Heholds a J.D. (cum laude) from the University of Michigan LawSchool and a BA (magna cum laude) from Wesleyan University.


Speaker Biographies

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Geoffrey KittredgePartnerDebevoise & Plimpton LLP

Geoffrey Kittredge is a corporate partner based in the Londonoffice of Debevoise & Plimpton. He is the Co-Chair of the firm'sEuropean Private Equity Funds Group. Geoffrey focuses on privateequity and investment fund formation and regularly represents abroad range of international private equity and other privateinvestment funds and their sponsors, including leveraged buyout,mezzanine, real estate and secondaries funds, as well as funds offunds. Geoffrey is also a member of the EMPEA Legal &Regulatory Council and of the Legal and Technical Committee ofthe BVCA.

Richard WardPartnerDebevoise & Plimpton LLP

Richard Ward is co-managing partner for the firm in London, andChair of the firm’s UK Tax Practice. A broad-gauged UK corporateand transactional tax lawyer, Mr. Ward has advised an array ofmultinational clients on mergers & acquisitions, joint ventures,financing transactions and private equity fund formation andoperation.

Zack WilsonGroup General CounselImpax Asset Management

Zack Wilson serves as Group General Counsel for Impax AssetManagement. He is also a non-Executive Director of Impax Funds(Ireland) plc. Prior to joining Impax in 2011, he was director andgeneral counsel for the investment management groupDevelopment Capital Management. Previously he was corporatecounsel for Telewest Global Inc. Zack qualified as a solicitor at theglobal law firm Norton Rose. He holds a Master of Arts inJurisprudence from Oxford University.


About Our London Office

www.debevoise.com

.


REPRESENTATIVE

CLIENTS

AIA Group Limited

American International Group

AREA Property Partners

Baring Vostok

Benfield Group

The Carlyle Group

Catlin Group

Clayton, Dubilier & Rice

Deutsche Bank

Doughty Hanson & Co.

Europa Capital

Exponent Private Equity

Global Infrastructure Partners

Goldman Sachs Reinsurance

Group

Hanover Insurance Group

HarbourVest Partners

Hardy Underwriting

Helios Investment Partners

Interros

Itaú Unibanco

Morgan Stanley

NLMK

Norilsk Nickel

Oaktree Capital Management

Och-Ziff Capital Management

Park Square Capital Partners

Petroleum Equity

Polyus Gold

Providence Equity Partners

Rexel

Reynolds Group Holdings

Stone Point Capital

The SUN Group of Companies

TA Associates

Uralkali

Contacts

Lord Goldsmith QC / Richard

Ward

Co-Managing Partners

+44 20 7786 9000Debevoise’s London office, opened in 1 989, works on some of the highest pr ofile, most complex and lar gest transactions in Eur ope. We do this by virtue of our English and US law capa bilities and deal technology, our close integration with our other offices in E ur ope andthe US, and our access to the worldwide resources of Debe voise.

The London office forms part of Debevoise’s market

leading global private equity practice.

Ranked # 1 overall in the “10-Year A-List” survey.

—THE AMERICAN LAWYER, 2013

Debevoise has a world leading international disputes

practice, with particular strength in both London and

New York.

—CHAMBERS UK, 2013

The firm’s international network of offices makes it well

placed to advise on the most complex, cross-border

matters.

—CHAMBERS GLOBAL, 2012

The firm’s London team “forms part of a global network

of insurance specialists spanning the USA, Europe and

Asia”.

The private equity practice at Debevoise is praised for its

“truly international” approach.


"Highly Commended" for our work on Uralkali's merger

with Silvinit in the category "Most Innovative Firms In

Corporate Law"

—FT INNOVATIVE LAWYERS 2012 REPORT



www.debevoise.com

Debevoise was noted for its work for Cascade

Investment on the OCI public takeover of Orascom

Construction Industries, which won the IFLR Middle

East awards “M&A Deal of the Year”.

— IFLR MIDDLE EAST AWARDS, 2014

Since opening in 1989, the London office – the firm’s

second-largest – has developed remarkable talent and

expertise in Debevoise’s core practice areas, including

private equity, insurance, international disputes and

investigations, financial institutions, m&a, finance,

capital markets and tax. Market wise and expert in

English and European law, the London office is an

integral part of a closely coordinated global practice that

includes colleagues in Europe, the U.S. and Asia.

In the corporate and transactional arena, where English and New York law have

come to occupy leading positions in much of the world, the London office boasts

deep expertise in both. Some 30% of Debevoise’s London lawyers hold U.S.

qualifications, and more than 75% are English law-qualified. Further, 10% of the

firm’s London lawyers are dual-qualified in both England and the U.S.

The office’s leading Disputes Resolution practice similarly spans legal regimes, as

well as international borders, languages, industries and court systems. Led by a

team of six partners, the practice’s advocacy-led approach makes it distinct in the

market, with capabilities ranging from international commercial arbitration,

domestic and international commercial litigation and public international law, to

white collar crime and investigations. Debevoise’s London talent and resources in

these areas are described by Chambers UK as “stellar” and “distinguished.” The

practice is chaired by former UK Attorney General Lord Goldsmith QC, who has

been described by the major legal directories as “one of the great doyens of the

English bar.”

Debevoise’s London transactional group has advised on some of the largest public

listings, globally significant M&A transactions, and innovative acquisition

financings and strategies for corporate clients, and have a market-leading fund

formation practice supporting its expanding fund sponsor client base. According

to Legal 500 UK, “the transactional team at Debevoise & Plimpton LLP are

‘responsive, thorough and precise.’”

In close collaboration with the firm’s other offices, London office lawyers build

and coordinate specialized teams to advise on local and international matters in

the UK and throughout Europe, as well as across emerging market territories,

including India, the Middle East, Africa, Russia/CIS and Latin America.



www.debevoise.com

LONDON OFFICE SELECT REPRESENTATIONS

Mergers andAcquisitions

Hanwha SolarOne in its

acquisition of Hanwha Q

CELLS in a deal valuing the

combined company at

$2 billion

American International

Group in its $7.6 billion sale of

International Lease Finance

Corporation to NYSE-listed

AerCap Holdings N.V.

NLMK in an investment by

SOGEPA, a governmental

investment entity in Belgium,

in its European businesses.

Petroleum Equity in its

$133 million acquisition,

through its investment

vehicle Alpha Petroleum, of

ATP Oil & Gas (UK) Limited.

Ontario Teachers’ Pension

Plan in the formation of a joint

venture with Aircastle to

invest in leased aircraft.

TIAA-CREF in its partnership

with Henderson Group PLC to

create TIAA Henderson Real

Estate Limited, a new global

real estate investment

management company, with

total assets under

management of over

$25 billion.

Eutelsat Communications in

its $1.14 billion acquisition of

Satélites Mexicanos.


Group in the proposed sale,

later terminated, of up to 90%

interest in International Lease

Finance Corporation to a

consortium of Chinese

investors in a transaction with

an implied enterprise value of

$27 billion.

Clayton, Dubilier & Rice in its

£417 million acquisition of

Bodycote Testing Group, the

laboratory materials testing

business of Bodycote Plc, and

of British Car Auctions.

Clayton, Dubilier & Rice, AXA

Private Equity and Caisse de

dépôt et placement du

Québec in the €2.1 billion

acquisition of SPIE from PAI

Partners.

HarbourVest Partners in its

$1.4 billion acquisition of the

private equity fund interests

and direct co-investments of

Conversus Capital.


$806 million acquisition of

Absolute Private Equity.


in the acquisition of a

controlling stake in

Interswitch, Nigeria’s largest

electronic transaction

switching and payment

processing service provider,

from several Nigerian banks.

Najafi Companies in its

acquisition of DirectGroup

France from Bertelsmann.

Norilsk Nickel in the $2 billion

spin-off of its gold assets and

creation of Polyus Gold, a

major international gold

company with a market

capitalisation in excess of

$9 billion.

Polyus Gold in the $11 billion

combination of KazakhGold

Group Limited with Polyus

Gold and in the $635.5 million

sale of its shares to

Chengdong Investment

Corporation and JSC VTB

Bank.


on the buyout of its partners'

interest in Kabel Deutschland,

Europe’s largest cable

company, a transaction

valuing Kabel Deutschland at

€3.2 billion.

Rockefeller Group

International in its acquisition

of a majority interest in the

European real estate fund

management group Europa

Capital.

Sberbank in its acquisition of

Cetelema.

TA Associates in its

acquisition of Access

Technology Group.

Insurance

Aetna Life Insurance in its

acquisition of Goodhealth

Worldwide.


Group and AIA Group Limited

in AIA's spin-off from AIG and

$20.51 billion initial public

offering and listing in Hong

Kong, the largest IPO in Hong

Kong's history and the world's

largest IPO in the insurance

sector.


Group in the proposed sale,

later terminated, of its Asian

life insurance unit, American

International Assurance, to

Prudential for $35.5 billion.


Group in its $2.16 billion sale

of its 97% interest in Nan

Shan Life Insurance Company

to Ruen Chen Investment

Holding Co. and Pou Chen

Corporation.

Benfield Group in its

$1.6 billion merger with Aon.

Catlin Group in its $1.2 billion

takeover of Wellington

Underwriting.

First Reserve Corporation in

its establishment of

Syndicate 2243 at Lloyd’s and

its arrangements with C.V.

Starr.

Goldman Sachs Reinsurance

Group in its acquisition of the

Bermuda-based reinsurance

operations of Ariel Holdings.

Goshawk Insurance Holdings

in its acquisition by Enstar

Group Limited.

Hanover Insurance Group in

its £313 million public bid for

Chaucer Holdings.

Hardy Underwriting in its

£143 million acquisition by

CNA Financial.

Omega Insurance Holdings in

its agreement with Canopius

Group on the terms of a

recommended £164 million

all-cash bid for Omega by

Canopius.

Pacific Life Insurance in its

acquisition of the

International Life Reinsurance

segment of Scottish Re

Group Limited.

