All types of financial assets accumulated during the course of a marriage are subject to division between the parties in a divorce. For certain holdings, such as cash in a joint bank account, distributing the proceeds among spouses is a fairly simple task. Likewise, the value of stocks and bonds can be assessed using current rates. When marital property includes substantial private equity assets however, sharp disagreements might exist as to how much those holdings are actually worth.
Private equity is the term used to describe funds that are raised to purchase ownership stakes, usually in existing companies, with the eventual goal of reselling the business or taking it public. There are several reasons why dividing the value of a private equity investment can be difficult during a divorce, such as:
- Lockup periods — To give fund managers, sometimes called general partners, the ability to make long-term decisions without worrying about a sudden loss of capital, most private equity assets have long periods in which individual investments cannot be withdrawn. Some of these “lockup” periods last up to 10 years, so this lack of liquidity means that a divorcing spouse cannot cash out their stake and allocate the proceeds.
- Future valuation — Generally, the value of a private equity stake depends on successful exits from the investments made by the fund. Projecting future performance is always risky and negotiations in a divorce could get bogged down as each side engages in speculation as to what will happen in the coming years.
- Carried interest — A general partner in an investment fund is typically compensated through carried interest, which is a share (sometimes 20 percent) of profits after limited partners have recouped their investments. One major benefit for fund managers is that carried interest payments are usually taxed at capital-gains rates, so any analysis during a divorce should recognize this.
Limited partners can shift ownership of their interests through secondary transactions, so that is one way to help gauge what a private equity stake might be worth at a given time. Consulting with a private investment manager might also provide valuable insight. Your first step should be to retain an attorney who has successfully handled high net worth divorces for decades and can help you avoid costly mistakes.
Bryan L. Salamone & Associates, P.C. is the Long Island divorce leader, providing exceptional legal representation to clients across Nassau and Suffolk counties. To discuss your situation and options, please call 631-388-6009 or contact us online.