Private Fund Basics: Understanding Private Equity, Venture Capital and Hedge Funds

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional
advice. You should consult with an attorney or other appropriate
professional to determine what may be best for your individual
needs. While Financial Poise™ takes reasonable steps to ensure
that information it publishes is accurate, Financial Poise™ makes
no guaranty in this regard.
DISCLAIMER
3

MEET THE FACULTY
MODERATOR:
Michele Itri Tannenbaum, Helpern, Syracuse &
Hirschtritt LLP
PANELISTS:
Brian Boorstein Granite Creek Capital Partners
Benoit J.P. Flammang Beninvest & Associates LLC
Jonathan Friedland Sugar Felsenthal Grais & Helsinger
4

According to the Securities and Exchange Commission, the number of private investment funds in the
United States grew from 20,000 in Q1 2013 to more than 25,000 in Q1 2015. This included 1,100
more hedge funds, 1,500 more private equity funds and 140 more venture capital funds. So what are
private funds and why are they growing so quickly? This webinar explains the basics of private funds,
how and why they differ from public investment options, and how investors gain access to the different
kinds of private fund vehicles. Included is a breakdown of the three major private funds (private equity,
venture capital and hedge fund) and what makes each unique.
This webinar is delivered in Plain English, understandable to you even if you do not have a
background in the subject. It brings you into an engaging, even sometimes humorous, conversation
designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone
webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it.
5

ABOUT THIS SERIES
Many people are familiar with the terms private equity, venture capital and hedge fund, but few can
actually define how each investment vehicle operates or makes money. Thanks to their seemingly
complicated nature and lucrative reputations, the PE, VC and hedge fund industries occupy an almost
mythic (and sometimes infamous) status for Americans. The combination of mystery and wealth creates
a vacuum for misinformation and mistrust. This webinar series de-mystifies these private funds,
explaining their similarities and differences from other investment vehicles and from each other- from
the legal, financial, and investment mandate perspectives.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to
investors, business owners, and executives without much background in these areas, yet is of primary
value to attorneys, accountants, and other seasoned professionals. And, as with every Financial Poise
Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other
episodes so that participants will enhance their knowledge of this area whether they attend one, some, or
all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
Episode #1 What is a Private Fund? 2/05/19
Episode #2 Basics of Fund Formation 3/05/19
Episode #3 Capital Raising 4/09/19
Episode #4 Due Diligence Before Investing 5/07/19
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Episode #1: What is a Private Fund?
© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 8

WHAT IS A “PRIVATE INVESTMENT
FUND”?
• Privately held, blind pool that makes investments in illiquid assets and other
so-called “alternative investments” (i.e., any asset class outside of the
conventional investment types – stocks, bonds and cash).
• Managed by investment manager with a “track record” that seeks to generate
a return on investment for “passive” fund investors.
• Accessible to sophisticated investors and institutions, but not “retail”
investors due to regulatory approach.

FUND”? (cont’d)
• Broad range in terms of size, strategy, complexity and geographic focus of
vehicles.
✓ Nominal amounts up to multi-billion dollar range
✓ Domestic “standalone” investment vehicle with US only portfolio
investments to fund complexes with multiple investment vehicles in
several different jurisdictions and portfolio investments in several major
geographic regions.
✓ Hedge/hybrid funds, versus venture capital funds, versus private equity
versus real estate.

FUND”? (cont’d)
• Similar in concept to mutual funds but more lightly regulated – now facing
increasing compliance burdens.
• Interests are not registered with the SEC and do not get traded on a stock
exchange.
• Generally fall into three main strategies –
✓ “private equity” funds which focus on investments in illiquid assets
(private companies, real estate).
✓ “venture capital” is financing that investors provide to startup companies
and small businesses that are believed to have long-term growth
potential.
✓ “hedge funds” which focus on investments in freely tradable assets
(publicly traded stock, derivatives).

FUND”? (cont’d)
• In recent years there has been a convergence in the strategies of some hedge
funds and private equity funds.
✓ Multi-year lockups, restrictions on abilities to redeem due to “gates” and
“side pockets” to hold illiquid assets.
✓ Management control positions in public companies, activist funds, loan
to own strategies.

