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Views from the Summit

by Alice Murray 15 November 2019

Session 1: The new exciting lives of tax professionals

Moderated by

Fiona Carptenter: Senior tax partner, on behalf of We are Guernsey

Clare Copeland: Principal – international tax lead, The Carlyle Group

Darren Bacon: Partner & advocate, Mourant

José Maria Palico: Principal, Permira

Anthony Stewart: Partner, Clifford Chance

The role of tax head has become a whole lot more exciting, according to panelists at the BVCA Summit.

Conflicts between the OECD’s economic substance requirements and principal purpose tests, not to mention the latest developments on digital taxation, which could have a material impact on private equity fund structures despite the ill-fitting name, have meant that structuring funds in a tax- efficient manner has become a roller-coaster ride.

Any private equity tax professional today needs to develop a tax strategy that achieves a multitude of aims, including the firm’s commercial objectives, meeting LPs’ reputational concerns, creating a high degree of consistency from portfolio companies to funds, meeting both substance and purpose requirements, while also allowing room for flexibility in order to future-proof against further changes, whether they be organisationally-driven, or regulatory-driven.

Substance and purpose

According to one panellist, substance has become a buzzword, with LPs more aware and asking more questions around both substance and purpose. “They’re more alive to the risk of public scrutiny and structures.”

But when it comes to understanding the differences between the two, one speaker pointed out that it’s easier for LPs to ask questions about substance than it is principal purpose. He added that it is legitimate for there to be confusion.

Said another panelist on the nuances between substance and purpose: “Substance is related to reputation, whereas principal purpose is pure tax and less to do with where the fund sits.”

One of the GP speakers encouraged the education of deal teams about why purpose is important. “Three or four years ago, the core job for tax professionals was making deals more efficient. Today it’s about consistency, which means there will be winners and losers when it comes to deal structures.”

Indeed, today’s tax professionals are no longer at the mercy of deal teams, looking to make exit returns more attractive through exotic structures. Rather, they are the stewards of fund structures, ensuring investors are protected.


A fund’s structure, and with it, its tax arrangements, have clearly become a key focus for LPs. One speaker noted that during his most recent fundraising expedition there were three to four times more questions on BEPS compared with the last road trip. “Reputation for LPs is a big topic,” he added.

Agreed another: “The reputational side of tax is a new development in recent years. It’s a case of LPs wanting to do due diligence and have faith that the manager is alive to all of this. They’re not necessarily looking for GPs to have all the answers but they want that awareness.”

One speaker pointed out that certain LPs could be in breach of their own strategy by backing certain managers, because of the structures used.


Another clear evolution has been around the increasing consistency of structures. Whereas in the past, managers would look to more complex structures from HoldCo to fund, often with HoldCos sitting in a variety of jurisdictions, today LPs are demanding a more coherent flow. This has led to GPs moving everything to just one jurisdiction.

“We made the decision to locate everything in Luxembourg because our AIF is there and we have a central hub there. There’s been a wholesale shift of the partnership to Luxembourg.” For this GP, that has meant a change to internal policy: “If we’re doing deals in Europe then they go through the Lux structure.”

Said another: “One of the key pillars of BEPS is transparency, it’s not only LPs that are interested in this, so are the tax authorities. So it’s important to have a consistent approach on fund structures and investments, and for that you can force through a policy within the firm.”

Flexibility and beyond

While tax professionals need to create structures that adhere to both substance and purpose requirements, as well as protect investor reputations, and are consistent from deals to funds, they also need to be future-proofed, which means also building in flexibility.

“You need to build in flexibility as you don’t know what will happen in the future. But it can’t be a case of letting the tail wag the dog.”

Said another: “The structure has to align with the commercial reality. We need to have flexibility to react and I don’t know where the debate is going on some of these matters. We do our best today but things can change. A lot of the concepts around today are new and untested.”

“We need to be forward looking. Our jobs are very interesting,” concluded another.

Session 2: Should fund terms play a more prominent role in fundraising?


Moderated by

Geoffrey Kittredge: Partner, Debevoise & Plimpton

Liz Judd: General counsel and compliance officer, STAR Capital Partnership

Tom Patrick: Partner/general counsel, Charterhouse

Adam Turtle: Partner, Rede Partners

Alexander Wolf: Principal, HarbourVest

Against a backdrop of strong distributions and continued growing demand for private equity, GPs are in an advantageous position to negotiate more favourable terms when fundraising.

