Orrick Library Seminar (3rd of 3): What to Consider When Forming Your Fund Management Company: A Case Study

Session 3

Seminar | March.27.2019 | 12:30pm - 2:00pm (Hong Kong Time)

Orrick Hong Kong

See also: Session 1 - 19 March (FULL) | Session 2 - 20 March (FULL)

This seminar addresses the issues founders face when they move beyond their initial partnership and take steps to institutionalize the private equity firm they founded by admitting new general partners. Our talk explores the financial and governance issues to consider when adding a new general partner to a private equity firm, specifically:

  1. structuring the compensation package (including shares of the carried interest, management company net profits and management company enterprise value);
  2. ongoing decision making (both at the fund and firm level);
  3. planning for a possible parting of the ways sometime in the future; and
  4. messaging to the firm's investors.

Our case study is centered on a private equity firm, but issues identified can be generalized to any fund management company—indeed, to any growing private company. We will discuss a single, hypothetical case study that highlights the following issues every fund manager faces:

Sharing the Wealth

  • Dividing up Firm Profits
  • Carried Interest
  • Phantom Carry
  • Vesting
  • Capital Contributions
  • Lending Money to New General Partner
  • Who Lends Money to New GP?
  • How Do You Handle Deemed Contributions?
  • Management Company Net Profits
  • How Much to Share?
  • Profit Pools
  • "Tail" Arrangements
  • What if Management Company is Sold?
A Seat at the Table: Participation in Decision Making

  • Fund Decisions
  • Which Funds?
  • How Many Votes?
  • What is Needed for Consensus?
  • Majority Vote for Everything?
  • Management Company Decisions
  • One person, One Vote?
"It felt so right. How did it turn out so wrong?" Breaking Up

  • No Fault Divorce
  • Forcing the Issue
  • Termination for Cause
  • Break-up Fees
  • How to Handle Vesting Schedules
  • Penalties Apply for Bad Acts
  • Accelerating Vesting
  • Handling Payments of Carried Interest
  • Escrowing Carried Interest
  • Handling Capital Commitments
  • Economic Interest in Management Company

CLE Credits Available: Y