The Cause for Structuring in Alternative Investments
The sponsor may create separate management partnerships, advisor and general partner, so the GP gets performance-based compensation as a share of profits (“profits interest”) and the tax character of the income. Doing this may minimize state and local taxes and allow for compensating portfolio managers through different income streams.
The four recognized fund structures below address economic or tax requirements of a particular investor or class of investors.
In single entity funds, taxable U.S. investors typically invest directly into the fund which engages in the investment strategy, or invests in a particular deal. Investors and the GP report their distributive shares of fund income, deductions, etc. based upon their capital contributions. The GP may receive its profits interest as well.
In master-feeder structures, foreign and tax-exempt investors invest through a foreign “feeder” treated as a corporation (“blocker”) for U.S. tax purposes. The U.S. taxable investors’ capital comes through a partnership feeder. The feeders pool their capital in a “master” entity. The blocker shields foreign investors from filing tax returns for domestic business income and tax-exempt entities from paying tax on “unrelated business taxable income”.
Parallel funds invest “side-by-side” but this allows for varying investments between them to avoid investments that may have unfavorable tax consequences to one set of investors.
Multi-manager funds or “funds of funds” provide diversification among multiple managers. This also gives smaller investors access to certain investments that, individually, they could not satisfy the minimum investment requirements for.
Ultimately, structuring is a tailoring process to achieve desired goals.
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Eliot Goldberg, CPA T (212) 751-9100 [email protected]
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