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    Pledge Fund

    The financial environment evolution over the last years has incited managers to adapt their existing models, this resulted in many promoters in private equity, venture capital and real estate sectors switching to the pledge fund structure.

    Pledge Fund are investment vehicles similar to the traditional models but with an emphasis on the fee’s options to investors in exchange for their rights to opt in and out of a specific deal of the fund.

    The managers have to provide investments opportunities during a period of time, generally between 2 and 3 years, to their investors which are allowed to participate on a deal by deal basis. The investors in pledge funds have committed capital to cover fund expenses and fees.

    The investors can naturally also refuse to participate but are at least obliged to take part in a predetermine number of deals, otherwise they will lose their ability to participate in future deals.

    This type of fund enables emerging manager to get an entry ticket into the private equity world and start their own traditional private equity or venture capital fund later.

    In regards to the fees structures, the management fees are paid on invested capital, generally 2%, but there is also a wide range of alternative options such as:


    • The higher the manager leverage is, the more likely a commitment fee will be applicable and also directly linked to presenting deal opportunities to investors
    • Like traditional PE Fund, there will be offsets to management fees which are triggered when there are transactions fees to the managers
    • Usually, a 20% carried interest (starting point) is charged to investors on a deal by deal basis. This is likely to be higher should the investments perform better than expected (joint venture)
    • There is also the option to include Clawbacks clause

    Setting up a pledge fund in Luxembourg would consist in structuring a Special Limited Partnership (SLP) which will acquire participations in targeted companies and, in comparison to traditional structure, each investment or deal will be made through a Special Purpose vehicle (SPV).

    Key advantages of the SLP for Pledge Fund:

    The use of the Special Limited Partnership is particularly advantageous thanks to its flexible legal and tax environment, with key benefits for pledge fund include:

    • No minimum capital
    • Unregulated up to 500 000 000 Eur (for close ended fund assuming that there is no leverage)
    • Investors can subscribe by contribution in kind into the fund
    • Commitment and Drawn down
    • Unlimited number of investors or capital account
    • External auditor is not mandatory
    • Vehicles can be listed on the Luxembourg Stock Exchange or on any overseas stock exchange
    • Capital premium may be used
    • There is no specific debt/equity ratio
    • Carried interest and tracking shares available
    • Full tax transparency – no withholding tax up on distribution of the dividends or profit

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