Stone Point Capital in its sale

of an interest in Securis

Investment Partners, an

insurance linked securities

manager.

Swiss Re on its €800 million

multi-year multi-peril

parametric index European

CAT bond programme and its

associated three-year

reinsurance treaty with

Groupama.

Private Equity Funds

Alfa Capital Partners in its

buyout, infrastructure and

real estate funds.

AREA Property Partners in its

European real estate funds.

Baring Vostok in its formation

of private equity funds

investing in Russia and former

CIS countries.

The Carlyle Group in its

European buyout and growth

capital funds.

Deutsche Bank in its

secondaries funds.

Doughty Hanson in its

European buyout, real estate

and technology funds.

Exponent in its UK buyout

funds.

Park Square in its European

Mezzanine and credit

opportunities funds.

SUN-Apollo in its India real

estate fund.

CapitalMarkets/Finance

Clayton, Dubilier & Rice and

portfolio company B&M in its

£590 million senior term and

revolving credit facilities

relating to B&M’s initial public

offering.

Clayton, Dubilier & Rice as

the majority shareholder of

Exova in the company’s

£220 million initial public

offering.

Clayton, Dubilier & Rice in the

financing aspects of its

€1.2 billion acquisition of

Mauser Group.



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Ray Investment, whose

shareholders were funds

controlled by Clayton,

Dubilier & Rice, Eurazeo,

BAML Capital Partners and

Caisse de Dépôt et Placement

du Québec, in a series of

accelerated book-building

offerings of Rexel shares

valued in excess of

€3.3 billion.

Polyus Gold in its debut

$750 million Eurobond

offering of 5.625% notes due

2020.

Norilsk Nickel in its $1 billion

offering of 5.55% Loan

Participation Notes due 2020

pursuant to Regulation S/Rule

144A.

The executive management

and certain other

shareholders of Arrow Global

Group in the company's


offering.

Uralkali in its $1 billion pre-

export facility agreement

provided by a syndicate of 14

international banks.

The executive directors of

HellermannTyton in the

company's £182 million initial

public offering.

Baring Vostok as a selling

shareholder in the $1.4 billion

NASDAQ initial public offering

by Yandex, the leading

internet company and most

popular search engine in

Russia.

Clayton, Dubilier & Rice, The

Carlyle Group and BAML

Private Equity in the

$15 billion acquisition of Hertz

Corporation from Ford Motor

Company. The debt financing

comprised $3.6 billion term

loan and revolving credit

facilities, $250 million letter of

credit facility, $2.9 billion

equivalent amount asset-

based multi-borrower, multi-

currency international credit

facilities, $1.8 billion offering

of 8.875% senior notes due

2014, €225 million offering of

7.875% senior notes due

2014 and $600 million offering

of 10.5% senior subordinated

notes due 2016.

Clayton, Dubilier & Rice,

Eurazeo and Merrill Lynch

Global Private Equity in their


Rexel from Pinault-

Printemps-Redoute.

Corbiere Holdings, an indirect

wholly-owned subsidiary of

Norilsk Nickel, in a $3.5 billion

offer to purchase for cash

common shares and

American depository receipts

of OJSC MMC Norilsk Nickel.

HarbourVest Global Private

Equity in the $830 million

global initial public offering

and listing on Euronext

Amsterdam.

Itaú Unibanco Holding in its

$10 billion global medium-

term note programme.

Norilsk Nickel in its

$2.35 billion five-year

unsecured syndicated loan

facility.




2018.


accelerated bookbuild sale of

$2.7 billion worth of its

shares.

OGK-2 in its $1 billion initial

public offering of shares and

Global Depositary Shares on

the London Stock Exchange.

Pinault-Printemps Redoute in

its €5.3 billion acquisition of

the Puma Group.

Polyus Gold in its debut



2020.

Polyus Gold in its $9 billion

premium listing on the

London Stock Exchange.

RAO UES in its Russian-law

mandated reorganisation,

including the spin-off of all of

its subsidiaries.

Rexel in its concurrent

€650 million offering of

5.125% senior notes and

$500 million offering of

5.250% senior notes, both

due 2020.

Rexel in its $400 million

offering of senior notes due

2019, its offering of

€500 million of senior

unsecured notes due 2018

and its offering of€650 million

of 8.25% senior notes due

2016 and in its $725 million

senior financing for the

acquisition of GE Supply.

Reynolds Group in its

$3 billion senior secured and

unsecured notes issuance

and a $2.02 billion term loan

senior secured financing for

the $4.5 billion acquisition of

Pactiv.

SPIE in its offering of

€375 million 11% senior notes

due 2019.

Universal Cargo Logistics in a

$4.2 billion acquisition of

Freight One and a $3.75 billion

financing of the transaction

provided by a syndicate of

banks.

Uralkali in its $1 billion pre-

export facility agreement

provided by a syndicate of 14

international banks.

Uralkali in its debut



2018.

Uralkali in relisting its global

depositary receipts on the

London Stock Exchange.

Dispute Resolution

The late Badri

Patarkatsishvilli, a prominent

and very wealthy Georgian

businessman and presidential

candidate, in disputes with

the Georgian government and

his principal heirs and family in

proceedings in six

jurisdictions, including in the

Chancery Division of the

English High Court and the

Supreme Court of Gibraltar,

concerning substantial

assets.

ExxonMobil in its NAFTA

claim against the

Government of Canada under

the ICSID Additional Facility

Rules.

Ferrostaal AG, a global

provider of industrial services

in plant construction and

engineering, in an extensive

internal compliance

investigation relating to

allegations of corruption and

other wrongdoing in several

jurisdictions.

Georgian Glass & Mineral

Waters in a threatened

regulatory expropriation by

the Georgian government.

Nambaryn Enkhbayer, the

former President of Mongolia,

in defence of corruption

charges brought against him

by the current Government of

Mongolia. We advised on

strategy concerning domestic

legal proceedings and liaised

with press and lobbying NGOs

and foreign governments to

bring attention to and explain

the various abuses of the

former president’s human

rights that occurred during

these proceedings.

Occidental Exploration and

Production Company in its

defence to a jurisdictional

challenge brought by The

Republic of Ecuador against a

$75 million UNCITRAL

arbitration award. The House

of Lords denied a further

appeal in November 2007.

OJSC Norilsk Nickel MMC

and Interros International

Investments Limited in a

dispute with United Company

Rusal, including LCIA

arbitration proceedings and

related court litigation in the

United States, England,

Russia, Switzerland, St. Kitts

& Nevis and The Netherlands.

Property developer Paddy

McKillen in the UK Court of

Appeal against the Barclay

brothers concerning the

£1 billion Mayfair Group of

hotels.

Siemens AG’s Audit

Committee in connection

with a world-wide

investigation into possible

corrupt payments to

government officials leading

to an early settlement with

the US and German

authorities.



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A major automotive

corporation as claimant in

consolidated ICC London

arbitration proceedings

against Volkswagen in

respect of a dispute involving

a multibillion euro cross-

shareholding and arising out

of a commercial alliance

formalised in December 2009.

Tethyan Copper Company in

arbitral proceedings in the

ICC against its joint venture

partner, the Government of

Balochistan, for breaches of

the joint venture agreement,

Pakistani law and international

law, and against the

Government of Pakistan in

ICSID for breaches of its

duties under the Bilateral

Investment Treaty between

Pakistan and Australia,

relating to the parties’ plans

to develop and mine

resources in the Reko Diq

region of Balochistan.

Ust-Kamenogorsk

Hydropower Plant, a

subsidiary of Samruk Energy,

as advocates to the appellant

in the UK Supreme Court on a

landmark arbitration appeal to

determine whether the

English Court has jurisdiction

to grant an anti-suit

injunction in circumstances

where no arbitration is

intended or in prospect.

Vincent Tchenguiz in judicial

review proceedings brought

in respect of search warrants

issued against Vincent

Tchenguiz and Vincos Ltd, a

company which provides

advice to the Tchenguiz

Family Trust and which is

chaired by Vincent Tchenguiz,

in connection with an SFO

investigation into the collapse

of Kaupthing Hf., an Icelandic

bank.

A bank in anti-arbitration

injunction proceedings

brought by the host state to

avoid arbitration under a BIT

in the courts of Belize and

Caribbean Court of Justice

(before which Debevoise is

believed to be the first non-

Caribbean firm to argue a

case).

A Canadian mining group in a

dispute with the Government

of an African country,

concerning claims of breach

of the tax stabilisation and

other provisions of an

agreement for the operation

of a copper treatment facility,

and an expropriation of

certain of the mining

company’s rights.

An Indian company in an LCIA

arbitration involving a dispute

over rights and obligations

under a shareholders

agreement and subsequent

sale and purchase agreement.

A large telecoms company in

a potential investment treaty

dispute relating to the

cancellation of 21 long term

telecoms licences in India.

A major pharmaceutical

company with advice at

board-level concerning

worldwide supply chain

issues, including delay and

quality concerns resulting in

severe disruption caused to

its global vaccines business,

resulting in a successful

settlement avoiding lengthy

arbitration proceedings.

A state-owned entity in a

dispute with an Asian state-

owned entity arising under a

long-term gas supply

agreement worth $30 billion.

Restructuring

Oaktree Capital in the finance

aspects of its restructuring of

its investment in Viken, a

distressed Norwegian

shipping group.

Renaissance Capital and

Atlas Capital (a spin-out from

GLG Partners) in their

complex debt investment in a

distressed Kazakh company

and related US and other

litigation.

The trustees of the Great

Lakes (UK) Limited Pension

Plan in the Chapter 11

bankruptcy proceeding of its

US parent, Chemtura

Corporation.

Globopar Communications

on its $1.3 billion

restructuring of Eurobonds

and syndicated bank debt.


and Franklin Mutual in the

£6.45 billion restructuring of

Eurotunnel debt.

