Allen Latta's Thoughts on Private Equity, Etc.
  • Allen's Blog
  • Blog Post Categories
  • Glossary of Private Equity Terms
  • Resources
  • About
  • Contact

LP Corner: Fund Terms - Key Person Clause

7/28/2018

0 Comments

 
This is one of a series of posts on fund terms.  Other posts in this series include:
  • Management Fee
  • GP Commitment
  • Carried Interest Overview
  • Carried Interest – Preferred Return and GP Catchup
  • GP Clawback
  • Management Fee Offsets
  • No Fault Divorce
  • For Cause Actions
  • Should Venture Capital Funds have a Preferred Return Hurdle?

When an LP invests in a fund, it is because the LP believes that the investment team will successfully invest the fund.  But what happens if members of that investment team leave the firm in the midst of investing?  What happens if a key member of the team dies, or is convicted of securities fraud?  A “key person” clause (historically known as a “key man” clause) provides LPs with protections in case these events, and others, occur.

To read more, please click on the "Read More" link below and to the right.

Read More
0 Comments

LP Corner: Should Venture Capital Funds Have a Preferred Return Hurdle?

7/21/2018

4 Comments

 
Why is it that most buyout funds, many growth equity funds and few venture capital funds have an 8% preferred return hurdle?  Why should there be a difference among the different strategies?
 
What is a preferred return hurdle?
A preferred return hurdle is a component of the fund manager’s carried interest. 
 
​To read more, please click on the "Read More" link below and to the right.

Read More
4 Comments

LP Corner: Fund Terms - Management Fee Offsets

7/15/2018

0 Comments

 
This is one of a series of posts on fund terms.  Other posts include:
  • Management Fee
  • GP Commitment
  • Carried Interest Overview
  • Carried Interest – Preferred Return and GP Catchup
  • GP Clawback
  • Key Person Clauses
  • No Fault Divorce
  • For Cause Actions
  • Should VC Funds have a Preferred Return Hurdle?

A private equity fund can generate fees in certain situations that are separate and distinct from management fees.  These situations include:

To read more, please click on the "Read More" link below and to the right.

Read More
0 Comments

LP Corner: Fund Terms - GP Clawback

7/13/2018

0 Comments

 
This is one of a series of posts on fund terms.  Other posts include:
  • Management Fee
  • GP Commitment
  • Carried Interest Overview
  • Carried Interest – Preferred Return and GP Catchup
  • Management Fee Offsets
  • Key Person Clauses
  • No Fault Divorce
  • For Cause Actions
  • Should Venture Capital Funds have a Preferred Return Hurdle?

In this post, we will explore what happens if the GP is paid too much carry.  Generally speaking, the GP must return the overpayment, and this is called the GP clawback.  But it’s not that simple, so read on!
 
How a GP Can be Paid Too Much Carry
In the prior post “LP Corner: Fund Terms – Carried Interest Overview” we discussed that there are two main types of carried interest – whole fund carry (also known as “European carry”) and deal-by-deal carry (also known as “American carry”). 
 
In whole fund carry, the GP is paid carry only after the fund has returned to the LPs all of their contributed capital.  This has the effect that the GP is paid carry later in the fund’s life (compared to deal-by-deal carry), and because the LPs are repaid all of their contributed capital before the GP takes its carry, it is pretty unlikely that the GP will receive too much carry. 
 
Conversely, in deal-by-deal carry, the GP can collect carry much earlier than under whole fund carry, and in some cases, the GP can be paid too much carry over the life of the fund.  Please review the example in the prior post for more detail on this and to see how too much carry can be paid.
 
To read more, please click on the "Read More" link below and to the right.

Read More
0 Comments

LP Corner: Fund Terms - Preferred Return and GP Catchup

7/8/2018

0 Comments

 
This is one of a series of posts on fund terms.  Other posts include:
  • Management Fee
  • GP Commitment
  • Carried Interest Overview
  • ​GP Clawback
  • Management Fee Offsets
  • Key Person Clauses
  • No Fault Divorce
  • For Cause Actions
  • Should Venture Capital Funds have a Preferred Return Hurdle?

