Tax Considerations in Structuring a Private Equity Fund


Summary

This practice note addresses certain tax issues at the fund, general partner/manager, investor, and portfolio level, highlighting methods developed by the private equity industry in order to structure around adverse tax consequences. The goal in structuring an investment product is to achieve the most efficient and cost-effective framework, given the form of management, investor base, and portfolio content, while concurrently paying the minimum tax at all levels. There is no "one-size-fits-all" approach to fund formation, and often funds are comprised of multiple entities that invest side-by-side in the same investment or are formed to hold entirely different types of investments. The choice of entity and type of structure is based on business, corporate, and administrative reasons in addition to tax. The most tax-efficient structure can often be the most administratively burdensome choice, so a balance must be struck between ensuring maximum business and tax efficiencies.