The major pension scheme of

Sea Containers Ltd, the

largest single creditor in the

ongoing Chapter 11 and

concurrent Bermuda

proceedings.


Private Equity in Europe

www.debevoise.com


London

+44 20 7786 9000

Frankfurt

+49 69 2097 5000

Paris

+33 1 40 73 12 12

Moscow

+7 495 956 3858

M&A

Katherine Ashton (London)

Raman Bet-Mansour (London, Paris)

Geoffrey P. Burgess (London)

David Innes (London)

Alan V. Kartashkin (Moscow)

Antoine F. Kirry (Paris)

Guy Lewin-Smith (London)

Pierre Maugüé (London)

Thomas Schürrle (Frankfurt)

Fund Formation

Geoffrey Kittredge (London)

Anthony McWhirter (London)

Finance

Pierre Clermontel (Paris)

Alan J. Davies (London)

Peter Hockless (London)

Philipp von Holst (Frankfurt)

Tax

Matthew D. Saronson (London)

Richard Ward (London)Debevoise is one of the world’s leading pr oviders of le gal services to pr ivate equity fir ms and their in vestment funds, portfolio companies and in dividual partners.

The firm is one of very few to have senior English, U.S.

and locally qualified corporate, fund formation and tax

practitioners in Europe, concentrated in London but also

resident in the firm’s Paris and Frankfurt offices. The

European team draws upon its strength and expertise in

each jurisdiction as well as that of the global Debevoise

network. It operates on a collaborative and

interdisciplinary basis permitting it to remain at the

cutting edge of current market practice. The European

team also has particular experience advising on activity

in Russia, India and across Africa.

As well as senior fund formation and buyout partners, the European team

includes market-leading and multi-qualified tax, finance, capital markets and

regulatory lawyers. In addition, the group’s proprietary database holds detailed

business and legal terms for over 2,100 private equity funds as well as a vast

library of private equity-led M&A and deal financing precedents. It also includes a

global survey of the securities and investment management laws that affect

private equity funds in approximately 80 jurisdictions. This combination of

knowledge and expertise means that the European group offers one-stop

shopping at every stage of a private equity firm’s lifecycle. It does so through lean

and efficient teams with a deep understanding of the private equity industry and

its commercial dynamics. It also permits the team to track, anticipate and

develop market trends and practices.

The team continues to draw praise from clients and the major legal directories.

Chambers Europe quotes one client as saying the team is “one of the market

leaders in what we do.” Chambers UK lauds the team’s ability to “guide clients

through regulatory, tax, investment and fund-raising matters with aplomb,” and

quotes one client as stating, “we got a better outcome in our transaction as a

result of working with them.” Chambers UK also notes the team has “good

experience in the US and European markets and on Russia, India and Africa-

related transactions,” while Legal 500 UK note the team’s “private equity clients

appreciate the firm’s ‘rigour and responsiveness.’”



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AWARDS AND RECOGNITIONS

Ranked as a leading law firm in the UK for Private

Equity: Buyouts: High-end Capability and Investment

Funds: Private Equity.

“We go to them for higher-risk matters, where there's

more complexity about how it might affect our fund.”

“They really treat us like a valuable client. They have

tons of big clients but even if we have the smallest

question they treat it like a top matter.”

“They do a really good job and have a high attention to

detail.”


The lawyers are "extremely smart and knowledgeable;

they know when they need to spend more time on issues

and when to take a light approach."


Ranked as a leading law firm in the UK for Private

Equity and Private Equity Funds.

—IFLR1000, 2015

Ranked as a top tier law firm for Investment Funds:

Private Funds and as a leading law firm for Private

Equity: Transactions in the UK.

Debevoise & Plimpton LLP’s private equity practice is

notable for its dual US and UK expertise.

—LEGAL 500 UK, 2014

"One of the market leaders in what we do. There are

three or four firms out there that are dominant players

in the market - they are our preferred legal adviser."

"They are strong - they deliver well and on time."



www.debevoise.com

"We got a better outcome in our transaction as a result of

working with them."

The team handles a sizeable amount of private equity

mandates… it is well equipped to advise on both

inbound and outbound investments.

—CHAMBERS EUROPE, 2013

“I thought very highly of the experience, knowledge and

attention to detail of the private equity team.”

—CHAMBERS GLOBAL, 2013

Debevoise & Plimpton LLP’s private equity clients

appreciate the firm’s “rigour and responsiveness, and its

lack of pretension”.

—LEGAL 500 UK, 2013

REPRESENTATIVE CLIENTS

AAC Capital

Access Industries

Adveq

Akina

Alfa Private Equity Partners

AREA Property Partners

Baring Vostok Capital Partners

The Carlyle Group

Cascade Investment

Clayton, Dubilier & Rice

CVC Capital

Deutsche Bank

Doughty Hanson


Global Infrastructure Partners

HarbourVest Partners


Morgan Stanley

Najafi Companies


Park Square Capital

Petroleum Equity

Prosperity Capital

Management


Rank Group

Sinergia com Imprenditori

Stone Point Capital

SUN-Apollo

TA Associates

Wendel Investissement



www.debevoise.com

PRIVATE EQUITY IN EUROPE SELECT REPRESENTATIONS

Mergers & Acquisitions

AIF Capital as a selling

shareholder in the sale of

certain female health care

businesses of Famy Care, the

world’s largest producer of

oral contraceptive pills, to

Mylan for $750 million, with

additional contingent

payments of up to $50 million.

HarbourVest Partners as a

selling shareholder, together

with Exponent, in the

purchase of Trainline by KKR.


acquisition of Access

Technology Group.

HarbourVest Partners in the

secondary acquisition of

limited partnership interests

in Doughty Hanson & Co

Limited Partnerships IV and V,

and commitment to Doughty

Hanson & Co Limited

Partnerships VI, in a stapled

transaction.

Management of Sky Bet in the

sale of a controlling stake in

the company by Sky to funds

advised by CVC, in a

transaction valuing Sky Bet at

£800 million.


€190 million secondary

acquisition of interests in

Magnum Capital from existing

investors in a structured

tender, together with a

stapled primary investment.


in its minority investment in

Wananchi Group as part of a

$130 million investment from

Helios and existing

shareholders.


acquisition of up to a 49%

stake in NYSE-listed CHC

Group, the world's largest

commercial helicopter

operator with an enterprise

value of $1.9 billion.



Mauser Group, a leading

provider of industrial

packaging.


€333 million secondary

purchase of the majority of

interests in Motion Equity

Partners II, as part of a tail-

end solution for that fund.

Petroleum Equity in its

$133 million acquisition,

through its investment

vehicle Alpha Petroleum, of

ATP Oil & Gas (UK) Limited.

Ontario Teachers’ Pension

Plan in the formation of a joint

venture with Aircastle to

invest in leased aircraft.


in its investment in

MallforAfrica, a Nigerian e-

commerce company.


acquisitions of Brand Energy

and Harsco Infrastructure in a

combined transaction valued

at $2.5 billion.

Cinram, a portfolio company

of Najafi Companies, in its

acquisition of Saffron Digital

Media from HTC.

Ray Investment S.a.r.l.,

whose shareholders are funds





du Québec, in accelerated

book-building offerings of

Rexel shares for €470 million

in 2012 and €640 million,

€500 million and €520 million

in 2013.

One of Deutsche Bank’s

private equity platforms in its

acquisition of interests in

Calastone, Graze, Secret

Escapes and Zoopla Property

Group from Octopus, a

leading specialist fund

management company.

Management of Vue Cinemas

in the £935 million sale of the

company by Doughty Hanson

to OMERS Private Equity and

Alberta Investment

Management Corporation.

Warner Music Group in its

$765 million acquisition of the

Parlophone Label Group from

Universal Music Group.

Cascade Investment, an

entity wholly owned by Bill

Gates, in its investment along

with U.S. co-investors of up

to US $1 billion in OCI, N.V., an

affiliate of Orascom

Construction Industries.


Group in the sale of up to 90%

interest in International Lease

Finance Corporation to a

consortium of Chinese

investors in a transaction with

an implied enterprise value of

$27 billion.


acquisition of a significant

stake in B&M Retail.

Management of Group NBT, a

portfolio company of Hg

Capital, in its management

subscription and equity plan.

Cunningham Lindsey in its

recapitalisation by CVC

Capital Partners.

Management of Novus

Leisure in the company's

£100 million acquisition by

LGV Capital and Hutton

Collins.


$1.4 billion acquisition of the

private equity fund interests

and direct co-investments of

Conversus Capital.

Najafi Companies in its

acquisition of the European

assets and business of

Cinram International Income

Fund, one of the world's

largest providers of pre-

recorded multimedia

products and related

distribution and logistics

services.

INTER RAO in its sale of a 26%

stake in Enel OGK-5 to a

consortium of investors.

Polyus Gold in the

$635.5 million sale of its

shares to Chengdong

Investment Corporation and

JSC VTB Bank.

Stone Point Capital in

Lockton's acquisitions of the

minority stake in its

operations outside the U.S.

held by Trident III, LP, an

investment fund managed by

Stone Point Capital.




insurance linked securities

manager.

Management of Eurofiber in

the company’s acquisition by

Doughty Hanson.


management buyout of

Quotient BioScience Group.

Najafi Companies in the

acquisition of DirectGroup

France, Belgium, Switzerland

and Quebec from

Bertelsmann AG.


investment in BenefitMall and

CompuPay.

Exal Corporation, a Teachers

Private Capital portfolio

company, in the €85 million

sale of its European division

to Ardagh Group.


$806 million acquisition of

Absolute Private Equity.




Québec in the financing of

their €2.1 billion acquisition of

SPIE from PAI Partners.


in the acquisition of a

controlling stake in

Interswitch, Nigeria’s largest

electronic transaction

switching and payment

processing service provider,

from several Nigerian banks.