In this post, we will explore two items relating to carried interest: preferred return and GP catchup.
 
Preferred Return Hurdle
A preferred return (or “hurdle rate”) is a minimum threshold return that LPs must receive before the GP can receive its carried interest (or “carry”).  The preferred return is usually expressed as a percentage return per year, and in private equity that is usually 8% per year.  This means that the LPs must receive an 8% annual return on their contributed capital before the GP can receive carry. 
 
GP Catchup
There are two types of preferred return hurdles: (1) a “pure preferred return” (also known as “hard preferred return”); and (2) a preferred return with GP catchup. 
 
Pure Preferred Return Hurdle.  In the pure preferred return hurdle, the GP only receives carry on gain in excess of the preferred return hurdle.  This has the impact of reducing the carry the GP receives over the life of the fund.  The pure preferred return hurdle is not used in private equity. 
 
Preferred Return with GP Catchup.  In a preferred return with GP catchup, once the preferred return hurdle is met, the GP receives all or most of the future profits until the GP catches up to its 20% carry amount, and after that the profits are split 80% to the LPs and 20% to the GP (for its normal carry).  The preferred return with GP catchup results in the GP receiving its entire 20% profit share.  This version of preferred return hurdle is the norm in the private equity industry.

To read more, please click on the "Read More" link below and to the right.

Read More
0 Comments
    About this Blog

    This Blog is a collection of thoughts on a variety of topics of interest to me, including:
    • Private Equity
    • Buyouts
    • Growth Equity
    • Venture Capital
    • Corporate Finance
    • Investment Banking
    • IPOs
    • M&A
    • Technology
    • Economics
    • Law
    I hope you find this blog of interest.
    View my profile on LinkedIn

    Categories

    All
    Anti-Dilution
    Berlin
    Board Of Directors
    Brazil
    Buyouts
    California
    China
    Cleantech
    Corporate Finance
    Corporate Venture Capital
    Crowdfunding
    Dilution
    Dividend Recap
    Economics
    Emerging Managers
    Endowments
    Entrepreneurship
    Europe
    Fund Terms
    General
    Growth Equity
    Healthcare
    India
    Innovation
    Investment Banking
    Ipo
    Israel
    Law
    Legal
    Libor
    Life Sciences
    Listed Private Equity
    London
    Los Angeles
    LP Corner
    M&A
    Mexico
    New York
    Pensions
    Politics
    Private Equity
    Public Stocks
    San Francisco
    Secondaries
    Secondary Exchanges
    Silicon Valley
    South America
    Speaking
    Stock Market
    Tax
    Technology
    Travel
    United Kingdom
    Valuation
    Venture Capital
    Venture Capital Deal Terms
    Webinars


    Archives

    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    February 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    February 2016
    January 2016
    November 2015
    October 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011


    Copyright Notice:

    ​All original works on this site are 
    © 2011-2020 Allen J. Latta. All rights reserved.  Neither this website nor any portion thereof may be reproduced or used in any manner whatsoever
    without the express prior written permission of Allen J. Latta.

    LP Corner® is a registered trademark of Campton Private Equity Advisors.  Used with permission.

    DISCLAIMER:  Readers of this Blog are not to construe it as investment, legal, accounting or tax advice, and it is not intended to provide the basis for the evaluation of any investment.  Readers should consult with their own investment, legal, accounting, tax and other advisors to the determine the benefits and risks of any investment.

    Private equity investments involve significant risks, including the loss of the entire investment.

    This Blog does not constitute an offer to sell or the solicitation of an offer to buy any security.

Copyright © Allen J. Latta.  All rights reserved.
Securities offered through LightPath Capital, Inc., Member FINRA/SIPC.
LightPath Capital, Inc., ​1560 E. Southlake Blvd, Suite 100, Southlake, TX 76092.  Phone: 214-481-7641