THE ALTERNATIVE INVESTMENT
LANDSCAPE
“Hard Assets”
Real Estate Commodities Natural Resources Antiques, Art, Ardvarks…

WHAT IS PRIVATE EQUITY?
• Private equity is an asset class consisting of securities invested in operating
companies with a view to generating value.
• By working with these companies managers unlock significant value by:
✓ Improving business strategy
✓ Injecting managerial expertise
✓ Advancing production technology
✓ Expanding distribution

WHAT IS PRIVATE EQUITY? (cont’d)
• Investment typically lasts between 3-7 years depending on the
investment focus of the company.
• The essence of private equity is the alignment of interests between
management and business owners. This structure supports long-term
planning without constant pressure of delivering quarterly results to
public shareholders focused on short-term results.

• PE employs varying strategies:
✓ Leveraged Buyout: the purchase of all/most of a company by using
relatively little equity and significant debt
o Targets are typically mature companies that generate strong operating
cash flow
✓ Growth Capital: equity investments in mature companies
✓ Mezzanine Capital: subordinated debt or preferred stock

• Regardless of strategy, leverage is typically key
• “Financial buyers”
• “Sponsor”

PE INDUSTRY PARTICIPANTS
• PE Firms
• Investment Banks
• Investors (“Limited Partners”)
✓ Fund of Funds – Pool funds together on behalf of institutional investors
to invest in PE funds
✓ Institutional Investors – Insurance companies, Pension Funds, Family
Offices seeking portfolio diversification
• Management
✓ Co-invest with the PE firms
✓ Accept lower cash compensation in exchange for equity participation

PE FUND STRUCTURE
• Most private equity funds are “closed-end” funds
✓Contrast with mutual funds and hedge funds
• GP usually commits at least 1% of the total capital and balance is
committed by LPs

PE FUND STRUCTURE (cont’d)
• Commonly structured as a limited partnership owned jointly by a private
equity firm (GP) and LPs
• GP manages and controls PE fund
• Partnerships have 10-year life with +1+1+1 extension
• 4-6 year investment period
• 1-2% annual management fee
• Profits split 80-20, after reaching “hurdle” return level for LPs

PE FUND STRUCTURE (cont’d)
• LPs need to fund within 2-3 weeks of “capital call”
• Penalties for failure to fund by LPs
• Investments typically are channeled through a NewCo
• Proceeds of capital received by NewCo then used to acquire Target

SIMPLIFIED U.S. FUND STRUCTURE
Source: Debevoise & Plimpton, Private Equity
Funds – Key Business, Legal and Tax Issues, pg.
10

SIMPLIFIED EUROPEAN FUND STRUCTURE
Source: Debevoise & Plimpton, Private Equity
Funds – Key Business, Legal and Tax Issues,
pg. 10

WHO CAN GENERALLY INVEST IN PE
FUNDS?
Accredited
Investors/Qualified
Purchasers
Sophisticated Non-Accredited
Investors (rarely allowed)
Fund-of-funds, public and
corporate pension funds, insurance
companies, endowments,
foundations, high net-worth
individuals, family offices, banks,
sovereign wealth funds, etc.

FORMS OF PRIVATE EQUITY
• Leveraged Buyouts
✓Companies are acquired using Financial Leverage.
✓Leverage can account for between 50% and 90% of total transaction cost.
• Growth/Expansion Capital
✓Company seeking expansion
✓Typically profitable and able to generate cash, but not enough to finance
expansion

FORMS OF PRIVATE EQUITY (cont’d)
• Distressed Investments
✓Investment in equity or debt securities of financially stressed companies
• Management Buyouts
✓PE fund supports existing management to take over company

PRIVATE EQUITY EXIT
• Limited partnerships must be dissolved within a certain time as they need
to return capital to LPs
• Exit = Monetization and realization of “paper” profits
• Exit requires advanced planning and preparation
• Sale
• IPO
• Recapitalization

WHAT IS VENTURE CAPITAL?
• Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential.
• Most venture capital funds, like private equity funds, are closed-end.
• Venture capital is long term risk capital to finance high technology projects
which involve risk but at the same time has strong potential for growth.