Rockefeller Group

International in its acquisition

of a majority interest in the

European real estate fund

management group Europa

Capital.



www.debevoise.com

Apax in its acquisition with

Bridgepoint Capital of

Histoire d'Or from Silverfleet

Capital and Marc Orian from

Qualium Investissement.


acquisition of a significant

stake in Holtzbrinck Ventures’

media-related venture capital

portfolio and HarbourVest’s

support of the spin-out of the

current management team to

form a new German venture

capital firm.


acquisition of British Car

Auctions.

Ripplewood in its €532 million

sale of AEG Power Solutions

B.V. to Germany1 Acquisition

Limited.

Stone Point Capital in its

investment in Lockton

International Holdings

Limited.

Argan Capital and BAML in

their sale of N&W Global

Vending to Barclays Private

Equity and Investcorp.

AAC Capital Partners in its

sale of a $1.5 billion

investment portfolio to a

group of investors led by

Goldman Sachs Asset

Management.


£417 million acquisition of

Bodycote Testing Group from

Bodycote plc.

Providence Equity Partners in

its $430 million investment in

Aditya Birla Telecom, a

subsidiary of Idea Cellular

Limited.

AAC Capital Partners in its

spin-out from the private

equity division of ABN AMRO

Bank and a €2 billion

commitment from ABN

AMRO to fund the ongoing

investment programme of

AAC Capital Partners in the

Dutch, UK and Nordic

markets.

D. E. Shaw in its acquisition,

with Quatrro BPO Solutions

Private Limited, of Babel

Media Limited.

First Reserve Corporation in

its investment in Lloyd's

through the creation of

Syndicate 2243, and its

arrangements with C.V. Starr.

Pardus Capital in its purchase

of a 20% interest in Valeo and

subsequent proxy contest.

Wendel in its €968.8 million

acquisition of an additional

interest in Compagnie de

Saint-Gobain.


acquisition of a new holding

company that will own

Cunningham Lindsey’s

operating businesses.


coinvestment in the buyout

led by Investindustrial and

Gala Capital of Panda

Software, a Spain-based

leading creator and developer

of IT virus protection

technologies, products and

services.

Salford Capital Partners, an

international private equity

firm based in the British Virgin

Islands, and Compound

Capital Ltd, a Bermuda-based

private investment firm, in

their acquisition of all of the

outstanding common stock of

Metromedia International

Group, a public company that

owns telecom assets in the

Republic of Georgia.


£1.3 billion sale of Brake Bros

to Bain Capital.

Groupe Accor, the leading

European hotel and tourism

business, in the €281 million

sale of its GO Voyages travel

agency business to Groupe

Arnault’s Financière Agache

Investissement.


acquisition of a 49% interest

in the international insurance

broking business of Alexander

Forbes (now known as

Lockton International, as the

other 51% is owned by

Lockton Inc.).


its acquisition of Canal

Digitaal, the Dutch satellite

TV provider. Debevoise acted

as U.S. tax counsel.

Clayton, Dubilier & Rice and

its portfolio company, Brake

Bros, on a £275 million PIK

financing and capital

restructuring.


its £1.5 billion acquisition,

with Doughty Hanson, of

Phones4U, a UK mobile phone

retailer.


its $2.8 billion sale, with The

Carlyle Group and GMT

Communications, of Casema

to Warburg Pincus and

Cinven. Debevoise acted as

U.S. tax counsel.


its $430 million investment in

Aditya Birla Telecom, an

Indian wireless

communications company.


acquisition of GE Supply from

General Electric.

Great Circle Fund in its

minority investment in

Overseas Logistic Service

Corporation, which controls

Russian Logistic Service

Group, one of Russia's leading

trucking and warehouse

logistic companies.


and The Carlyle Group in their

€349 million purchase of UPC

Sverige AB, the Swedish cable

business of Liberty Global.


the buyout of its partners’

interest in Kabel Deutschland,

Europe’s largest cable

company, a transaction

valuing Kabel Deutschland at

€3.2 billion.


its acquisition, as part of a

consortium with Apax

Partners, Permira advisors,

Kohlberg Kravis Roberts and

The Blackstone Group, of

TDC, a publicly traded Danish

telecommunications carrier,

at the time Europe's largest

buyout.


its €1 billion acquisition of

Com Hem Communications

AB, the Swedish telecom

operator, from EQT Group.

Debevoise acted as tax

counsel and advised on the

shareholder arrangements.


Eurazeo and Merrill Lynch

Global Private Equity in their


Rexel from Pinault-

Printemps-Redoute.




insurance-linked securities

manager.


investment in BenefitMall and

CompuPay.

Polyus Gold in the

$635.5 million sale of its

shares to Chengdong

Investment Corporation and

JSC VTB Bank.

Dozens of direct co-

investments throughout

Europe for co-investors such

as HarbourVest Partners and

for various sponsors.

Acquisition Finance

Syniverse Holdings, a

portfolio company of The

Carlyle Group, in the financing

of its €550 million acquisition

of MACH.




Québec in the senior and

bridge financings of their

acquisition of SPIE, and the

issuance of $375 million of

high yield rates for the

refinancing of the bridge debt.


senior and mezzanine

financing of its acquisition of

British Car Auctions.


acquisition of Reynolds

Consumer Products and

Closure Systems

International and the

associated financings and

refinancings, a group of

transactions valued at

$3 billion.



www.debevoise.com


senior and mezzanine

financing for the £417 million

acquisition of Bodycote

Testing Group.

AAC Capital Partners in a

bank financing for the

secondary sale of a large

portfolio of private equity

investments by ABN AMRO to

a consortium led by Goldman

Sachs Asset Management.

BAML Private Equity and

Argan Capital in the senior

and mezzanine financings for

the acquisition of N&W Global

Vending.

Rank Group in a €900 million

high-yield bond facility in its

bid for SIG Holding.

Rank Group in the $1.6 billion

credit facility for its

acquisition of the packaging

assets of Alcoa.

Clayton, Dubilier & Rice, The

Carlyle Group and BAML

Private Equity in connection

with its $2.9 billion equivalent

amount asset-based multi-

borrower, multi-currency

international credit facilities

relating to the acquisition of

Hertz.


Eurazeo and BAML Private

Equity in the €2.4 billion

revolving and term loan credit

facilities for and €600 million

high-yield offering by Ray

Acquisition SCA (the

consortium's acquisition

vehicle for Rexel).

Numerous financing packages

for unsuccessful bidders in

auction sales.

Capital Markets


sale of an approximately 12%

stake in B&M for €384 million.



B&M Retail in the company’s

£1 billion initial public offering.



Exova in the company’s


offering.

Ray Investment, whose

shareholders were funds





du Québec, in a series of

accelerated book-building

offerings of Rexel shares

valued in excess of

€3.3 billion.

The executive management

and certain other

shareholders of Arrow Global

Group in the company’s


offering.

The executive directors of

HellermannTyton in the

company’s £182 million initial

public offering.

Rexel in its concurrent

€650 million offering of

5.125% senior notes and

$500 million offering of

5.250% senior notes, both

due 2020.

SPIE in its €375 million

offering of 11% senior notes

due 2019.


offering of 6.125% senior

notes due 2019.


$3.25 billion offering of 5.75%

senior secured notes due

2020.

Rexel in its €500 million

offering of 7% senior notes

due 2018.

Baring Vostok, as selling

shareholder, in the $1.4 billion

NASDAQ initial public offering

by Yandex, the leading

internet company and most

popular search engine in

Russia.

A fund managed by

HarbourVest Partners, as

selling shareholder, in the

$228 million initial public

offering and Nasdaq OMX

Stockholm listing of

Transmode Holding.

Exova in its £155 million high

yield offering of 10.5% senior

notes.


$3 billion senior secured and

unsecured notes issuance for

the $4.5 billion acquisition of

Pactiv.



2016.


$1 billion senior notes

issuance for the acquisition of

the Evergreen businesses and

the Whakatane Mill.

HarbourVest Global Private

Equity in its $830 million

global initial public offering

and listing on Euronext

Amsterdam.

Bureau Veritas and its

shareholder, Wendel

Investissement, in the

€1.4 billion global initial public

offering of Bureau Veritas'

ordinary shares and its listing

on Euronext Paris.

Rexel and its shareholders,


Eurazeo and BAML Private

Equity, in the €1 billion initial

public offering of Rexel shares

and its listing on Euronext

Paris.

Legrand and its shareholders,

KKR and Wendel

Investissement, in the

€1 billion initial public offering

of Legrand shares and its

listing on Euronext Paris.

Citigroup and Crédit Suisse in

the €1.7 billion initial public

offering and listing on

Euronext Paris of shares by

Paris Re Holdings Limited, a

Stone Point Capital portfolio

company.

Wendel Investissement in its

€313 million sale of shares of

Legrand.

Wendel Investissement in the

block trading, together with

KKR, of 40 million of Legrand’s

shares for €1.15 billion.

Wendel Investissement in the

€567 million sale by Wendel

and KKR of 23.7 million shares

of Legrand.

Wendel Investissement, as

shareholder of Legrand, in the

€280 million sale by KKR of

11.5 million shares of

Legrand.

Wendel Investissement and

KKR in the €555 million sale of

30 million shares of Legrand.


Eurobond offering.

Rexel in its €600 million high

yield bond issuance.

Fund Formation

Alfa Private Equity Partners, a

$200 million private equity

fund investing in Russia and

former CIS countries.

Alfa Capital Partners as co-

sponsor of a $320 million

Russian real estate fund.

Alfa Capital Partners as

manager of a maritime

infrastructure fund.

AREA European Real Estate

III, a $1.3 billion pan-European

real estate fund.

Ares Europe Real Estate Fund

IV, a $1.3 billion Europe real

estate fund.

Baring Vostok Private Equity

Fund II, a $200 million private

equity fund investing in Russia

and former CIS countries.


Fund III, a $400 million private




Fund IV, a $1.5 billion private




Fund V, a $1.5 billion private



Carlyle Europe Partners III, a

€5.4 billion European buyout

fund.

