This thesis mainly demonstrates the legalissues of PrivateEquityFund (referred to as PE) from the perspectives of PE manager supervision, internal governance, and Valuation Adjustment Mechanism (referred to as VAM Agreement), and tries to make some suggestions to improve the leglal systems of China’s PE.
Abstract: In the development of privateequity funds, the tax legal system, especially the income tax law system, plays an important role. At present, China's tax system involving privateequity funds urgently needs further reform and improvement in order to stimulate the positive role of privateequity funds in the healthy and healthy development of China's economy. Keyword: PrivateEquityFund, Enterprise Income Tax Law, Individual Income Tax Law, Tax Concessions.
The aim of this research was to match theory with an empirical case on how PE investors used MCS in strategy implementation during ownership of buyout targets. The case examined what MCS were used and how. Furthermore, the factors that influenced the design and use of MCS were of notable interest. Distinctive motivation behind this research was to realize MCS of PE buyouts in a wider context involving parent organization and its customers as investors. Similar case research had not been conducted before. Thus, expansion of scope in aforementioned way raised the need to integrate additional and relevant theoretical insights into the framework. Systematic combining (Dubois & Gadde 2002) was chosen as the research method. Consequently, the research was defined by continuous and incremental matching between theory and empirical findings. Variety of different data sources were used to construct a longitudinal view of the fund strategy implementation. This approach shed light on the use of MCS practices during the whole ownership period until the final exit mode. The research was retrospective in a sense that the research took place during the final phase of the PE fund lifespan. This exceptional case illustrates how MCS were not designed and used in isolation from factors such as ownership, parent organization and capabilities. Such aspects have been of minor or even non-existent interest among earlier MCS research. This will be discussed in the first part identifying factors of MCS in PE context. Second, strategy implementation by MCS design has been covered in the second part. Third, emerging complementary insights to MCS, processes of strategy implementation, dynamic capabilities and their interconnections will be discussed.
In this paper, we present a stochastic model for the dynamics of a privateequityfund. Our work differentiates from previous research in the area of venture and privateequityfund modeling in the following respects. Our model of a fund’s capi- tal drawdowns and distributions is based on observable economic variables only. In this sense, we do not specify a process for the dynamics of the unobservable value of a fund’s assets over time, as done in the existing deterministic and stochastic models of Takahashi and Alexander (2002) and Malherbe (2004). Rather, we en- dogenously derive the market value of a fund by using equilibrium intertemporal asset pricing considerations. The combination of equilibrium asset pricing principles and appropriate economic modeling of the underlying stochastic processes allows us derive a simple closed-form solution for the market value of a fund over time. This market value can be used to define a periodic model return of a privateequityfund. Hence, we do also provide a new approach to measure the return of privateequity investments that does not suffer from typical problems, such as stale or managed pricing.
A privateequityfund is controlled by the general partner (the privateequity firm) who obtains commitments from limited partners who are qualified investors such as financial institutions, endowments, pension funds and wealthy individuals. When the general partner identifies investments, it calls the required capital which is supplied by limited partners on a pro rata basis. These investments create the privateequity fund’s portfolio of companies. The limited partners receive a return which is net of management fees and carried interest to the general partner. Carried interest is typically 20% of profits. Management fees are stated as a percent of assets with 2% a common figure. These fees are, however, effectively much larger since in early years they are charged on committed capital even if only a fraction of the commitment has been called and invested. For instance, Phalippou and Gottschalg (2009) estimate that fees to general partners make net returns about 6 percent per year less than gross returns. While funds generally have a finite life (approximately 10 years with possible extensions), general partners often start additional funds. General partners normally take an active interest in the governance and management of portfolio companies, often providing management expertise.
2006), featured prominently in global research and policy scenes interested in PT. This is not surprising as this project represented one of the first comparative research efforts focused exclusively on the PT phenomenon. Furthermore, it was the first research endeavour to systematically explore and document the PT phenomenon in nine countries that had once been under various communist regimes: Azerbaijan, Bosnia and Herzegovina, Croatia, Georgia, Lithuania, Mongolia, Poland, Slovakia and Ukraine. As the first of its kind, this large scale quantitative research based mainly on the perspectives of pupils and students focused on the general characteristics of PT such as the scope, cost, geographic spread and subject matter of PT services as well as factors underlying the demand for PT and the impact of PT on formal educational systems (Būdienė, 2006). This initial project offered clear and intriguing findings regarding the characteristics and organisation of PT in all participating countries. It showed that PT was widespread, with researchers in all countries reporting that over half of participants participated in some form of PT in the final year of secondary education (Silova & Bray, 2006). In most of the researched contexts as well as in the follow-on study in Central Asia, these results instigated active and dynamic debate regarding the PT phenomenon (Silova, 2009).