WHAT DO VCs DO?
• Find investment opportunities
• Pick winners (only some of which will win), plot structure, management, and
harvest
• Manage the investment (participate on Board)
• Harvest the investment (get $$, the end game) usually by acquisition of the
portfolio company or by IPO

VC AS A COUSIN OR SISTER OF PE
VC PE
OR
PE
VC

ACCREDITED INVESTORS?

WHERE DO VC FUNDS GET THEIR
FUNDING?
•Insurance companies, educational endowments, pension funds, wealthy
persons
•Within investment portfolios, these funders allocate to various classes,
including “alternative investments” (maybe 5 – 10%)
•VC is an alternative investment, with potentially high returns

TYPES OF FUNDING

ORGANIZATIONAL STRUCTURE

VC FUND STRUCTURE
• “Closed-end” funds
✓ Contrast with mutual funds
• GP usually commits at least 1% of total capital and balance committed by
LPs

VC FUND STRUCTURE (cont’d)
• Commonly structured as a limited partnership owned jointly by a VC firm
(GP) and LPs
• GP manages and controls VC fund
• 10-year life with +1+1+1 extension
• 4-6 year investment period
• 1-2% annual management fee
• 80-20 profit split, after reaching “hurdle”
• LPs need to fund within 2-3 weeks of “capital call”
• Investments typically are channeled through a NewCo
• Proceeds of capital received by NewCo then used to invest in target

LIMITED PARTNERS
• LPs contribute up to 99% of the capital of fund
• LPs have little control over fund’s activities
• LPs protected by basic covenants in fund documents
• Restrictions on how much capital can be invested in any one company
• Restrictions on type of investment fund can make
• Cash from portfolio sales commonly must be distributed to LPs

GP COMPENSATION
•Management Fee: Usually 1-2% of total capital commitments until end of a
four to five-year investment horizon, then 2% of unreturned funded capital
thereafter (declining as investments are sold or realized)
•Carried Interest: 20% profit split to GP after Preferred Return is paid to LPs
(subject to a Claw-back)
✓Claw-back is applied at the liquidation and winding up of a fund that
adjusts distortions in compensation to GP
•Portfolio Company Fees and Expenses: Paid directly by portfolio companies
to VC Firm

THE LP’s EXIT
• Limited partnerships must be dissolved within a certain time as they need
to return capital to LPs
• Monetization and realization of “paper” profits
• Sale
• IPO
• Recapitalization
• LPs may be able to sell their interests in the secondary market

WHAT IS A HEDGE FUND?
Privately-offered
Pooled Investment vehicle
Not widely available to the public
Assets managed by a Hedge Fund Manager
Many investment techniques in vast array of assets
Not VC, PE, or a real estate fund

HEDGE FUNDS LOOM HOW LARGE?
• 9,175 Hedge Funds with $7.53 trillion gross asset value reported to the SEC
by SEC-registered investment managers
• Mutual Funds $18.75 trillion (2017)

HEDGE FUND LIMITED PARTNERSHIP
STRUCTURE
• Hedge Fund is often an LP, and most often organized in Delaware
• Typically, the Hedge Fund Manager is a separate affiliate of the General
Partner of the fund
• Flow-through of items of taxable income and loss to GP and LPs, including
long-term capital gains and certain qualified dividend income
• Assets in custody of Prime Broker, which handles clearing and settlement
• Hedge fund typically retains a third party administrator to handle record-
keeping and reporting.
• Hedge funds are generally open-ended, with new partners admitted on a
monthly basis and generally permitted to withdraw on a monthly or quarterly
basis, subject to notice requirements, lock-ups, gates, and side-pockets.