Indeed, top quartile performers have been successful in securing GP-friendly terms including reductions or total elimination of hurdles, larger carry percentages, as well as longer investment periods. Furthermore, in Europe we are seeing more deal-by-deal waterfalls.

But, with around 60 terms that can be negotiated, how integral are they to the success of the fundraise? By the time terms are being agreed, would an LP back out? “In theory, no,” responded one panellist. “But I wish it did matter more. The truth is fund terms don’t evolve that much, it’s only the top 10% who can change their terms. I wish GPs were coming up with fund terms that caught investors’ attention. Private equity is a luxury product, and we’re programmed to associate luxury with high cost; that more expensive equals better. It’s a shame you can’t use more levers to create demand.”

The terms they are a’changin’

While the most notable fund term changes have been the reserve of top performers, there have also been some more common developments.

First is the GP commitment, which has been increasing and currently sits at an average of around 2%. While the commitment plays an important part in LP-GP alignment, the speakers pointed out the perhaps more prominent role it plays in terms of partners’ own pockets. “Private equity is one of the best wealth creators, and partners are very happy to keep buying their own product.”

Said another, “If you’re not backing yourself on such good terms then that’s worrying. Plus, there’s more lending available for this now, that’s a major drive from 1% to 2%.”

Said one speaker, “Our commitment has gone up, and there’s been more of a dialogue with LPs in terms of who’s paying and how they’re financing it.”

While LPs seem to be paying more attention to how the commitment is sourced, one of the panellists doesn’t think they will probe too far. “LPs are looking more and more at how the commitment is funded, but it’s not a major issue whatever the answer is.”

More at stake

Another driver for increased GP commitments is the evolution of the GP stake sale. “Like secondaries, GP stake sales have moved from a limited number of experts to LPs doing it themselves. GPs are good businesses and it is becoming more standardised,” commented one speaker. Another pointed out the potential impact of these deals on the LPA, “Could this spark some kind of limitation on the change of control clause?” In response, the panellists discussed how LPs might react to GPs selling a minority stake. “The basic principle is alignment with the manager. If there’s third party ownership in a GP, you don’t want them to have a say in the strategy; it can be the cause of value leakage.” This speaker pointed to bespoke deals, such as captive houses within banks. “Carry and fee income leaked up to the platform, which led to more turnover at the manager level.”

Rock n’ role

The rise of GP stake sales also highlights the changing role of LP advisory boards. “People previously attended advisory boards because they were nice and it often meant a little trip. They have had a shock. Now they’re dealing with real stuff like continuation funds.”

Indeed, the burgeoning secondaries market has meant LPACs play a much bigger role in the running of funds. “The rise of secondaries has changed their role, people on the board may wish to participate in a secondary, and that is also impacting fund terms.”

While safeguarding the investors and supporting the GP is the key function of the LPAC, innovations such as GP stake sales, GP-leds and secondaries are taking their toll. “On a practical basis, too many consultations, right and votes could materially slow down a fund’s ability to operate.”

One panellist concluded: “Generally, the concept of the limited partnership should hold. The industry is still figuring out the role of the LPAC and there isn’t yet a robust process.”

27 November 2019

The data journey waits for no one

Private equity’s data journey may only just be setting off, but like any expedition, packing the best equipment and selecting the right companions make reaching the final destination a lot more enjoyable

22 November 2019

AIFMD II: WTF? (What the fund, obvs)

Following a review of the AIFM Directive in 2017, where are we now, what has happened, will there be an AIFMD II?

18 November 2019

ESG Role Call

As LP demands on ESG continue to build, what types of skills and backgrounds should PE firms be looking for, and what does the role of ESG practitioner mean today?

8 November 2019

Fund structures are so last season

As new waves of regulation continue to hit private equity, managers are quietly shifting to the peaceful waters of deal-by-deal investing

8 November 2019

Time to bite back

For too long operational leaders have been yes men, it's high time they became key men

9 August 2019

Leverage in secondaries: friend or foe?

The use of leverage in secondaries is on the rise, but does this little talked about feature of the market represent an important driver for growth and innovation, or a matter for concern?