Structuring and securing carried interest for a management company’s partners

The situation

Our support

1. 01

   Structuring the partners’ participation

   We worked with the management company and the fund’s advisers in order to define:

   • the vehicle through which the partners would hold their rights;
   • the allocation of carried interest among the team members;
   • the amount of each partner’s personal investment;
   • the arrangements for financing the subscriptions;
   • the vesting, reallocation and dilution rules;
   • the consequences of a departure, depending on good-leaver or bad-leaver situations.

   We also checked how the percentage of carried interest allocated to each partner tied in with his share of the required collective investment.

   Point of attention. Carried interest must align the partners with the fund’s performance while organising, from the outset, the consequences of future changes in the team.
2. 02

   Securing access to the carried-interest tax regime

   We reviewed the Limited Partnership Agreements, subscription forms and other plan documents in order to check the conditions of the regime set out in particular by article 150-0 A, II, 8° of the CGI.

   Our analysis focused, in particular, on:

   • the nature and location of the fund and of the carried-interest vehicle;
   • the status of the beneficiaries;
   • the subscription or acquisition of the units at their real value;
   • the existence of a class of units giving access to carried interest;
   • the overall investment level of the management team;
   • the subordination of the partners’ rights to those of ordinary investors;
   • the timing of the first distributions;
   • the normal remuneration received by the partners for their duties.

   Simplified example: where a team collectively holds 20% of the carried interest and must invest 1 million euros, a partner entitled to 25% of the carry pool may be required to contribute up to 250,000 euros, according to the rules set out in the documentation.
3. 03

   Supporting the partners throughout the life of the fund

   Our involvement continued after the plan was set up, in order to assist the partners in connection with:

   • the admission of new members to the scheme;
   • changes to the allocation of carried interest;
   • the departure or change of duties of a partner;
   • additional capital calls;
   • the first distributions;
   • any transfer of rights between vehicles;
   • the preparation of individual tax returns.

   We put in place a monitoring process to reconcile, for each partner:

   • the amount actually invested;
   • the carried-interest rights held;
   • the distributions received;
   • the repayments of contributions;
   • the share of any taxable gain;
   • the supporting documents provided by the fund.

   This distinction matters because the treatment of distributions depends, in particular, on the classification of the fund and on compliance with the conditions of the regime by the vehicle and by each of the beneficiaries.

   Point of attention. Securing carried interest does not end when the plan is signed. Investments, partner movements and distributions must be documented throughout the life of the fund.