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Formation

Forms of vehicle

What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?

Among the different types of funds that may be operated as private equity fund vehicles in Korea (including venture funds and small and medium-sized business investment funds, etc), the Financial Services and Capital Markets Act of Korea (FSCMA) sets out the basic requirements for establishing a private fund for management participation (PEF), which is the form used generally for most private equity funds in Korea, and is the type of private equity fund that is the subject of this chapter. PEFs established under the FSCMA use the habja­hoesa legal form. A habjahoesa has following characteristics:

  • a habjahoesa is a legal entity regulated under both the FSCMA and the Commercial Code of Korea. The FSCMA’s provisions may, however, expressly override any otherwise conflicting general provisions of the Commercial Code with regard to some aspects of PEF formation and business or investment activities; and
  • a habjahoesa has separate legal personality under the laws of Korea, but otherwise combines some limited partnership-type characteristics with corporate features.

The manager of a PEF is a general member (analogous to a general partner) of the PEF, and has unlimited liability in relation to the PEF’s obligations (in this chapter, the general member will generally be referred to as the ‘manager’). Investors (other than the general member) are limited members (analogous to limited partners) of the PEF and their liability exposure in relation to the PEF’s obligations is limited to the amount of capital they have committed to the PEF. Although the manager of the PEF in principle has unlimited liability for the PEF’s obligations, the FSCMA generally prohibits borrowing and debt-based financing by PEFs (see question 8). Accordingly, the liability of a PEF manager is somewhat limited in practice.

Forming a private equity fund vehicle

What is the process for forming a private equity fund vehicle in your jurisdiction?

To establish a PEF, the members must agree upon and execute the articles of incorporation of the PEF and the manager must register the PEF at the Commercial Registry.

Under the FSCMA, the articles of incorporation of a PEF must include the following basic contents:

  • business purpose;
  • name;
  • location of office;
  • amount of each member’s capital commitment, method of contribution of each member (cash or in kind) and valuation method for in-kind contributions;
  • duration (up to 15 years);
  • any dissolution events other than the standard statutory events specified in the FSCMA and Commercial Code;
  • name and identification number of each member;
  • classification of each member (ie, general member or limited member); and
  • execution date of the articles of incorporation.

Of course, the articles of incorporation of a PEF may include various other clauses, if desired by the members. The following contents of the articles of incorporation must be registered at the Commercial Registry:

  • business purpose;
  • name;
  • location of office;
  • duration;
  • any dissolution events other than the standard statutory events specified in the FSCMA and Commercial Code;
  • details of the manager (name, identification number, location of office); and
  • date of establishment (the date on which the manager filed the PEF registration application to the registrar).

If there is any change in the registered information, the manager must cause the change to be entered into the Commercial Registry.

Upon establishment, the manager must file a PEF establishment report to the Financial Supervisory Service (FSS). The amount of information required in the PEF establishment report is fairly extensive and includes (but is not limited to) the following:

  • name;
  • business purpose;
  • date of establishment;
  • location of office;
  • duration;
  • any dissolution events other than the standard statutory events specified in the FSCMA and Commercial Code;
  • number of all limited members and the number of limited members in each investor category (ie, professional investors and ordinary investors) (see question 26);
  • details of manager (name, identification number, location of office, summary financial statement, commitment amount to PEF, major shareholders, list of directors or employees that will manage the PEF);
  • total commitment amounts and the commitment amounts of each investor category;
  • total contribution amount and the contribution amounts of each investor category;
  • investment policy (if specified in articles of incorporation);
  • investment target and investment strategy (if specified in articles of incorporation);
  • details of investment purpose company (see question 8); and
  • fees payable to the manager (including carried interest, if any).

If there is any change in the information stated in the PEF establishment report, the manager must report such change to the FSS.

Requirements

Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?

A PEF must hire a local custodian that is licensed as a trust company under the FSCMA and a PEF must have a registered office in Korea. Typically, the office of the manager is also used as the registered office of the PEF. The manager of the PEF is required to maintain the books and records of the PEF.

The manager may hire a local administrator that is licensed as an administrator under the FSCMA, but this is not a requirement.

Access to information

What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?

