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  • Investment Advisers: Where to Find Financial Info &

    How to Make Sense of It All

    Roslyn Clarke

    Conference Sponsored by

    Research Track Sponsored by

  • Disclaimer I originally presented this material at a conference in the summer of 2014. It should be considered a general guideline with conceptual examples of how typical private equity and hedge fund investment advisers organize and operate. Many firms do not fit these models. I have not included or addressed all methods and/or topics relevant to Investment Advisers, SEC forms, or industry compensation.

  • Session Outline

    1. Basic Firm Structure

    2. Owners, Partners & Clients

    3. Assets & Fees

    4. Compensation - Structure, Practices & Data

    5. Examples & Case Studies

    6. Reference Material (ADV Map, Guide & TMI)

  • Before we get started The Securities and Exchange Commission (SEC) says Investment Advisers are individuals

    or groups who advise and/or manage investment assets or analyze securities for a fee, including private equity funds, venture capital funds and hedge funds the focus of this presentation. When they meet certain requirements, theyre regulated by the SEC. (Basics available in Handout)

    The Dodd-Frank Wall Street Reform Act changed/clarified which firms qualify as Investment Advisers. The status & requirements changed for some firms in 2011/2012.

    Not every private equity, venture capital and hedge firm files the SECs Form ADV found at http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx. (See 6. TMI for more.)

    Exempt Reporting Advisers, including firms with a VC Exemption, file but dont answer

    ALL the questions & dont have to create a Brochure. (See 6. TMI for more.)

    http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspxhttp://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspxhttp://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx

  • 1. Basic Firm Structure

    Firm

    Directing Entity

    Fund A Fund B

    Directing Entity

    Fund C

    The more you know about the firms type & structure and where your prospect is located in the org. chart, the better your results will be. Note: There are 7 private fund types including hedge, private equity, and venture capital. One firm may have multiple fund types.

    Directing Entity is not an official term of any kind. I just made it up.

    PresenterPresentation NotesEach firm can have multiple funds of different types. There are 7 private fund types in the Form ADV. Were going to talk about the 3 most common. The key concepts apply to all three.

  • 1. Basic Firm Structure

    Fund A

    Investment or Company 1

    Investment or Company 2

    Investment or Company 3

    Each fund may have a portfolio of investments or companies The Directing Entity is the person or entity overseeing Fund As investments.

    In the Form ADV Schedule D, Section 7.B.(1) Private Fund Reporting: find the funds Directing

    Entity in Question 3

    find the Fund Type in Question 10

  • 1. Basic Firm Structure - Types of Legal Organization

    The majority of Private Equity & Venture Capital

    firms based in the US are legally organized as Limited Partnerships (LPs).

    The next popular option is Limited Company (LC)

    aka Limited Liability Company (LLC). Unlike LPs, LLCs can be owned by a single member.

    Hedge Funds may also be organized as LPs, but

    LLCs are more common among HFs than among PE/VE firms.

    Interests in both LPs and LLCs are considered

    securities and are therefore regulated by the SEC.

    See Form ADV, Part 1A Item 3 Form of Organization.

  • 1. Basic Firm Structure - Three Groups in Limited Partnerships

    Limited Partnership

    General Partnership

    Managing Partnership

    Legal Structure of Firm: The distinction between the three is

    mostly for legal and tax reasons.

    Investment Adviser refers to the entity in charge of investment decisions and raising capital, which is frequently the General Partnership.

    A funds sponsors refer to the individuals or entities that own the general partner or the investment manager of the fund Investment authority may also be shared within the general partner through the use of investment committees. (Breslow & Schwartz, 1:2.5 [A])

    PresenterPresentation NotesFor firms that are not legally organized as LPs, the same basic concept, structure, and roles are the same mostly its the terminology that differs.

  • Limited Partnership

    General Partnership

    Managing Partnership

    At the FIRM level:

    Members of the MP are often members of the GP, too. But firm-based members of the GP are almost always members of the MP.

