Archives: Debt & Equity Financing

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Long-Term Brexit Impact on US Middle Market Private Equity

On June 23, 2016, British voters surprised much of the world by voting in favor of “Brexit” in a 52% to 48% vote.  By now, most people that watch or read the news are familiar with the term Brexit, but for any uninitiated readers, Brexit is the withdrawal of the United Kingdom (“UK”) from the European Union (“EU”).  The Brexit vote on June 23 began a period of uncertainty that has shaken, to some extent, nearly every business sector in … Read More

Unregistered Broker-Dealers and Private Equity Firms

On June 1, 2016, the Securities and Exchange Commission (the “SEC”) announced a settlement with Blackstreet Capital Management, LLC (“BCM”), a Maryland-based private equity firm, and its principal, Murry Gunty, that could negatively impact the ability of private equity funds to charge transaction fees in the future.[1]  Private equity funds have long charged fees at the closing of portfolio company transactions for their work in facilitating those transactions.  These fees have become an important aspect of private equity fund … Read More

SEC Audits of PE Firms: 3 Must Dos

As we have noted in earlier posts, the SEC has had increased authority over the private equity industry since Dodd-Frank was passed in 2010. Several years ago, an SEC official remarked that SEC exams “identified what we believe are violations of law or material weaknesses in controls over 50% of the time” (see below for link to quote). Not surprisingly, the Office of Compliance Inspections and Examinations of the SEC identified the examination of private fund advisors, with a focus … Read More

House of Representatives Attempting to Ease Regulation of Private Equity Funds

The Wall Street Journal recently reported that the House of Representatives is preparing legislation that would exempt private equity fund managers from rules that some say are burdensome.  Representatives Robert Hurt and Juan Vargas are authoring the bill, which would update current law to ease this burden.

The current law requires private equity fund managers with more than $150 million in assets under management to register and file reports with the Securities Exchange Commission.  The proposed bill, which has not … Read More

Taxation of Private Equity and the 2016 Presidential Election

The taxation of carried interests is a common topic of discussion and something that is watched closely by private equity fund managers who derive substantial income from these interests.  As background, private equity fund managers derive much of their income from management fees and carried interests.  While management fees are taxed at ordinary income rates, payments made in respect of carried interests are currently taxed at the much lower capital gains rate of 20%, thereby allowing fund managers to receive … Read More

New Risk of Private Equity Fund Withdrawal Liability or Other Liability from Portfolio Company Pension Plans

Following a remand by the First Circuit Court of Appeals, a federal district court recently found that two affiliated private equity funds were jointly and severally liable for the withdrawal liability of a jointly owned portfolio company that previously participated in a multiemployer pension plan.

Terms to Know:

  • ​​Multiemployer pension plans are qualified retirement plans in which more than one employer participates pursuant to a collective bargaining agreement (such plans must meet requirements of ERISA, the Internal Revenue Code and
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The VCOC Exemption and Initial Fund Investments

It is common for private equity funds to have limited partners that are pension plans or other retirement vehicles subject to ERISA (“ERISA benefit plans”).  By having ERISA benefit plan limited partners, the assets of the private equity fund will be considered “plan assets” subject to ERISA, unless the fund is able to avail itself of an exemption.  In the event a fund’s assets are deemed to be plan assets, the fund becomes subject to strict ERISA rules, including those … Read More

Agreements to Negotiate in Good Faith and the Risks in Delaware

handshake_puzzle_300dpi_cmyk_2Private equity funds routinely enter into letters of intent or term sheets respecting the acquisition of portfolio companies.  While most frequently the parties view these preliminary understandings as non-binding, a body of law has developed surrounding whether they create an obligation of the parties to negotiate in good faith to complete the contemplated transaction on the terms described in the preliminary understanding.

Most frequently, these preliminary understandings are silent as to whether there is a duty to negotiate definitive agreements … Read More

New HSR thresholds were recently announced for 2016, and go into effect on February 25

These thresholds generally require HSR (Hart-Scott-Rodino Antitrust Improvements Act) filings for non-exempt transactions where:

  • The size of the transaction exceeds $78.2M (measured by the aggregate value of assets, voting securities and non-corporate interests being acquired); and
  • The size of one of the parties to the transaction has sales or assets over $312.6M and the other party has sales or assets over $15.6M

HSR filing fees will be:

  • $45K for transactions valued above $78.2M but less than $156.3M
  • $125K for transactions
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Earn-Outs in Private Equity M&A Deals – Tax and Accounting Implications

As discussed in Part 1 and Part 2 of this post, earn-outs can provide various advantages to buyers and sellers depending on the way they are structured. The parties and their counsel should understand the tax and accounting implications.

Tax treatment: Often, the seller will want to ensure that it receives installment sale treatment with respect to earn-out payments to prevent recognizing taxable gain on amounts not received. Sellers should consider in particular whether the taxable gain associated with earn-out … Read More

Structuring the Earn-Out – Maximizing the Benefits in Private Equity M&A Deals

As discussed in Part 1 of this post, there are various advantages and disadvantages to buyers and sellers choosing to use earn-outs in private equity M&A transactions. These features can be enhanced or minimized depending on how the earn-out is structured. The main components of a well-structured earn-out are appropriate financial milestones, length of the earn-out period, obligations during the earn-out period, calculation of the earn-out payment and payment terms. Tax and accounting implications of earn-out payments will be discussed … Read More

Advantages and Disadvantages of Earn-Outs in Private Equity M&A Deals

Earn-outs are a tool used in M&A transactions to bridge gaps between the buyer’s valuation of the target company and the seller’s belief as to what its company is worth.

Earn-outs are particularly valuable when

  1. the target has growth potential but limited operating results on which to base the purchase price,
  2. the target has had a decrease in earnings that may be temporary, or
  3. the seller believes the target will grow beyond its historical operating results and is worth more
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