Carlyle Europe Technology

Partners II, a€530 million

technology fund.

Carlyle MENA Partners, a

$500 million fund to invest in

the Middle East and North

Africa.



www.debevoise.com

Deutsche Bank Secondary

Opportunities II, a

$615 million secondaries

fund.

Deutsche Bank Secondary

Opportunities Fund III, a

$1.65 billion U.S. and Europe

secondaries fund.

Doughty Hanson & Co. Fund

V, a €3 billion European

buyout fund.

Euro Choice III, a €500 million

European mid-market fund of

funds managed by Akina

Limited.


Partners II, a £800 million UK

buyout fund.

New Russia Generation

Limited, a $200 million fund

managed by Prosperity

Capital Management and

investing in the Russian

power sector.

Oaktree European Principal

Opportunities II, a €1.6 billion

European midmarket buyout

fund.

Oaktree Principal Fund V, a

$2.8 billion global distressed

fund.

Park Square Capital Partners

II, an €850 million mezzanine

debt fund.

Prosperity Quest II Fund, a

$150 million buyout fund

investing in Russia/CIS.

Prosperity Voskhod Limited,

a fund investing in Russian

power assets.

Client Update

March 2, 2015

1

www.debevoise.com

Client UpdateVolcker Rule FAQ ExpandsAbility of Non-U.S. Banks toInvest in Private Funds

On Friday afternoon, the Federal Reserve and other implementing agencies

issued an important new interpretation of the Volcker Rule and the final Volcker

Rule regulations.1 The new interpretation, styled as a response to a Frequently

Asked Question, makes it substantially easier for a non-U.S. banking entity2 to

invest directly in private equity funds, hedge funds and other private funds

organized and sponsored by fund sponsors that are not affiliated with the non-

U.S. banking entity, even if those funds are offered to U.S. investors by the

unaffiliated fund sponsors.3

179 Fed. Reg. 5536 (Jan. 31, 2014)(the “Final Rules”).

2A “non-U.S. banking entity” is any banking entity that is not, and is not controlleddirectly or indirectly by a banking entity that is, located in or organized under the laws ofthe United States or of any U.S. state. See Final Rules § _.10(b)(1)(iii).

3Volcker Rule FAQs are available on the agencies’ websites, including the Federal ReserveBoard website at http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm. Thenew FAQ is Question 13 and was posted on February 27, 2015. Also on Friday, the SECreleased a speech by Commissioner Kara Stein. The Volcker Rule: Observations onSystemic Resiliency, Competition, and Implementation (Feb. 9, 2015), available athttp://www.sec.gov/news/speech/volcker-rule-observations-on-systemic-resiliency-competition.html. In the speech, Commissioner Stein made several suggestions for theongoing functioning of the interagency interpretive process. In particular,Commissioner Stein suggested that the interagency Volcker Rule Working Groupconsider “establishing a deadline, such as 60 days, for indicating whether a questionregarding the Volcker Rule will be answered or not, and then have a deadline foranswering it.” She also suggested that the agencies provide additional clarity andtransparency around the types of questions that are being presented to the workinggroup. Whether Commissioner Stein’s suggestions will be implemented remains unclearat this stage.

WASHINGTON, D.C.

Satish M. Kini

[email protected]

Kenneth J. Berman

[email protected]

Gregory T. Larkin

[email protected]

NEW YORK

Jonathan Adler

[email protected]

Andrew M. Ahern

[email protected]

Erica Berthou

[email protected]

Sherri G. Caplan

[email protected]

Michael P. Harrell

[email protected]

Gregory J. Lyons

[email protected]

Jordan C. Murray

[email protected]

David J. Schwartz

[email protected]

Rebecca F. Silberstein

[email protected]

David L. Portilla

[email protected]

HONG KONG

Andrew M. Ostrognai

[email protected]

LONDON

Geoffrey Kittredge

[email protected]

Client Update

March 2, 2015

2

www.debevoise.com

NEW FAQ CLARIFIES THAT THE SOTUS FUND MARKETING RESTRICTION

DOES NOT APPLY TO THIRD-PARTY FUND SPONSORS

The Volcker Rule, among other things, prohibits a “banking entity” from

sponsoring, acquiring or retaining an ownership interest in a “covered fund,”

which includes most private funds. However, the final Volcker Rule regulations

permit non-U.S. banking entities to make investments in covered funds “solely

outside of the United States,” subject to a number of conditions (the “SOTUS

fund exemption”). Among those conditions, the SOTUS fund exemption

includes a restriction on offerings that target U.S. residents.

The new FAQ addresses the scope of the U.S. offering restriction of the SOTUS

fund exemption in the following key ways:

The FAQ states that the U.S. offering restriction only applies to the

sponsoring or investing non-U.S. banking entity and its affiliates that seek to

rely on the SOTUS fund exemption.4 In addition, the U.S. offering

restriction would apply where the banking entity sponsors or serves, directly

or indirectly, as the investment manager, investment adviser, commodity

pool operator or commodity trading advisor to the covered fund.

The FAQ clarifies that the U.S. offering restriction does not apply to a

covered fund sponsored by a third party unaffiliated with the non-U.S.

banking entity making the investment if the non-U.S. banking entity (and

its affiliates) does not participate in the offering of the interests of the

covered fund to U.S. residents.

The new FAQ notes that applying the U.S. offering restriction exclusively to a

non-U.S. banking entity that is sponsoring or investing in the covered fund is

consistent with the purposes of the SOTUS fund exemption to (i) limit the

extraterritorial application of the Volcker Rule, (ii) limit risks to the U.S.

financial system and (iii) provide for competitive equality between U.S. and

foreign banking organizations with respect to the offering of covered fund

services in the United States.5

4This interpretation had been suggested by multiple commenters prior to the adoption ofthe Final Rules. See 79 Fed. Reg. at 5741, n. 2431-37 (citing, among others, commentletters from the Institute of International Bankers, the Private Equity Growth CapitalCouncil and the Securities Industry and Financial Markets Association).

5This view is consistent with the consensus interpretation letter of Debevoise & PlimptonLLP and 14 other leading law firms regarding foreign bank investments in parallel fundstructures under the Volcker Rule. See Client Update, Foreign Bank Investments inParallel Fund Structures under the Volcker Rule (May 1, 2014),http://www.debevoise.com/insights/publications/2014/05/foreign-bank-investments-in-parallel-fund-struct__.

Client Update

March 2, 2015

3

www.debevoise.com

Implications for Third-Party Sponsors

The new FAQ substantially addresses many of the Volcker Rule issues faced by

third-party fund sponsors.

Simplified Fund Structures. A fund sponsor not affiliated with the investing

bank may offer covered fund interests simultaneously to U.S. investors and

non-U.S. banking entities without forming parallel funds or using other

complicated structures.

No Transfer Restrictions. There is no requirement that the sponsor prohibit

transfers from non-U.S. investors to U.S. investors.

Choice of U.S. or Non-U.S. Jurisdiction. As a general matter, the private fund

could be organized in the United States or outside of the United States and

still could qualify as a SOTUS fund, so long as the fund relies on Sections

3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the “ICA”) or is

otherwise included in the definition of “covered fund.”

Available for Bank and Non-Bank Sponsors. The new FAQ does not appear to

make a distinction between non-banking entity fund sponsors and banking

entity fund sponsors. Therefore, a banking entity may be able to sponsor a

covered fund under the final Volcker regulations’ “asset management

exemption,” and another unaffiliated non-U.S. banking entity would appear

to be able to invest in such fund in reliance on the SOTUS fund exemption.

The new FAQ does not address a separate interpretive question under the

Volcker Rule regarding the application of the definition of “banking entity” to

certain fund structures. Thus, two effective restrictions on private funds remain:

Wholly-Owned Subsidiary Restriction. A SOTUS fund may not be a “wholly-

owned subsidiary” of a banking entity (e.g., a single-investor fund where the

investor owns 100%).

Restriction on Control of Non-Covered Fund. A non-U.S. banking entity may

not “control” a fund organized outside of the United States that is offered

only to non-U.S. investors and does not rely on Sections 3(c)(1) or 3(c)(7) of

the ICA (i.e., a “foreign excluded fund” or “foreign non-covered fund”) by, for

example, holding 25% or more of the fund’s voting securities.

Under each of these circumstances, the fund itself may be considered a banking

entity (and therefore itself subject to the Volcker Rule restrictions).

Client Update

March 2, 2015

4

www.debevoise.com

Implications for Non-U.S. Banking Entity Investors

The new FAQ considerably eases the burden on investing by non-U.S. banking

entities in private funds.

No Representations on U.S. Offering Necessary. Non-U.S. banking entities

should no longer need representations or other assurances that a third-party

fund sponsor will not make an offering that targets U.S. residents.

Representations on Covered Fund Status and Wholly-Owned Subsidiary. In fact,

the only Volcker Rule-related assurances that a non-U.S. banking entity may

need when investing in a SOTUS fund would be representations or

covenants to ensure that a fund maintains its covered fund status (so it can

qualify for the SOTUS exemption) and that the SOTUS fund does not

become a wholly-owned subsidiary of the non-U.S. banking entity (for the

reasons discussed above).

Other SOTUS Fund Restrictions Remain. A non-U.S. banking entity must also

still comply with the remaining restrictions under the SOTUS fund

exception, including, among other things, (i) the decision making (and the

relevant personnel) of the non-U.S. banking entity must be located outside

of the United States, (ii) the investment by the non-U.S. banking entity must

not be accounted for by a branch or an affiliate in the United States, and

(iii) the financing of the investment must not come from a U.S. branch or

affiliate of the non-U.S. banking entity.

* * *

Please contact us with any questions you may have.

Client Update 1

15 December 2014

www.debevoise.com

Client Update UK Tax on Management Fees, Co-Invest and Carry: Is Anything Safe?

