USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
1. Market Overview 1.1 State of the Market
2. Alternative Investment Funds 2.1 Fund Formation 2.1.1 Fund Structures Limited Liability Entities Alternative funds are typically formed as either limited partnerships or limited liability companies (LLCs) under Delaware law. Both limited partner - ships and LLCs provide several advantages for alternative funds: • they provide significantly more flexibility than other entity types (eg, corporations) to modify profit sharing (as between the fund sponsor and investors) and to customise economic and governance arrangements; • as discussed in 2.1.3 Limited Liability , they provide robust protection of investors’ limited liability; • they facilitate “pass-through” taxation such that the limited partnership or LLC is not sub - ject to an entity-level tax and all items of gain and loss are passed through to the partners; and • investors both within and outside the United States are most familiar with limited partner - ships and LLCs compared to other available entity types. The choice between a limited partnership or LLC will depend on the business objectives of the fund, tax considerations, the degree of recogni - tion of LLCs by non-US jurisdictions, and other factors. Limited partnerships are the more com - mon choice for alternative funds, but in some cases LLCs may provide additional flexibility in designing the fund, including the ability to insti - tute familiar corporate governance concepts such as a board of directors.
The United States continues to be a leading centre for investment funds across all strategies and asset classes. Despite a general decrease in fundraising activity since 2021, the fundraising market in the United States remains robust, and many sponsors have had success adapting to changing market dynamics. Among other adap - tive strategies, the US market has seen: • a continued trend toward consolidation of smaller asset managers with larger asset managers, which can provide a stronger brand name to accelerate fundraising efforts; • widespread innovation in fund product design to facilitate access to retail investor capital; • expansion of liquidity solutions for late-stage funds through a variety of GP-led secondary transactions, including continuation funds; • a rise in market acceptance of NAV-based lending as an additional liquidity and value- creation tool during a time of decreased M&A and IPO activity; • a shift toward strategies that have performed well and provided for regular distributions in a higher interest rate environment (eg, private credit) and away from strategies that have struggled under recent macroeconomic con - ditions (eg, real estate); and • increased interest in specialised and niche strategies (eg, artificial intelligence and data- focused funds). Looking forward, sponsors are optimistic that deal activity will continue to ramp up in the near term, suggesting a less challenging fundraising environment may lie ahead as investor capital frees up.
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