HEDGE FUND MANAGER COMPENSATION
• Carried Interest plus management fee
• Variable, but can be similar to “2 and 20” arrangement of PE Fund managers
• 2% management fee
• 20% performance fee – sometimes not payable unless performance reaches
benchmarks

HEDGE FUND MANAGER COMPENSATION
(cont’d)
• High watermark – theoretically similar to the “claw-back” provision used by
many private equity funds
• For LP/Investors, fund performance minus “2 and 20” is the key

HEDGE FUND INVESTMENTS
• Hedge funds are extremely flexible vehicles and are used by investment
managers to pursue strategies across many different asset classes, from the
highly liquid to the highly illiquid.
✓ Hedge funds that trade illiquid assets often utilize “side pockets.”
• Private debt - comprises mezzanine and other forms of debt financing that
comes mainly from institutional investors such as funds and insurance
companies – but not from banks. In contrast to publicly listed corporate
bonds, private debt instruments are generally illiquid and not regularly
traded on organized markets

HEDGE FUND INVESTMENTS (cont’d)
• Small Business Investment Companies (SBICs) - supply small businesses
with financing in both the equity and debt arenas. They provide a viable
alternative to venture capital firms for many small enterprises
seeking startup capital.
• Leverage- use several forms of leverage to chase large returns.
✓Explicit -money or assets contractually borrowed for a fee.
✓Implicit -commonly referred to as off-balance-sheet financing. Implicit
leverage can take various forms, some riskier than others. This type of
leverage includes options, futures, forwards and swaps.

INVESTMENT STRATEGIES EXAMPLES
• Long Only: Purchase and sell specific securities for upside from share price
increases
• Long/Short: take long and short positions based upon FM’s view of
undervalued and overvalued assets instead of on overall direction of market
• Short-Bias: invest primarily in short positions, focused on overvalued stocks

(cont’d)
• Event-Driven Arbitrage: profit from price differences of securities involved in
specific announced or likely corporate events (mergers, acquisitions,
restructuring), facing transaction risks and possibly diversifying across sectors
and transactions
• Distressed Securities: “Vulture Funds,” somewhat like PE turnaround
investments seeking profit from special opportunities (must also lock up
investors for long period of time) -- may use “loan to own strategies or
“fulcrum” lender strategies

(cont’d)
• Managed Futures (CTAs): also known as commodity trading advisors, going
long and short on gold, currencies, grains, and government bond via
futures, forwards, and options contracts

REGULATORY OVERSIGHT
• State and federal laws against fraud and insider trading
• State and federal laws covering trading and reporting requirements of
investors in publicly traded securities
• Federal laws regulating trade in commodities (Commodity Futures Trading
Act of 1974)

REGULATORY OVERSIGHT: Dodd-Frank Wall
Street Reform and Consumer Protection Act (2010)
• In general, Hedge Fund managers with over $150 million in assets must register
with the SEC
• Most commodity pool operators and commodity trading advisors must register
with CFTC
• Financial Stability Oversight Board created to monitor systemic risk in the
marketplace

VETTING HEDGE FUND MANAGERS
• Large Hedge Funds: see SEC’s Investment Advisor Public Disclosure
website (background, disciplinary record)
• Small Hedge Funds: search state securities regulators via North American
Securities Administration Association website

MICHELE ITRI
Itri@thsh.com
Michele Itri is the Co-Chair of the Tax Law Practice at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Michele
Itri’s practice focuses on the tax and legal aspects of investment funds, financial instruments, international
transactions, corporate and real estate transactions. She works closely with clients to structure transactions to achieve
that most favorable tax results. Her practice encompasses all aspects of federal, state, local and international taxation,
with an emphasis on onshore and offshore investment funds, venture capital transactions, corporate acquisitions,
financial instruments and real estate acquisitions and dispositions. Michele assists clients in the structuring of
onshore and offshore investment funds (such as general equity funds, fund of funds, real estate funds, venture capital
funds, distressed debt funds, arbitrage funds and global macro funds) and in the structuring and organization of
private partnerships and limited liability companies (primarily investment management and real estate management
companies and start-ups). She is a graduate of Harvard Law School (J.D.1998) and Colgate University (B.A.1995).

