USA Trends and Developments Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E Levisohn and Steven D Lear, Holland & Knight LLP
A PEI that has more debt-like features will frequently entitle the PEI investor to the right to receive regular payments of a preferred return on the PEI (similar to the interest payments on a mezzanine loan) and the priority repayment of the PEI by a specified date (simi - lar to a mezzanine loan repayment at the maturity of the mezzanine loan). In the more debt-like PEI joint venture structure, the joint venture’s common equity distributions will typi - cally be subordinated until the PEI (including any pre - ferred return thereon) has been paid in full. The repay - ment obligation may be secured by a pledge of the ownership interests in the joint venture (or a guaranty by the owners of the joint venture or their affiliates). If the joint venture has a loan, the PEI investor and the lender may enter into a recognition agreement, which may contain provisions that acknowledge the PEI investor’s economics, governance rights and rem - edies but may require the PEI investor to make certain concessions to the lender, such as offering replace - ment guarantees. In the more equity-like PEI joint venture structure, the PEI investor will typically be entitled to receive a return on (and a return of) the PEI on a priority basis, and the joint venture’s distributions to the common equity will be subordinated until the PEI (which may also include any accrued preferred return thereon) has been paid. The preferred return on the more equity-like PEI will often accrue if the joint venture’s cash flow is insuf - ficient to pay the preferred return on a current basis (similar to a common equity investment), and the PEI will not typically be required to be redeemed until a specified date (similar to a common equity invest - ment). In addition, the more equity-like PEI will often not be secured but may allow the PEI investor to take over control of the joint venture. If the joint venture has a loan, the loan documents will sometimes con - tain provisions that acknowledge the PEI investor’s governance rights and rights to receive priority dis - tributions. A PEI in a US joint venture is not without risks. A joint venture sponsor may be required to give up more con - trol to a PEI investor than to a common equity investor or a standard lender. The PEI may not be secured, and a PEI investor may need to be prepared to take over
control of the joint venture. If the joint venture’s under - lying investment is successful, then the PEI investor may achieve a lower return than they would have oth - erwise achieved with a common equity investment in the joint venture. Both the PEI investor and the joint venture sponsor will likely incur additional costs to negotiate and document the PEI and address the PEI investor’s and joint ven - ture sponsor’s respective control, governance, repay - ment, transfer and exits rights. PEIs made through a US joint venture structure may subject both the PEI investor and the joint venture sponsor to additional litigation risks and the risk of tax recharacterisation. Co-Investment Joint Ventures and Club Joint Ventures A CJV is typically a US joint venture (in the form of a corporation, limited partnership or limited liability company) where one or two institutional investors (eg, pension funds, investment funds or family offices) invest non-controlling equity in an investment oppor - tunity alongside a sponsor. CJVs are often entered into when the sponsor of a private fund or another joint venture needs additional capital to acquire or fund an attractive investment opportunity. CJVs are also sometimes used to recapitalise investments in cases where one or more of the sponsor’s existing investors need exit liquidity. In CJV structures that involve the acquisition of a new investment, the CJV sponsor (and the CJV sponsor’s existing investors) and the CJV investor will typically each contribute equity capital to a newly formed CJV that will utilise the equity capital and debt to acquire the investment opportunity. In CJV structures that involve a recapitalisation transaction, the CJV spon - sor’s existing private fund or joint venture will contrib - ute some or all of the existing private fund’s or joint venture’s assets to a newly formed CJV, and the CJV investor will contribute equity capital to the CJV. The CJV will then distribute some or all of the CJV con - tributed equity capital to the departing investors in the existing private fund or joint venture. A club JV is a US joint venture where multiple insti - tutional investors (pension funds, investment funds, family offices, etc) invest together on a collective basis
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