The general public can access the Commercial Registry. As a result, anyone can access the following information on any PEF that is duly registered in the Commercial Registry (see question 2):

  • business purpose;
  • name;
  • location of office;
  • duration;
  • any dissolution events specified in the articles of incorporation of the PEF in addition to those provided under the FSCMA and the Commercial Code;
  • details of the manager; and
  • date of establishment.

Other information, such as the identities of limited members and the amounts of their individual capital commitments, is not publicly available.

Limited liability for third-party investors

In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?

Generally, investment in a Korean PEF is restricted to the members (ie, general members and limited members). A limited member’s liability exposure is limited to the extent of the limited member’s capital commitment to the PEF. Unlimited liability may be imposed on a limited member, however, in cases where: the limited member has expressly or implicitly misrepresented itself as being a general member; and the relevant PEF creditor has entered into a transaction with the PEF owing to a misunderstanding caused by the limited member’s misrepresentation.

Fund manager’s fiduciary duties

What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?

Under the Commercial Code, the manager of a habjahoesa owes a general ‘duty of care as a prudent manager’ and ‘duty of loyalty’. In Korean law, a person’s ‘duty of care as a prudent manager’ is essentially a ‘reasonable person’ standard in a management context, meaning the duty of care that is ordinarily expected from similarly situated managers exercising reasonable prudence in carrying out management responsibilities.

The object of such duties is not expressly provided in the Commercial Code. Some commentators argue that the manager owes such duties to both the habjahoesa and its members, while other commentators argue that the manager owes such duty to the habjahoesa entity but not to the other members. In practice, many PEFs’ articles of incorporation include an express obligation for the manager to indemnify both the company and other members against damage caused by the manager.

A review of court cases and the relevant statutory provisions does not produce a definitive statement as to whether fiduciary duties can be modified by a habjahoesa’s articles of incorporation. Moreover, the commentators do not discuss this issue. However, a reasonable analysis of certain provisions of the Commercial Code would appear to provide a sound basis for recognition of such modifications. More specifically, the Commercial Code expressly recognises that a habjahoesa’s articles of incorporation can override the provisions of the Commercial Code with regard to rights and obligations among the members of the habjahoesa. Accordingly, it is reasonable to conclude that if the articles of incorporation expressly modify the manager’s fiduciary duties, such modification is likely to be upheld in the event of a dispute.

Such modification is not possible, however, in cases where the FSCMA explicitly sets out concrete provisions concerning the duty of loyalty of the manager of the PEF. The FSCMA prohibits managers from taking certain actions, including (but not limited to):

  • engaging in transactions between the PEF and the manager itself, without consent of all other members;
  • providing a list of PEF assets to third parties, without consent of all other members; and
  • using information concerning PEF assets for the purposes of investing the manager’s own assets.

Gross negligence

Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?

In Korea, a gross negligence standard of liability is generally recognised.

A review of court cases and the relevant statutory provisions does not produce definitive views as to whether the gross negligence standard can be applied with regard to the management of a PEF. Moreover, the commentators do not discuss this issue. However, the Commercial Code expressly recognises that a habjahoesa’s articles of incorporation can override the provisions of the Commercial Code with regard to rights and obligations among the members of the habjahoesa. This would appear to provide a sound basis for recognition of provisions in a habjahoesa’s articles of incorporation that purport to limit the scope of the manager’s liability by applying a gross negligence standard instead of an ordinary negligence standard.

Other special issues or requirements

Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?

The FSCMA provides various restrictions on investment activities or transactions of PEFs:

(i) A PEF is generally prohibited from debt-based financing (borrowing funds) and from providing guarantees for any third-party debt. As an exception to this general prohibition, however, a PEF may, in limited circumstances, borrow money or guarantee the debt of an investment purpose company (IPC), as defined in the FSCMA. These exceptions apply in cases where:

(a) a member has withdrawn and the PEF has insufficient cash for redemption;

(b) the PEF experiences a temporary shortfall of operating capital; or

(c) the PEF temporarily lacks the cash needed for investment into the target company.