BRIAN BOORSTEIN
brian@granitecreek.com
Brian B. Boorstein has spent his career in the private equity, investment banking and consulting fields. He has been a principal equity investor for
nearly 30 years, and has participated in leveraged buyouts, growth equity, venture capital and leveraged build-up transactions. Brian currently is a
co-founder and Managing Partner of Granite Creek Partners, an investment fund that provides equity and debt capital to public and private
companies and innovative specialty finance for underserved industries. Brian began his career in private equity with Golder, Thoma & Cressey, one
of the largest and most successful investment firms in the country. In 1988, he was one of the three founding members of Heller Equity Capital
Corporation, where he was responsible for executing a middle-market equity investment strategy and overseeing the entire portfolio. That business
grew from the start-up stage to a portfolio of 22 companies.
In 1995, Brian formed Dakota Capital Partners, L.L.C. to focus on leveraged buyouts and growth equity investments in industrial and business
service companies. Prior to the formation of Granite Creek Partners, Brian ran his principal investing activities through his investment vehicle,
Montana Street Holdings, L.L.C. Brian’s early professional experiences include consulting at Arthur Andersen and investment banking at Merrill
Lynch Capital Markets. Brian received a B.S. in biological sciences from Stanford University and an M.B.A. from the University of Chicago.

BENOIT J.P. FLAMMANG
ben@beninvest.com
Benoit J.P. Flammang is a Family Office investor and a serial entrepreneur, currently focusing on Blockchain Fintech initiatives in the diamond industry. Ben
spent the first five years of his career at IBM Belgium. He moved to the US in 1988 and restructured a money losing R&D/Manufacturing telecom company in
Raleigh, NC, made it profitable, structured and implemented a management buy-out.
He created Beninvest in 1992 in New York for alternative investments. The Family Office now opened their private Luxembourg domiciled funds to non US
investors. He raised money and did strategic business development for many companies and investment fund managers in Europe, Latin America, the Middle
East and Japan. He was a partner in the establishment of the merchant bank of the Indian Hinduja Group in NY and an advisor to the Antwerp Diamond
Bank for a private equity fund.
He created, published, and distributed in 48 countries, the first English buyers guide in the world for new prestigious wristwatches. He sold the company in
2000. He also crossed the Sahara in a VW-combi at age 17, did NY-LA on the motorbike, is a car aficionado, airplane pilot, skier and runs at least 10 miles a
week.
He received his degree in Applied Economics from ICHEC Management School in Brussels. He is fluent in English, Dutch/Flemish, French and
conversational in German. He is a frequent speaker at LP/GP, Family Office and Blockchain events. He was the 2016 Keynote speaker at the Arabian
Venture Forum at KAUST in Saudi Arabia. He spoke at Keio University in Tokyo about alternative investments.

ABOUT THE FACULTY
Jonathan Friedland is a Partner with Sugar Felsenthal Grais & Helsinger, LLP, with offices in Chicago and New York. Jonathan regularly
advises private funds in their M&A activity and private companies in their day-to-day affairs. Jonathan has extensive experience in guiding
companies and their boards through a variety of challenging situations, including in Chapter 11 and other insolvency regimes.
Jonathan graduated from the SUNY Albany, magna cum laude, in 1991 (after three years of study) and from the University of
Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct Professor of
Strategic Management at the University of Chicago’s Graduate School of Business for several years and was the 2006 Clayton Center for
Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan has been profiled,
interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside
Counsel; LAW360; BusinessWeek.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions;
Dow Jones LBO Wire; and The Daily Deal. Jonathan is also lead author and editor of several significant treatises, several chapters in
other treatises, and hundreds of articles on law and business. Jonathan holds the highest possible rating from Martindale-Hubbell (AV®
Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in multiple areas of practice, including
Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, has been named several times as a “Leading Lawyer” by Leading
Lawyers Magazine, and has received several other similar distinctions. He is also the founder of DailyDAC/Financial Poise.
56© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
JONATHAN FRIEDLAND
jfriedland@sfgh.com

The material in this presentation is for general educational
purposes only.
It has been prepared primarily for attorneys and accountants for
use in the pursuit of their continuing legal education and continuing
professional education.
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About Financial Poise™
www.financialpoise.com
DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
attorneys, accountants, business owners and executives, and investors. Its
websites, webinars, and books provide Plain English, entertaining,
explanations about legal, financial, and other subjects of interest to these
audiences.
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