Blocker
Some sponsors insert a “blocker” or “stopper” fund to change the character of the underlying income or asset (or both), primarily to address entity qualification criteria under tax, regulatory, or legal guidelines. Inserting a blocker fund converts “bad” assets and income into “good” assets and income (a dividend instead of a distribution from a limited partnership), allowing the investment company to maintain its status or to achieve a more beneficial tax outcome.
Some sponsors insert a “blocker” or “stopper” fund to change the character of the underlying income or asset (or both), primarily to address entity qualification criteria under tax, regulatory, or legal guidelines. Inserting a blocker fund converts “bad” assets and income into “good” assets and income (a dividend instead of a distribution from a limited partnership), allowing the investment company to maintain its status or to achieve a more beneficial tax outcome.
Subscription Line of Credit 👆👆
SLCs represent one of several funding tools available to GPs. The flexibility offered through SLCs can be used to the benefit of both LPs and GPs. SLCs can reduce the frequency of capital calls and help GPs avoid surprise capital calls. Also, SLCs may help GPs avoid capital calls if some of the investors are facing liquidity issues. The side effects of these benefits are distorted performance measures as shown above 👆👆.
SLCs represent one of several funding tools available to GPs. The flexibility offered through SLCs can be used to the benefit of both LPs and GPs. SLCs can reduce the frequency of capital calls and help GPs avoid surprise capital calls. Also, SLCs may help GPs avoid capital calls if some of the investors are facing liquidity issues. The side effects of these benefits are distorted performance measures as shown above 👆👆.
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Private Equity Fund vs. Hedge Fund: A Comparison
Many investment professionals aspire to form and operate their own private investment fund. This article will briefly outline two of the more popular types of funds: private equity funds and hedge funds.
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Buyout Fund - Combination of U.S. taxable investors, U.S. tax-exempt investors and non-U.S. investors
If a buyout target is a flow through entity, a fund should assess its investor pool and determine the most appropriate acquisition structure to house the buyout target.
A two-tier holding company structure (i.e., an acquisition company owned by a fund and the management team, and an acquisition subsidiary typically wholly-owned by the acquisition company) is a common structure used by funds to acquire a buyout target.
For example, UBTI-sensitive investors and ECI-sensitive investors generally would not wish to hold their investment in the buyout target through flow-through acquisition vehicles, whereas U.S. taxable investors typically do not wish to invest in underlying investments through entities treated as corporations for U.S. tax purposes because of the U.S. tax leakage associated with those entities.
U.S. taxable investors, U.S. tax-exempt investors that are not sensitive to UBTI, and non-U.S. investors that are not sensitive to ECI, would invest in the buyout target through a flow-through acquisition vehicle structure. In the alternative investment structure, the UBTI-sensitive investors and the ECI-sensitive investors would become shareholders of the "blocker" entity, and their income would generally consist of dividends and gains from the blocker entity.
U.S. tax-exempt investors should not be subject to U.S. tax on these dividends and gains as long as investors do not use debt proceeds to capitalize their interest in the blocker entity. Dividends derived by non-U.S. investors from the blocker entity generally should not be treated as ECI (althoughdividends would be subject to U.S. withholding tax), and gains derived by these investors also should not be treated as ECI if the blocker entity is not a USRPI.
U.S. tax-exempt investors and non-U.S. investors should be aware that the use of a blocker entity in a structure will result in a layer of U.S. tax leakage because the blocker entity will be subject to U.S. tax. Investors must therefore take this tax leakage into consideration when determining whether to invest through a blocker structure. A common technique to mitigate this tax leakage is to insert shareholder loans and/or third-party loans at the level of the blocker entity. If a loan is from a non-U.S. investor in the blocker entity, the loan could be structured so that interest payments to thenon-U.S. investor are treated as ‘portfolio interest’ and exempt from U.S. withholding tax.
If a buyout target is a flow through entity, a fund should assess its investor pool and determine the most appropriate acquisition structure to house the buyout target.
A two-tier holding company structure (i.e., an acquisition company owned by a fund and the management team, and an acquisition subsidiary typically wholly-owned by the acquisition company) is a common structure used by funds to acquire a buyout target.
For example, UBTI-sensitive investors and ECI-sensitive investors generally would not wish to hold their investment in the buyout target through flow-through acquisition vehicles, whereas U.S. taxable investors typically do not wish to invest in underlying investments through entities treated as corporations for U.S. tax purposes because of the U.S. tax leakage associated with those entities.
U.S. taxable investors, U.S. tax-exempt investors that are not sensitive to UBTI, and non-U.S. investors that are not sensitive to ECI, would invest in the buyout target through a flow-through acquisition vehicle structure. In the alternative investment structure, the UBTI-sensitive investors and the ECI-sensitive investors would become shareholders of the "blocker" entity, and their income would generally consist of dividends and gains from the blocker entity.
U.S. tax-exempt investors should not be subject to U.S. tax on these dividends and gains as long as investors do not use debt proceeds to capitalize their interest in the blocker entity. Dividends derived by non-U.S. investors from the blocker entity generally should not be treated as ECI (althoughdividends would be subject to U.S. withholding tax), and gains derived by these investors also should not be treated as ECI if the blocker entity is not a USRPI.
U.S. tax-exempt investors and non-U.S. investors should be aware that the use of a blocker entity in a structure will result in a layer of U.S. tax leakage because the blocker entity will be subject to U.S. tax. Investors must therefore take this tax leakage into consideration when determining whether to invest through a blocker structure. A common technique to mitigate this tax leakage is to insert shareholder loans and/or third-party loans at the level of the blocker entity. If a loan is from a non-U.S. investor in the blocker entity, the loan could be structured so that interest payments to thenon-U.S. investor are treated as ‘portfolio interest’ and exempt from U.S. withholding tax.