Even in such exceptional situations, the total amount of debt or guarantee obligations that may be incurred is limited to a level that is not more than 10 per cent of total net capital of the PEF. In contrast, the IPC can borrow money up to an amount equivalent to 300 per cent of its net capital. The purpose of these IPC-related provisions is to protect the manager from unlimited liability that would otherwise be incurred owing to its status as general member of the PEF. Consequently, establishment of an IPC is a necessary step for PEFs seeking to carry out leveraged buyouts.

(ii) The PEF can invest into one or more IPCs, provided that the PEF holds at least 50 per cent of the equity interests in any such IPC. With regard to the balance of equity interests of an IPC that are not held by the PEF, business entities that are mainly engaged in financial business activities, such as banks, brokers, dealers or other licensed funds, are as a general rule prohibited from being equity holders.

(iii) The PEF or IPC must invest into a target company only by way of:

(a) acquiring 10 per cent or more of the target company’s equity;

(b) acquiring equity of less than 10 per cent and appointing one or more directors of the target company; or

(c) acquiring mezzanine securities with the ultimate purpose of making an investment in the form of (a) or (b) above.

(iv) The PEF must invest at least 50 per cent of contributed capital directly, or indirectly through an IPC, within two years following the PEF’s receipt of the contributed capital, in a target company or target companies in the manner described in (a) or (b) of (iii) above.

(v) When a PEF has invested into a target company in the manner described in (iii) above, it must maintain such investment for at least six months.

(vi) Although not expressly stated in the FSCMA, under the Financial Services Commission (FSC)’s interpretation of relevant FSCMA provisions, PEFs are prohibited from investing in Korean paper companies or shell companies (ie, any company that does not actually engage in any substantive business as a going concern). The FSC’s interpretation does not prohibit Korean PEFs from investing in foreign paper companies or shell companies.

(vii) The FSCMA also regulates transfers of PEF interests. The interests of the manager may be transferred to a third party only pursuant to receiving the unanimous consent of the PEF members. The interests of a limited member may be transferred to a third party pursuant to receiving the manager’s consent.

(viii) Conversion or redomiciling of foreign PEFs or collective investment vehicles to Korean PEFs or collective investment vehicles is not allowed.

Fund sponsor bankruptcy or change of control

With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?

Pursuant to the Commercial Code, the bankruptcy of a member is an automatic withdrawal event for such member. Additionally, the articles of incorporation of some PEFs include insolvency, change of control, restructuring or similar events with regard to a member as events that trigger automatic withdrawal for such member.

A limited member’s withdrawal does not trigger the dissolution of the PEF. On the other hand, the manager’s withdrawal does trigger the dissolution of the PEF, except in cases where a replacement manager joins the PEF.

Regulation, licensing and registration

Principal regulatory bodies

What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?

Under the FSCMA, the FSC has ultimate regulatory authority over PEFs and their managers. For practical administrative purposes, however, nearly all of the day-to-day supervisory and regulatory operations are delegated to the FSS. The FSS has general inspection rights concerning the business activities and assets of PEFs.

The manager of a PEF must file various reports to the FSS:

  • in principle, the manager must file an establishment report to the FSS within two weeks from the establishment of the PEF. In some extraordinary cases, such as where the capital commitments of affiliates of the manager constitute over 30 per cent of total capital commitments, the establishment report must be submitted immediately after establishment;
  • further, if any subsequent change occurs with regard to the information contained in the establishment report, the manager must report such change to the FSS;
  • the manager must file semi-annual reports to the FSS regarding the PEF’s financial status. (Alternatively, such reports can be filed on an annual basis if the PEF’s assets have a total value of less than 10 billion won); and
  • the manager must file an investment report within two weeks after it has invested in a target corporation.

Governmental requirements

What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?

Before the 2015 amendment of the FSCMA, PEFs were required to be registered with the FSS. Subsequent to the amendment, no approval, licensing or registration requirements apply to Korean PEFs. The manager only needs to file an establishment report with the FSS.

Please note, however, that if the manager is not only licensed as a manager of a PEF, but is also licensed to operate as a financial institution, such as a broker, dealer, investment adviser, etc, the manager must obtain approval from the FSC regarding its planned capital commitment to the PEF, before the PEF is established.

Registration of investment adviser

Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?

