First, it is important to note that the liquidation preference is not just a tool of venture capitalists. It shows up in growth capital private equity as well. There are a number of good resources that have described the liquidation preference, including a blog post by Brad Feld, a post on Venture Beat, and a blog post by Ryan Roberts at Startup Lawyer.…
Many private equity, real estate, and infrastructure fund sponsors offer co-investment opportunities to limited partners in their funds. The practice of offering co-investment opportunities to limited partners has been an accepted part of the industry since well before I joined it in 2008.1The appetite for co-investments among limited partners—particularly certain large and sophisticated institutional investors with the resources to build in-house direct investment expertise—has grown significantly since the 2008 global financial crisis.…
The article notes that large institutional investors often negotiate for preferential treatment in respect of management fees, carried interest splits, co-investment rights, and advisory committee seats; either due to the absence of a MFNclause or a tiered MFNclause, these preferential rights are not available to smaller investors. The article suggests that this trend is a negative development, with quotes from various participants—portfolio managers and lawyers—relating to transparency or unequal economic terms.…
More pertinent, why should a fund sponsor care? The short answer, is “because prospective limited partners care”. A fund’s tax structuring is often the subject of fairly extensive due diligence and negotiation by prospective limited partners, and in extreme situations where the fund sponsor cannot accommodate a prospective investor’s tax structuring requirements can result in that investor declining to make an investment.…
The starting point for the sale of securities—broadly defined to include equity and debt instruments, investment contracts, certificates of deposit, securities index, participation rights in a profit-sharing agreement, interests in mineral rights, derivatives, and interests in investment funds howsoever organized1—in the United States is the prohibition in the SAon offering or selling any security sold using the instruments of interstate commerce unless such security is registered with the SECor is exempted from registration.…