Earlier papers mostly use VE. Although Preqin and CA have been around for some time, Preqin has not been used a lot in PE research (Harris, Jenkinson, & Stucke, 2010). The most recent data provider is Burgiss, which have gained popularity among researchers in later years. As mentioned, most of the earlier papers, including both Kaplan and Schoar (2005) and Phalippou & Gottschalg (2008), use VE. Later research have shown that the VE data has several negative features. Stucke (2011) finds that net asset values (NAV) and cash flows were not updated for years. NAVs was rolled on for each year, making the numbers going forward almost meaningless at the end. These NAVs are for instance used by Phalippou & Gottschalg. As a funds maturity increases, IRR will decrease, thus understating returns. This affects Kaplan and Schoar, Phalippou and Gottschalg and most other papers based on VE.
For instance, responding to the turmoil in USA financial markets, the USA Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989, 100 which prohibited S&Ls companies from investing in junk bonds. S&Ls were to invest only in investment-grade bonds. Instantly, a huge funding pool had been taken out of the LBO financial market. That Act further required S&Ls companies holding junk bonds to sell their holdings by the end of 1993, precipitating a situation whereby the market was awash with low priced assets, while conversely, the market for new issuances was frozen (as lower rated issuers could not afford to underwrite funding at the new costly rates) – creating a situation of substantial financial strains among corporations that had become extensively exposed to the privateequity financing method. Special situations and distressed privateequity thrive under these circumstances. Fund managers that still had uncommitted capital found high-quality assets to buy at distressed prices. Distressed privateequity had emerged as a new high- earning investment activity.
are provided by these institutions then certain tax (e.g. Unrelated Business Taxable Income) and regulatory issues will need to be considered by the fund before entering into such facilities. There are certain funds, particularly emerging market funds, which draw down from Limited Partners in a liquid currency such as dollars, euros or sterling, but are required to make investments in illiquid currencies with significant volatilities. An equity bridge allows the fund to proceed with the investment and issue a capital call when the exact funding requirement from its Limited Partners becomes known. For real estate funds in particular, an equity bridge facility allows the fund to have short term financing until more permanent financing is put in place once the asset has been acquired and repositioned in the acquiring group. Such facilities may also be useful for development finance where the facility is put in place during the development phase on a real estate transaction and as a backstop to construction debt.
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influenced by either request. It has been suggested that the requirement of reliability can, to some extent, be difficult to satisfy with respect to databases containing selection bias. Kaplan and Schoar (2005) believe that funds performing extraordinary good or bad will have little motivation to report their results. They do, however, fail to confirm these hypotheses through research and cannot conclude whether GPs actually behave this way. Funds with low or negative returns will not wish to report results as this may lower the chances for collecting follow-on funds. If this is indeed the case, it will create a positive or negative bias in average returns. Kaplan and Schoar (2005) believe that if there is a bias, it would most likely take the form of underreporting by the worse performing funds. Given the relationship between zombie funds and performance, which we will address later in this thesis, it is reasonable to assume that most zombie funds are among the poor performers. According to the previous rationale, this suggests that GPs operating zombie funds have little incentive to report performance data. LPs, on the contrary, do not share this view, as they are not concerned with raising additional funds.
Sponsors of real estate funds may need to use or consider using third parties to help them raise capital, which is particularly true in real estate cycles following recessions and other economic downturns. The use of third parties (i.e., persons who are not the initial sponsors of the real estate fund) raises a number of securities issues. Securities laws generally prohibit issuers from compensating persons for referring or procuring potential investors unless those persons are appropriately qualified and registered as broker-dealers under applicable federal and state laws. Compensating unregistered finders in violation of these requirements can result in the offering failing to qualify for exemptions from applicable registration requirements, which, along with other violations of securities laws, can result in investors seeking a refund of their investment. Unwary promoters and sponsors may not realize that compensating a friend for referring an investor is a violation of applicable securities laws unless that friend is a registered broker-dealer. There are also practical limitations on the effective utilization of registered broker-dealers. Among these limitations are
A pan-European single fund structure will permit particularly European institutional investors to invest freely in privateequity and venture capital on a pan-European basis, without either very high costs or even the impossibility to do so. It would give certainty to legal and tax treatments, and simplify both fund raising and administration, and ensure the manager of the fund can focus on the commercial requirements of managing and growing the investments it has made. EVCA recommends the creation of a specific fund structure at European level, by mutual recognition, providing the same opportunities and benefits to all the fund’s investors and managers. Existing national structures should be retained alongside but would remain simply as national structures. As fiscally transparent structures are legally enforced in almost all EU countries, it would be sufficient for member states to recognise this characteristic in a common fund. Regarding investors, each country would retain fiscal control at the final stage.