Only Korean corporations that have been registered with the FSS can take on the role of manager of a Korean PEF. A natural person cannot be a manager of a PEF. For registration purposes, a corporation must satisfy a number of requirements, including (but not limited to) the following:

  • the net capital of such corporation must be not less than 100 million won;
  • the directors and regulatory auditor of such corporation must be qualified for such positions in accordance with the requirements set out in the Act on Corporate Governance of Financial Institutions;
  • two or more employees or directors of the corporation must be dedicated to the management and administration of the PEF; and
  • the corporation must have a satisfactory system of internal compliance rules in place.

Fund manager requirements

Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?

See the requirements listed in question 12. There are no other explicit requirements that apply to personnel of the manager who carries out the management of the PEF.

Political contributions

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.

The Political Funds Act prohibits political contribution by an entity. Only a natural person may make political contributions. A manager of a PEF must be a corporation (see question 12) and it may not donate political funds. Further, the Political Funds Act prohibits political contributions by non-Korean natural persons.

Otherwise there are no rules or policies of public pension plans or other governmental entities that restrict, or require disclosure of, political contributions by a general member’s employees.

Use of intermediaries and lobbyist registration

Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.

The manager may hire other licensed dealers or brokers to carry out offers and sales of limited member interests and the identity of any such dealer or broker must be included in the establishment report (or any subsequent change report if the dealer or broker is hired after the PEF’s establishment).

Otherwise there are no rules or policies of public pension plans or other governmental entities that restrict, or require disclosure concerning the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities.

Bank participation

Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.

Some Korean banks that have one or more branches in the United States are subject to the US Bank Holding Company Act of 1956. Therefore such banks and their affiliates’ investments into PEFs that invest in US companies may be restricted.

Under the Banking Act, a bank must acquire prior approval from the FSC if its capital commitment to a PEF constitutes more than 30 per cent of the total capital commitments of such PEF. However, this restriction is not necessarily a consequence of the recent global financial crisis.

Taxation

Tax obligations

Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.

A PEF is considered a corporation for Korean tax purposes and is therefore subject to a corporate income tax in Korea. However, under article 100-15 of the Restriction of Special Taxation Act, a PEF may elect to be treated as a partnership for tax purposes. A PEF electing to be treated as a partnership does not have corporate income tax imposed at the entity level. Rather, the PEF’s income is taxed at the level of the members at the time of the PEF’s allocation. However, please note that even when a PEF has elected to be treated as a partnership, any income allocated to its members nevertheless should be treated as dividend income for the members.

A partnership is required to report its income and distribution return to the head of the competent tax office by the 15th day of the third month following the closing of the partnership’s taxable year. A partnership must also apply withholding tax on income allocated to its non-Korean residents and foreign corporations and pay the amount withheld to the competent tax office by the 10th day following the day on which the partnership’s report and distribution return is due (see above for the specific due date). The specific withholding tax rates are as follows:

  • 22 per cent (including surtax) for limited members (however, subject to a reduced rate of withholding tax for limited members that are residents of a country that has an effective income tax treaty with the Republic of Korea); or
  • graduated tax rate (6.6 to 44 per cent for non-resident individuals and 11 to 24.2 per cent for foreign corporations, as of 2017).

Local taxation of non-resident investors

Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?

Non-resident investors in a PEF would not be subject to a return-filing requirement or taxation thereof (other than the withholding tax mentioned above), if it does not have a permanent establishment in Korea.

Local tax authority ruling

Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?

There is no notable tax treatment other than the ones mentioned in previous paragraphs.

Organisational taxes

Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?

There is no organisational tax imposed on a PEF upon its organisation.

Special tax considerations

Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.

VAT exemption is afforded to services provided by the general member or manager to PEF, such as services relating to the operation, management, or holding of PEF property, sale or redemption of the PEF’s equity, etc.

Tax treaties

Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.

The Republic of Korea has an income tax treaty in effect with more than 90 countries, and investment vehicles are usually not considered as resident for treaty purposes. Please also note that the Overseas Investment Vehicle (OIV) regime was introduced into the Korean tax law as a procedural mechanism to claim tax treaty benefits in 2012 for reduced withholding tax rates, and 2014 for capital gains tax exemption. An OIV is broadly defined as an overseas vehicle that raises funds through an investment offering, manages investment assets, derives value from the acquisition and disposition of such assets, and distributes such derived value to its investors. Under the OIV regime, the respective OIVs may be looked through for withholding purposes in applying the relevant reduced withholding rate under the relevant tax treaty.