LONDON

Richard Ward

[email protected]

Ceinwen Rees

[email protected]

“If I had a world of my own, everything would be nonsense. Nothing would be what it

is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t

be. And what it wouldn’t be, it would. You see?” said Alice in Lewis Carroll’s Alice’s

Adventures in Wonderland & Through the Looking-Glass. This is, perhaps, the

guiding principle behind the UK Government’s draft legislation regarding the

taxation of the newly coined, disguised investment management fees.

On Wednesday, 3 December 2014, the UK Government announced that it was

going to ensure that amounts arising to investment fund managers for their

services would be taxed as income rather than under the more favourable capital

gains regime. The draft legislation published to support this announcement was

released on Wednesday, 10 December 2014. We would like to be able to say that

the whirl of speculation that followed the announcement has now ended.

Unfortunately, the legislation has raised as many questions as it has answered

and, although perhaps not everything is nonsense, much is not what it purports

to be.

HOW THE DRAFT LEGISLATION WORKS

As with many recent legislative regimes, the taxation of disguised management

fee rules are drafted incredibly broadly and are then subject to a small number of,

limited, exceptions.

The main charging provision, which will be inserted into the Income Tax Act

2007, provides that “where one or more disguised fees arise to an individual in a tax

year from one or more collective investment schemes…the individual is liable for

income tax…as if (a) the individual were carrying on a trade for the tax year, (b) the

disguised fees were the profits of the trade of the tax year, and (c) the individual were

the person receiving or entitled to receive those profits.” The key to understanding

the legislation is therefore what constitutes a disguised fee.

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15 December 2014

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A disguised fee has four component parts:

the individual receiving the amount performs investment management

services in respect of the fund;

there is a partnership involved in the fund arrangements;

under these arrangements, a management fee arises (whether in the form of

a loan or advance, by way of allocation of profits or otherwise); and

some or all of this management fee is untaxed.

The first and second of these requirements are fairly straightforward and likely

to be satisfied by most private equity fund arrangements. Conditions three and

four require a bit more investigation.

What Is a Management Fee?

Current Status

Until Wednesday, what constituted a management fee would have elicited fairly

uniform responses throughout the industry; that it is the fixed amount,

normally in the region of 1-2%, which the fund manager receives regardless of

the success, or otherwise, of investments. In the UK, such amount is commonly

structured as a priority profit share paid up to the general partner, who is:

a limited partnership (a “GPLP”);

a limited liability partnership (a “GPLLP”); or

a limited company (a “GPCo”).

Some of this priority profit share is used to pay the manager its fee and the

remainder is paid up to the management team.

For individuals receiving returns through the GPLP or GPLLP, the transparent

nature of the structures means that the priority profit share retains its capital

characteristics and so is chargeable to capital gains tax in the hands of the

recipient. For non-UK-domiciled individuals claiming the remittance basis, gains

arising from offshore investments will retain their non-UK source status and

therefore fall within the UK tax net only to the extent that they are remitted to

the UK.

For those who are shareholders in a GPCo, returns will be paid up as dividends

and individuals will benefit from dividend rates (which although higher than

capital gains tax rates are still lower than income tax rates). If the GPCo is

offshore, non-UK-domiciled individuals should be able to treat dividends as non-

Client Update 3

15 December 2014

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UK source income and therefore subject to UK tax only to the extent that

amounts are remitted to the UK.

Proposed Law

Unfortunately, the legislation has not adopted this accepted concept of

management fee, unlike in the US where there is a tax on guaranteed payments

which is designed to catch management fee type arrangements. Instead, any sum

arising to an individual “directly or indirectly” from a fund under any

arrangements is a management fee except so far as the sum:

constitutes carried interest – which is given a statutory definition in this

draft legislation as amounts paid out of profits after investors have received

back all or substantially all of their investment together with a preferred

return at least equal to compound interest of 6% on their investment (there

is a whole fund and a deal–by–deal formulation, but both rely on this 6%

concept); or

arises by way of a repayment of an investment or constitutes a commercial

return on an investment – in both cases, the investment has to be made by

the individual receiving the relevant sum.

What Does “Untaxed” Mean?

Interestingly, untaxed doesn’t actually mean that an amount has not been

subject to tax but instead means, for the purposes of this legislation, that an

amount has not been subject to income tax as employment income or trading

income. Meaning, the returns obtained in the form of dividends and subject to

tax at the UK dividend rate (which is lower than the general UK income tax rate)

would be treated as untaxed.

Anti-Avoidance

Unsurprisingly, there is a wide ranging anti-avoidance provision included in the

draft legislation. Under this provision, any arrangements put in place, the main

purpose, or with one of the main purposes, of which is to secure that the

disguised management fee rules do not apply will be disregarded.

WHAT DOES THIS MEAN?

At a basic level, as drafted, the legislation will mean that any individual

performing investment management services in the UK (which, for the purposes

of the legislation includes fundraising and researching potential deals) will be

Client Update 4

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subject to UK income tax unless it can be shown that such sum is either carried

interest pursuant to the narrow definition discussed above or, is a return of an

invested amount or a commercial return on such invested amount. Therefore,

individuals benefiting from capital treatment on excess management fee derived

through a GPLP or GPLLP structure should expect an increased tax bill from

6 April 2015.

Beyond this, the exact scope of these rules is not clear from the draft legislation.

Work needs to be done with HMRC to establish the boundaries of the rules and

their interaction with existing legislation. We understand that the BVCA will be

having detailed discussions with HMRC in the new year with a view to clarifying

many of the anomalies.

Discussing all of the potential issues arising under the draft legislation is beyond

the scope of this note, but instead we focus on some of the key areas of concern.

Co-Invest

When introducing this legislation, the UK Government specified that it did not

intend to catch returns made on investments. It is therefore with surprise that

we note that co-investment returns are not specifically excluded but, on the

contrary, may be included within the definition of disguised investment

management fees for two reasons.

Investments have to be made by the individual receiving the sum. In cash

based co-investment arrangements this requirement may be satisfied but it

is more difficult to be certain of this position for leveraged co-investment

arrangements where the GP takes on third-party debt with which to fund

the co-investment.

Profits on an investment are excluded only to the extent that they represent

a “commercial return”. Although this return is not quantified (unlike the

investors’ preferred return), it has to be at a rate comparable to a commercial

rate of interest and have terms reasonably comparable to those of external

investors. This appears to mean that individuals who have managed or

advised a fund with a successful investment will get penalised with a higher

tax rate unless the excess over a commercial return can be treated as carried

interest within the draft legislation. For these purposes, it is necessary for

co-invest to be paid out only after other investors have received back their

invested amount and their 6% compound interest preferred return (although

we note that the individuals may count as investors with respect to their co-

invest piece, which will negate the need for the 6% preferred return).

Client Update 5

15 December 2014

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Carried Interest

As stated above, the definition of carried interest requires that investors first

receive all, or substantially all, of their investment back and also benefit from a

return of at least 6% of their investment compounded annually. This is odd, in

our experience; not all funds use compound interest as a calculation of return,

instead favouring IRR. Also, the definition ignores a whole gamut of distribution

arrangements, such as those where there is a reduced priority return but no

catch-up or no management fee but an immediate 80:20 split. Such

arrangements are particularly common in the venture capital and debt fund

markets.

Further, having a legislative definition of carried interest is of concern because

not only could it give rise to market distortion but it also gives the UK

Government a very easy way to punitively tax the industry in the future by

simply upping the return required by investors.

Non-UK-Domiciled Individuals

The effect for non-UK-domiciled individuals will be that all amounts falling

within the legislation will have a UK source and therefore be taxed in the UK

whether or not they are remitted into the country.

Non-UK Resident Individuals

There are questions over the jurisdictional scope of the legislation. The

legislation looks to investment management services which “are to any extent

performed in the United Kingdom”. This suggests that, for example, a US

individual working for the New York-based manager but who spends a month in

the UK assisting the UK advisor with a particular deal and a month in the UK

meeting with potential investors may have 1/6th of his income treated as having

a UK source. It is likely that, in our example, the UK/US double tax treaty would

kick in to prevent the UK from actually taxing the US individual but for

individuals in jurisdictions not benefiting from a double tax treaty with the UK

they may suffer double taxation.

Even more concerning, it is possible that individuals managing an offshore fund

with neither a UK manager nor a UK advisor may be caught by these rules to the

extent that they perform any investment management services in the UK –

given that this includes meeting with investors and researching potential deals,

this is a genuine risk.

Client Update 6

15 December 2014

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NEXT STEPS

Unfortunately, there is no one-size-fits-all solution to these rules and the answer

to “what now?” will differ from fund to fund. What is clear is that any fund

manager with any kind of UK presence should be considering its position. We

would be very happy to work with you in determining what your current

exposure to these rules is and developing a plan with which to move forward.

As Alice would say, “curiouser and curiouser.”

* * *

Please do not hesitate to contact us with any questions.

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Client UpdateAre Your Carry and Co-InvestReturns Safe from UK IncomeTax? (Sadly YourManagement Fee ProbablyIsn’t.)

Salvador Dalí, the man who brought us Lobster Telephone, is famously quoted as

saying that “what is important is to spread confusion, not eliminate it”. It

appears that the UK Government was taking lessons from this great master

when they published the draft Finance Bill at the close of 2014. The Bill

introduced a new taxing regime for, so called, disguised management fees the

drafting of which was so wide in scope and jurisdictional breadth that it appeared

to catch potentially all types of distributions made by a fund to its management

team, wherever based, if even just marginal UK activity took place. After a

period of consultation revised rules were published yesterday in the Finance Bill

2015.

AUTUMN DRAFT OF THE FINANCE BILL (“AUTUMN DRAFT”)

Tucked away in the UK Chancellor’s Autumn Statement in November 2014 was

a comment that the Government would be “taking measures to prevent

[amongst other things] the disguising of fee income by investment managers”.