While there are general guidelines for the overall structure of an opportunity fund, there can truly be no universal paradigm for best practice, given that everything depends on the strategy and investor makeup of each specific fund. Knowing one’s investor mix and each one’s array of complex needs and concerns can be of significant benefit to new fund sponsors. It is essential for fund sponsors to analyze carefully their target investor type, as the composition of their investor base can have far reaching effects on the configuring of their funds. This thesis has only begun to scratch the surface of the extensive and complex structuring issues that challenge sponsors of real estate opportunity funds today. Hopefully, the readers have gained some insight into the current industry trends and have been inspired to consult their legal and tax professionals early and often.
Because the dealer’s initial hedge of a call spread will be long, it does not raise issues under Section 5 of the 1933 act. However, if the issuer elects to cash settle or net share settle a call spread, the dealer will often sell the shares comprising its long hedge into the open market. Because these sales are, in a sense, made at the instigation of the issuer (because the issuer chooses the settlement method), this raises a concern that these sales could be viewed as attributable to the issuer. Because an issuer can only sell shares pursuant to an effective registration statement or pursuant to limited exemptions (eg, in a private placement), attribution of the dealer’s sales to the issuer raises the concern that the dealer’s sales should also be registered under the 1933 act (or executed pursuant to a private placement or other exemption). For this reason, market participants often structure these transactions so as to weaken any argument that these sales should be attributed to the issuer (eg, generally the market price used to measure the in-the-money value of the options for purposes of cash settlement or net share settlement will not be based on the price at which the dealer sells any hedge shares).
When confronted with an investor who manifests one or more indicia of high risk, the fund manager, in consultation with the compliance officer, should undertake enhanced due diligence procedures to confirm the legitimacy of the subscription funds. To confirm the legitimacy of the investor and his or her funds, one can review reports published by the US or other multinational agency (for example, FATF) with regard to the AML or coun- terterrorism legislation in the investor’s home country. The fund manager can also do a standard internet or media search (or search of any other publicly available database) to assess the investor’s business reputation. The fund manager should also, to the extent reasonably possible, assess the source of the investor’s wealth and, where a SFPF or PEP is involved, take reasonable steps to determine that the source funds are not derived from any public corruption. With respect to an investor who is a non-natural-person legal entity, the fund manager should review any recent changes in ownership or senior man- agement and determine the relationship between the entity and its home government. If despite the additional due diligence, there continues to be a risk that the subscription funds originated from illicit sources, the investor should be rejected. The decision to accept or reject an investment by a high-risk investor should involve more senior management than that typically required to open an investor account. The entire decision-making process with respect to high-risk investors should be documented and retained. Moreover, upon rejec- tion of the high-risk investment, the compliance officer and fund manager should assess whether the circumstances warrant the filing of a SAR with FinCEN.
This article strives to assess how the current Czech legislation provides for the legal PE/VC fund structures and their tax treatment. Data required for the analysis was obtained from studies published by the European Venture Capital Association/EVCA, German PrivateEquity and Venture Capital association e.V. (Bundesverband Deutscher Kapitalbeteiligungsgesellscha en/BVK), Austrian PrivateEquity and Venture Capital Organisation/AVCO and the Czech Venture Capital Association/CVCA. The introduction deﬁ nes the prerequisites for the correct operation of the PE/VC market. The legal regulation of suitable legalfund structures for PE/VC investments and their tax treatment can be seen as a key factor. The “Results” section analyses key area to be focused on by the economic policy of the state in terms of optimization of fund structures, and assesses the current situation in the Czech Republic. The development of the PE/VC market in the Czech Republic is obviously adversely aﬀ ected by the following factors: inﬂ exibility of corporate law (ﬁ xed capital level requirements, non-existence of share classes, etc.), tax obstructions and non-transparency of the existing structures. If the PE/VC market in the Czech Republic is to be positively stimulated, it appears necessary to make legislative amendments addressing the problem areas outlined. In “Discussion”, proposals for improvement of the current status are formulated.
Third, we develop several measures of public market valuations at the beginning of the month or the quarter of each "nancing. Rather than employing an overall market index, we construct industry indexes. We "rst associate each of the 103 VentureOne industry classes with a three-digit Standard Industrial Classi"cation (SIC) code. This is based on an examination of all "rms in each VentureOne class that had gone public. The Securities Data Company's Corpo- rate New Issues database provides the primary three-digit SIC code assigned to these "rms at the time they went public. In most cases, the overwhelming majority of "rms in each VentureOne class are assigned to a single three-digit SIC code. When no SIC code represents a majority, we also examine the distribution of the three-digit SIC codes of the active privately held "rms listed in the Corporate Technology Directory. In cases that remain ambiguous, we consult with VentureOne o$cials regarding their classi"cation criteria. In some cases, multiple VentureOne classi"cations were assigned to the same three-digit SIC code. For example, numerous classi"cations were matched to SIC code 737, &Computer and Data Processing Services'.