Other significant tax issues

Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?

Because of the dividend income treatment for allocations made by PEFs (regardless of the character of income when received by the PEF) under Korean tax rules, a discrepancy arises in terms of income characterisation when a transaction relates to a direct investment from or by a foreign investor.

To partially resolve this problem, the Korean legislature has introduced a special rule applicable to certain foreign governmental agencies or pension funds investing in domestic PEFs as limited members, if such agencies or funds meet certain requirements. Under this regime, assuming the requirements are met, the character of income allocated to certain foreign governmental agencies or foreign pension funds is maintained for Korean withholding purposes despite the PEF’s allocation (ie, the income character is not changed as dividends). However, please note that such special treatment is only afforded to limited types of entities.

Selling restrictions and investors generally

Legal and regulatory restrictions

Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.

The FSCMA makes distinctions based on two investor categories: professional investors (as defined in the FSCMA); and ordinary investors. Essentially any investor that is not a professional investor falls into the ordinary investor category.

There is no limitation on the offers of PEF limited member interests to professional investors. But offers to more than 49 ordinary investors are restricted. In addition to this, a Korean PEF is not allowed to have more than 49 ordinary (ie, non-professional) investors as limited members.

Usually the offers and sales of PEF limited member interests are conducted by the manager. However, the manager may hire other licensed dealers or brokers to conduct offers and sales of limited member interests.

Types of investor

Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).

There is no limitation on the capital commitments of professional investors. Ordinary investors, on the other hand, must commit more than 300 million won. This restriction is intended to protect ordinary investors who are not wealthy or sophisticated investors from PEF investment risks.

Identity of investors

Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?

Generally, if there is any change to the information submitted in the PEF establishment report, the manager must file a change report to the FSS (see question 10). The identity of each investor and the capital commitment of each investor are not required to be included in the establishment report. On the other hand, the following must be included in the report:

  • the total number of investors;
  • the number of members that are in each investor category (ie, professional investor or ordinary investor);
  • the aggregate capital commitment amount of all investors in each investor category; and
  • the aggregate contribution amount of all investors in each investor category.

Additionally, with regard to investors falling into the professional investor category, the types of entities must be indicated. In other words, the report should indicate the number of pension funds, licensed commercial funds, and other sub-categories of professional investors that are participating as investors in the PEF. For the ordinary investor category, an indication of whether the relevant investors are natural persons must be included. In both cases, the specific identities of the investors do not need to be included in the report. With regard to the manager, the ownership/control structure and management structure of the manager must be disclosed in the establishment report.

Accordingly, a transfer of fund interests will usually require a filing by the manager.

Licences and registrations

Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?

As described in question 24, the registered general member of the PEF itself may offer and sell interests of the PEF, and it may engage a licensed dealer or broker. But it may not engage another person or entity that is not licensed as a dealer or broker.

Money laundering

Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.

Under the Act on Report and Utilisation of Certain Financial Transaction Information (the RUCFTI Act), financial institutions (as defined in the RUCFTI Act) are required to perform due diligence corresponding to know-your-customer and anti-money laundering rules of other major jurisdictions. However, a PEF’s manager is not included per se in the RUCFTI definition of financial institutions and is not subject to the due diligence duties.

Exchange listing

Listing

Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?

A Korean PEF is a privately placed fund and the interests of a PEF cannot be transferred freely (see question 8). Consequently, a Korean PEF cannot be publicly listed on a securities exchange in Korea.

Restriction on transfers of interest

To what extent can a listed fund restrict transfers of its interests?

Listing is not possible. See question 29.

Participation in private equity transactions

Legal and regulatory restrictions

Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?

See question 8.

Compensation and profit-sharing

Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.

There are no legal or regulatory issues that would affect the structuring of the manager’s compensation and profit-sharing arrangements with respect to the PEF. But such arrangements must be included in the PEF articles of incorporation.