    Clients are mostly outside investors who do not participate in investment decisions or firm operations. Dont confuse the LP clients with the firm organized as an LP.

    Owners are members or shareholders of the GP.

    Partners usually have an equity stake in the firm representing voting rights or a type of compensation, not ownership of assets or fees.

    2. Owners, Partners & Clients in LP Structures

    PresenterPresentation NotesThis is my preferred language. These terms are frequently used elsewhere, but sometimes applied inconsistently.

  • 2. Owners, Partners & Clients - Limited Partners

    Limited Partnership

    More about LPs: Members agree to keep their money

    in the fund for a specified amount of time.

    At PE and VC firms, its usually 10

    years (the usual life of a fund).

    At HF firms, the lock up period may be monthly, quarterly or as much as 2 or 3 years. Withdrawals are allowed as specified monthly or quarterly redemption periods.

    Some LP members can negotiate

    different terms and rates than other members.

    Terms can be broken under certain conditions

    LP members can be individuals, pension funds, endowments, insurance companies and other investment advisers. To see the breakdown, see Form ADV, Item 5. Information about Your Advisory Business, Clients.

    PresenterPresentation NotesSource: Private Equity Funds: Formation and Operation by Stephanie R. Breslow and Phyllis A. Schwartz, (2009)

  • (Certain Conditions Might Include)

    Part 1A, Item 11: Disclosure Information Information on disciplinary history, including criminal, regulatory or civil judicial actions in the last 10 years. Disclosure Reporting Page (DRP): If the firm answered yes in Item 11, the details are reported here...

  • The General Partnership

    At the FIRM level, there is an ultimate GP & MP.

    The Managing Partnership

    PresenterPresentation NotesIf the firm is a LLC, owners (aka the GP) will be called MEMBERS.

  • 2. Owners, Partners & Clients

    General Partners

    More about GPs: They have no employees and

    expenses are limited.

    Members are usually the firms founders and superstars.

    Skin In The Game - For tax purposes, the GP invests alongside the LP to be considered a true partner.

    Additional co-investing by top investment managers or execs also aligns interests and bolsters investor confidence.

    If the firm is legally organized as a LLC, instead of forming a GP, owners will be called members or managing members who will have limited liability. If the firm is legally organized as a LP, the GP will be organized as a corporation or LLC to limit itself form debts and obligations.

    PresenterPresentation NotesSource: Practicing Law Institute, Private Equity Regulation , Chapter 2: Terms of Private Equity Funds

  • 2. Owners, Partners & Clients GP Tax Recommendation

    Although the IRS has dispensed with an earlier requirement that, for entities to be classified as partnerships for tax purposes, the general partner must contribute 1% of the total capital contributions, it is still common industry practice to use this number Oftentimes, a minimum contribution equal to the lesser of 0.2% of total contributions of the partnership or $500,000 is recommended by tax advisors.(Breslow & Schwartz,3:2.5 [A])

    The General Partnership

  • 2. Owners, Partners & Clients FIRM Level

    Managing Partnership

    More about MPs: The MP usually takes

    care of business operations for the fund(s) and offers investment advice to the GP as opposed to making investment decisions.

    It has employees and covers expenses like base salaries, rent, software and hardware.

    It does not typically make a capital contribution to the fund.

    Sometimes, the MP will have authority to make investment decisions if the funds form of organization is an entity (e.g. corporation or business trust) without a GP.

  • 2. Owners, Partners & Clients

    Limited Partnership

    General Partnership

    Managing Partnership

    At the FUND level: The Directing

    Entity is often, but not always, a member of the MP or GP.

    Sometimes, the

    Directing Entity is a Relying Adviser of the firm - a subsidiary or affiliated entity under common control, collectively conducting a single advisory business and filing a single Form ADV.

    Members of the LP at PE & VCs buy a stake in a particular fund. At HFs, they buy into a particular fund or a separate series of the firms securities.

  • At the FUND level, there may be additional entities or individuals serving as a junior

    GP or MP...

    Firm

    Directing Entity

    Fund A Fund B

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