When the documents accompanying this statement were published later that

week there were reassurances that this was not aimed at catching carried interest

or co-invest returns. There followed a week of speculation about what this would

mean in practice although not even the most pessimistic of speculators predicted

a regime so broad in scope and so out of step with the industry that it had the

potential to bring GP profit share as well as carry and co-invest returns within

the UK income tax net, rather than the more favourable capital gains tax

regime.1

1For a fuller discussion of the Autumn Draft see our Client Update “UK Tax onManagement Fees, Co-Invest and Carry: Is Anything Safe?”, 15 December 2014.

LONDON

Richard Ward

[email protected]

Ceinwen Rees

[email protected]

Client Update

25 March 2015

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The industry response, spearheaded by the British Private Equity & Venture

Capital Association, was quick and comprehensive; the rules as proposed did not

satisfy the stated aims in the Autumn Statement, did not reflect the commercial

reality of private equity and would make the UK uncompetitive in a global

market. In last week’s budget the UK Chancellor reassured the industry that

“Following consultation, the legislation has been revised to better reflect industry

practice on performance related returns, to restrict the charge on non-UK residents to

UK duties…”.

FINANCE BILL 2015

Since yesterday, the truth of this statement was open for review. Tucked in

amidst nearly 350 pages of legislation are the new disguised investment

management fee rules. Our first impression of the rules is that they are

drastically different from the rules published in the Autumn Draft; the Treasury

has clearly not been afraid to splash about the red ink (which can only be a good

thing). Underlying these changes, the structure of the rules remains the same;

there are still four requirements that need to be satisfied for the legislation to

apply:

Likely to besatisfied in

most privateequity fundstructures.

An individual performinginvestment management services

receives amounts from fund.

There is a partnership involved inthe fund structure.

A management fee arises.

Some or all of this management feeremains untaxed.

These bothhave unusual

statutorydefinitions.

Client Update

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And, once within the regime, amounts will be subject to UK income tax (up to

45%) and possibly national insurance liabilities (2%) rather than UK capital gains

tax (up to 28%).

WHAT IS A MANAGEMENT FEE UNDER THE REVISED LEGISLATION?

Under the new rules, any sum arising to an individual directly or indirectly from

a fund under any arrangements is a management fee except so far as the sum

constitutes:

a repayment (in whole or part) of an investment made directly or indirectly

by the individual;

an arm’s length return on an investment made directly or indirectly by an

individual; or

carried interest.

UK incometax [& NI]

Carried interest

Profit-related returnwhere there’s a significantrisk of its not arising.

All amounts arising to an individual from the fund

£100

Management Fee

Return of investment &arm’s length return

Investment may be madedirectly or indirectly.

The return paid to theindividual must be an“arm’s length return”.

£53

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It is still not clear precisely what arising means and whether amounts held in a

corporate entity will be treated as arising to an individual who is a shareholder.

We expect HMRC to address this point in their guidance.

IS CARRIED INTEREST SAFE NOW?

The short answer: probably.

One of the most controversial parts of the Autumn Draft was the definition of

carry, which required that it be amounts paid out of profit after participants had

received back their capital plus a preferred return of 6% compound interest.

Although Parliament has stayed wedded to this definition of carry, it now forms

a safe harbour rather than the only form of return that may constitute carry.

The broader carried interest definition is “any sum which arises to the

individual...by way of profit-related return” provided that such amount is not

guaranteed but is at “significant risk of not arising”. A return is a profit-related

return if:

the sum will arise only if there are profits;

the amount of the sum varies in accordance with the profits; and

returns to external investors are determined by reference to such profits.

We would therefore expect most standard carried interest structures to fall

within this exclusion.

ARE CO-INVESTMENT RETURNS SAFE NOW?

The short answer: probably, although we await further clarification from HMRC.

Co-invest returns should not fall within this regime but the drafting presented in

the Autumn Draft was fairly tortuous, relying on a return’s being in respect of an

investment made by an individual himself and that the return should not exceed

a “commercial return” (which raised concerns in respect of any successful

investment). Both of these concerns have been addressed in the new legislation.

Amounts representing the return of an investment made directly or indirectly by

an individual fall outside of the regime and rather than a return’s needing to be

commercial it instead needs to be an arm’s length return.

A return is an arm’s length return if it:

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is a return on an investment which is the same kind of investment as

external investors have made in the fund;

the return on the investment is reasonably comparable to the return to

external investors on those investments; and

the terms governing the return on the investment are reasonably

comparable to the terms governing the return to external investors on those

investments.

The pause for thought in these conditions is the fact that the terms need to be

“reasonably comparable”. This is a phrase that has remained in the legislation

from the original draft. We understand that HMRC has intimated that co-

investment which is not subject to management fee or carry will nevertheless

satisfy this condition and that guidance will be issued confirming the point.

HMRC proposes publishing this guidance prior to 1 April but has not confirmed

the exact date.

WHAT DOES “UNTAXED” MEAN UNDER THE NEW LEGISLATION?

The short answer: anything not subject to UK income tax.

Sadly the definition of untaxed remains relatively unchanged; in keeping with

the very broad approach taken to defining management fees, “untaxed” doesn’t

actually mean that an amount has not been subject to tax but instead means, for

the purposes of this legislation, that an amount has not been subject to income

tax as employment income or trading income. Provision does not appear to have

been made for foreign taxes paid and instead people will have to rely on double

tax treaties, where they exist.

WHAT ABOUT THE INTERNATIONAL EFFECT?

Short answer: things are much better.

The exceptionally wide jurisdictional scope of the first draft of these rules caused

much consternation. Thankfully, HMRC has reigned itself in somewhat and

now the regime bites only to the extent that an individual performs investment

management services in the UK.

The effect for non-UK-domiciled individuals will still be that all amounts falling



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For a non-UK resident individual, who provides investment management

services in the UK, the situation is still a little knotty. Technically, it looks like

this person would be within the rules, although we would hope that double tax

treaties should help most people. In terms of administration, though, it is not

clear how an income tax liability arising to a non-UK tax resident would be

assessed. We can but hope that HMRC provides some guidance on this point in

its much anticipated guidance.

WHAT NEXT?

The Finance (No. 2) Bill 2015 was published yesterday, 24 March. It will pass

through Parliament today. We expect the Bill to be passed in unamended (or

insignificantly amended) form before Parliament dissolves on 30 March ready

for May’s election. The legislation will take effect from 6 April although,

worryingly the Treasury has reserved itself a very broad right to amend the

legislation by regulations.

Given this tight timescale, we suggest speaking with Richard Ward or Ceinwen

Rees as soon as possible so that you can move quickly. We would also like to

invite you to a webinar at 4pm UK time today in which we will be discussing

these issues further. If you would like to attend (or receive a recording of the

webinar), please email [email protected].

Parliament may have played a clever hand; it delivered something

incomprehensible and so now when presenting something, which 6 months ago

would have caused horror, it is instead greeted with a feeling of deflated

resignation and the mantra “it’s not as bad as it could have been”. We have

moved from a lobster telephone to being served “Still Life with Two Lemons”2.

* * *


2Dalí, c.1926.

Client Update

26 March 2015

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Client UpdateMore UK Tax?Additional Guidance on theDisguised InvestmentManagement Fee Rules

The UK is showing its teeth when it comes to combating aggressive tax planning

and it is not feeling constrained by our watery borders. In this year’s budget the

UK has introduced new and, potentially, far reaching rules which seek to:

tax certain distributions from a fund to its management team as UK income

instead of UK capital gains; and

in some cases bring certain distributions to a management team into the

UK’s tax net.

A detailed discussion about the rules themselves is contained in our Client

Update “Are Your Carry and Co-Invest Returns Safe from UK Income Tax?

(Sadly Your Management Fee Probably Isn’t.)”, which is reproduced as an Annex

to this note for your convenience.

This Client Update serves as a supplement to our more detailed note and has

been written following the publication by HMRC of its guidance to accompany

the new disguised management fee rules. The guidance can be accessed at

https://www.gov.uk/government/publications/investment-managers-disguised-

fees-income (the “Guidance”).

As we had hoped, the Guidance provides clarification about many of the issues in

the Finance Bill which were a little sparse on detail. We set out below a summary

of the key points to note.

UK RESIDENT NON-DOMICILIARIES

The view that we expressed in our previous note – that for non-UK

domiciled individuals all amounts falling within the legislation will have a

UK source and therefore be taxed in the UK whether or not they are remitted

to the UK – has been confirmed in the Guidance.

LONDON

Richard Ward

[email protected]

Ceinwen Rees

[email protected]

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26 March 2015

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NON-UK RESIDENTS

HMRC has provided a very helpful clarification that a tax charge should

generally arise in respect of a non-UK resident that undertakes only minimal

services in the UK only if their activities create a permanent establishment in

the UK (which, for minimal activities, would be unusual). This view is based

on the relevant person’s benefiting from the business profits provision in an

applicable double tax treaty.

WHEN DO AMOUNTS ARISE TO AN INDIVIDUAL?

The Guidance clarifies that a sum “arises” to an individual when the

individual actually has access to such amount. Sums allocated but

inaccessible to an individual will not have arisen to them. However, sums

advanced to an individual by way of loan, even if there has been no allocation

to the individual, will be considered as “arising” to that individual.

The legislation applies to fees arising on or after 6 April 2015, so amounts

which accrue in a partnership prior to that date but which are made available

to an individual on or after that date will be subject to a charge.

Tucked away at the back of the Guidance are various examples. Example 8 is

helpful for anyone planning to make pre-6 April distributions as it confirms

that HMRC will respect these distributions even though the allocations to

support such distributions are made post-6 April. In addition to being helpful

in terms of short-term planning this also gives a useful insight into how

HMRC views distributions and allocations, with cash coming out as king.

Although not expressly stated in the Guidance, it appears that HMRC may

respect genuine corporate blockers. Example 4 is as follows:

The key point to take away from this example is that HMRC’s analysis rests on

the dividend that is paid to AB and not on the amount that is paid into ABCD

Limited. This looks like a genuine corporate blocker may work. That said,

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HMRC do also state that where “sums are made available to an individual, who

chooses to apply them in a particular way, for example by investing them in the

fund, then they will arise at the point that they are made available,

notwithstanding that they have been reinvested.” This brings into question the

role of a corporate GP in facilitating co-investment on a pre-tax basis. In

arrangements where amounts arising to the GP Co are automatically invested it

may be possible for HMRC to say that the individual has chosen to apply

amounts in a certain way. The specific facts in each case are therefore likely to be

determinative.

CO-INVEST

It has been clarified that the requirement that returns on a co-investment

and the terms governing such returns must be reasonably comparable to

those applicable to an external investor can accommodate co-investment

that is paid free of management fee or carry. HMRC goes so far as to say that

“the wording ‘reasonably comparable’ is intended to allow for this sort of

difference, i.e. where there are genuine commercial reasons for the

difference.”

CARRIED INTEREST

An amount may constitute carried interest only to the extent that there is

“no significant risk that a sum of at least a certain amount…would not arise

to the individual” (s.809EZC). It appears that we were not alone in our

confusion over the meaning of this phrase. HMRC dedicates a number of

paragraphs to its explanation, which boils down to meaning “sums which are

virtually certain to arise”.

HMRC has further confirmed that the risk element relates to the

arrangements in place between the management team and the fund rather

than to the underlying investments or the track record of the fund manager.

NATIONAL INSURANCE

The Guidance confirms that national insurance (2%) will be applicable to

disguised management fees in the same way as it applies to other trading

income.

We would be very happy to discuss the Guidance and related legislation with you

further. Please contact Richard Ward or Ceinwen Rees to talk about both

existing structures and future planning.

Client Update

26 March 2015

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AnnexARE YOUR CARRY AND CO-INVEST RETURNS SAFE FROM UK INCOME TAX?

(SADLY YOUR MANAGEMENT FEE PROBABLY ISN’T.)

Salvador Dalí, the man who brought us Lobster Telephone, is famously quoted as

saying that “what is important is to spread confusion, not eliminate it”. It

appears that the UK Government was taking lessons from this great master

when they published the draft Finance Bill at the close of 2014. The Bill

introduced a new taxing regime for, so called, disguised management fees the

drafting of which was so wide in scope and jurisdictional breadth that it appeared

to catch potentially all types of distributions made by a fund to its management

team, wherever based, if even just marginal UK activity took place. After a period

of consultation revised rules were published yesterday in the Finance Bill 2015.

AUTUMN DRAFT OF THE FINANCE BILL (“AUTUMN DRAFT”)

Tucked away in the UK Chancellor’s Autumn Statement in November 2014 was

a comment that the Government would be “taking measures to prevent

[amongst other things] the disguising of fee income by investment managers”.

When the documents accompanying this statement were published later that

week there were reassurances that this was not aimed at catching carried interest

or co-invest returns. There followed a week of speculation about what this would

mean in practice although not even the most pessimistic of speculators predicted

a regime so broad in scope and so out of step with the industry that it had the

potential to bring GP profit share as well as carry and co-invest returns within

the UK income tax net, rather than the more favourable capital gains tax

regime.1

The industry response, spearheaded by the British Private Equity & Venture

Capital Association, was quick and comprehensive; the rules as proposed did not

satisfy the stated aims in the Autumn Statement, did not reflect the commercial

reality of private equity and would make the UK uncompetitive in a global

market. In last week’s budget the UK Chancellor reassured the industry that

“Following consultation, the legislation has been revised to better reflect industry

practice on performance related returns, to restrict the charge on non-UK residents to

UK duties…”.

1For a fuller discussion of the Autumn Draft see our Client Update “UK Tax onManagement Fees, Co-Invest and Carry: Is Anything Safe?”, 15 December 2014.

Client Update

26 March 2015

5

www.debevoise.com

FINANCE BILL 2015

Since yesterday, the truth of this statement was open for review. Tucked in

amidst nearly 350 pages of legislation are the new disguised investment

management fee rules. Our first impression of the rules is that they are

drastically different from the rules published in the Autumn Draft; the Treasury

has clearly not been afraid to splash about the red ink (which can only be a good

thing). Underlying these changes, the structure of the rules remains the same;

there are still four requirements that need to be satisfied for the legislation to

apply:

And, once within the regime, amounts will be subject to UK income tax (up to

45%) and possibly national insurance liabilities (2%) rather than UK capital gains

tax (up to 28%).

WHAT IS A MANAGEMENT FEE UNDER THE REVISED LEGISLATION?

Under the new rules, any sum arising to an individual directly or indirectly from

a fund under any arrangements is a management fee except so far as the sum

constitutes:

a repayment (in whole or part) of an investment made directly or indirectly

by the individual;

Likely to besatisfied in

most privateequity fundstructures.

An individual performinginvestment management services

receives amounts from fund.

There is a partnership involved inthe fund structure.

A management fee arises.

Some or all of this management feeremains untaxed.

These bothhave unusual

statutorydefinitions.

Client Update

26 March 2015

6

www.debevoise.com

an arm’s length return on an investment made directly or indirectly by an

individual; or

carried interest.

It is still not clear precisely what arising means and whether amounts held in a

corporate entity will be treated as arising to an individual who is a shareholder.

We expect HMRC to address this point in their guidance.

IS CARRIED INTEREST SAFE NOW?

The short answer: probably.

One of the most controversial parts of the Autumn Draft was the definition of

carry, which required that it be amounts paid out of profit after participants had

received back their capital plus a preferred return of 6% compound interest.

Although Parliament has stayed wedded to this definition of carry, it now forms

a safe harbour rather than the only form of return that may constitute carry. The

UK incometax [& NI]

Carried interest

Profit-related returnwhere there’s a significantrisk of its not arising.

All amounts arising to an individual from the fund

£100

Management Fee

Return of investment &arm’s length return

Investment may be madedirectly or indirectly.

The return paid to theindividual must be an“arm’s length return”.

£53

Client Update

26 March 2015

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broader carried interest definition is “any sum which arises to the individual...by

way of profit-related return” provided that such amount is not guaranteed but is

at “significant risk of not arising”. A return is a profit-related return if:

the sum will arise only if there are profits;

the amount of the sum varies in accordance with the profits; and

returns to external investors are determined by reference to such profits.

We would therefore expect most standard carried interest structures to fall

within this exclusion.

ARE CO-INVESTMENT RETURNS SAFE NOW?

The short answer: probably, although we await further clarification from HMRC.

Co-invest returns should not fall within this regime but the drafting presented in

the Autumn Draft was fairly tortuous, relying on a return’s being in respect of an

investment made by an individual himself and that the return should not exceed

a “commercial return” (which raised concerns in respect of any successful

investment). Both of these concerns have been addressed in the new legislation.

Amounts representing the return of an investment made directly or indirectly by

an individual fall outside of the regime and rather than a return’s needing to be

commercial it instead needs to be an arm’s length return.

A return is an arm’s length return if it:

is a return on an investment which is the same kind of investment as

external investors have made in the fund;

the return on the investment is reasonably comparable to the return to

external investors on those investments; and

the terms governing the return on the investment are reasonably

comparable to the terms governing the return to external investors on those

investments.

The pause for thought in these conditions is the fact that the terms need to be

“reasonably comparable”. This is a phrase that has remained in the legislation

from the original draft. We understand that HMRC has intimated that co-

investment which is not subject to management fee or carry will nevertheless

satisfy this condition and that guidance will be issued confirming the point.

Client Update

26 March 2015

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HMRC proposes publishing this guidance prior to 1 April but has not confirmed

the exact date.

WHAT DOES “UNTAXED” MEAN UNDER THE NEW LEGISLATION?

The short answer: anything not subject to UK income tax.

Sadly the definition of untaxed remains relatively unchanged; in keeping with

the very broad approach taken to defining management fees, “untaxed” doesn’t

actually mean that an amount has not been subject to tax but instead means, for

the purposes of this legislation, that an amount has not been subject to income

tax as employment income or trading income. Provision does not appear to have

been made for foreign taxes paid and instead people will have to rely on double

tax treaties, where they exist.

WHAT ABOUT THE INTERNATIONAL EFFECT?

Short answer: things are much better.

The exceptionally wide jurisdictional scope of the first draft of these rules caused

much consternation. Thankfully, HMRC has reigned itself in somewhat and

now the regime bites only to the extent that an individual performs investment

management services in the UK.

The effect for non-UK-domiciled individuals will still be that all amounts falling



For a non-UK resident individual, who provides investment management

services in the UK, the situation is still a little knotty. Technically, it looks like

this person would be within the rules, although we would hope that double tax

treaties should help most people. In terms of administration, though, it is not

clear how an income tax liability arising to a non-UK tax resident would be

assessed. We can but hope that HMRC provides some guidance on this point in

its much anticipated guidance.

WHAT NEXT?

The Finance (No. 2) Bill 2015 was published yesterday, 24 March. It will pass

through Parliament today. We expect the Bill to be passed in unamended (or

insignificantly amended) form before Parliament dissolves on 30 March ready

for May’s election. The legislation will take effect from 6 April although,

Client Update

26 March 2015

9

www.debevoise.com

worryingly the Treasury has reserved itself a very broad right to amend the

legislation by regulations.

Given this tight timescale, we suggest speaking with Richard Ward or Ceinwen

Rees as soon as possible so that you can move quickly. We would also like to

invite you to a webinar at 4pm UK time today in which we will be discussing

these issues further. If you would like to attend (or receive a recording of the

webinar), please email [email protected].

Parliament may have played a clever hand; it delivered something

incomprehensible and so now when presenting something, which 6 months ago

would have caused horror, it is instead greeted with a feeling of deflated

resignation and the mantra “it’s not as bad as it could have been”. We have

moved from a lobster telephone to being served “Still Life with Two Lemons”2.

* * *


2Dalí, c.1926.

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