Alternative Investments and Your Orange County Divorce

Divorce can be one of the most challenging stages in anyone’s life. Having the right family law attorney is not just an advantage – it’s an absolute necessity. At Minyard Morris, we understand the details of family law. Selecting a Minyard Morris family law attorney can make a critical difference in achieving the best outcome possible.

With over 600 family law attorneys who practice family law in Orange County, what are the odds that you will find the best one for you and your case?

Minyard Morris has been serving the residents of Orange County since it was formed over 47 years ago. Our family law attorneys limit their practice to Orange County family law matters and have a combined nearly 300 years of experience. If you want a firm that is large enough to address any crisis you may have during your case, retain Minyard Morris.

In 2024, Best Lawyers in America® listed 19 of 20 Minyard Morris family law attorneys, a recognition that is unparalleled for a family law firm.

What Alternative Investments Should I Consider In My Divorce?

A divorce is a division of a partnership where the community assets must be divided equally between the parties.  In fact, Family Code section 721 incorporates parts of the California Corporation Code in recognition of the fact that a marriage is a partnership. The Corporation Code refers to a partnership, but that word has the meaning of a marriage in context. When dividing a partnership, parties and lawyers need to understand the nuances and nature of the assets owned by the parties. How can the assets be analyzed, equally divided and distributed unless the nuances, risks, related liabilities, and values are understood. Lawyers have an ethical duty to understand the issues in a case or decline representation. When interviewing lawyers, an individual considering filing for divorce should inquire as to the lawyer’s knowledge and experience relative to the issues and assets involved in the case.

Hedge Funds, Private Equity Funds, Venture Funds and Individual Investments in private companies fall into an asset class known as Alternative Investments, known as “Alts” in the investment industry.  Alternatives include a very wide variety of investments that generally are not publicly traded. However, there are exceptions like: Blackstone (BX), Blackrock (BLK), KKR (KKR) and the Carlyle Group (CG) which are publicly traded. Alts are becoming more and more popular in the investment world because of their potential higher yields and the fact that they are less correlated to the public markets, meaning that they do not increase and decrease in value in lockstep with the public securities. They are also being more widely purchased by investors because the us security and exchange commission has relaxed the qualifications necessary to qualify to invest in Alts. Of course, there are negatives related to investing in Alts.

Generally, an investor is locking up the invested capital for two to 12 years when acquiring one of these investments. In theory, an investor is paid a higher rate of return in part because of the lock up and lack of liquidity of the investment. The fees charged by the fund are significantly higher than investing in the public markets and range from 1.5% to 2.5% of either committed capital or invested capital, which means that the actual fees as a percentage can be significantly higher than those percentages especially when the fund’s “carry” is considered.

Calling something a private equity fund does not disclose a lot about the fund other than it invests in private companies or private debt.  private equity funds invest in many areas including, but not limited to, the following investments:

• Private Credit and Debt: These investments include private placement debt, distressed credit, asset-based loans, mezzanine financing, etc.
• Infrastructure: Infrastructure investments are made in pipelines, bridges, data centers, toll roads, etc.
• Sports Teams: This is a newer concept that has gained significant popularity. investments are being made in soccer, baseball, hockey, and basketball.
• Real Estate: Investments are made in all types of real estate including storage facilities, multi family, commercial, industrial, farmland, etc.
• Commodities: This investment includes the purchase of oil and gas, wheat, gold, etc.
• Roll Ups: This is the process of purchasing multiple small companies in the same market and merge them together.
• Leverage Buy Outs (LBO): This is a transaction where a company is purchased using a large amount of borrowed money.
• Niche Industries: These investments are made in specific areas like the purchase of defense contractors, enterprise software, fitness, etc.
• GP Stakes: A GP stake is a minority interest in the management company and general partnership of private market sponsors (private equity firms, venture capital firms, wealth management firms).
• Secondaries: These investments are the purchase of an asset or a portfolio company, at a deep discount, by one private equity fund from another. Often it is the purchase of one of the last remaining assets in an older fund who seeks to wrap up the fund.
• Hedge Funds: This is the investment of private money in publicly traded securities using sophisticated trading techniques like short selling, derivatives and leverage to increase performance.
• Venture Funds: These funds invest in companies in their infancy that are often focused in emerging technology.
• Fund of Funds: This is an investment in a portfolio of different private equity funds.

Terms

General Partners form the fund, raise the money, and run the management company

Management Companies manage the day-to-day operations and fund the operational expenses

Limited Partners are the investors in the fund not in the firm.

Investors are endowments, pension funds, family offices, and high net worth individuals.

Mark to Market is an accounting practice that involves adjusting the value of an asset to reflect its current value

Committed Capital is the amount of money that the investors are contractually obligated to invest

Invested Capital is the amount of money actually invested in the fund by the investors

Claw Back is a payment by the general partner to the limited partners of money the general partner received from the successful sale of a portfolio company that they are required to pay to the limited partners as a result of the lack of success of other portfolio companies

Hurdle Rate is the preferred rate of return that the investors receive before the general partner receives their portion of the carry.

Carry is what a general partner receives as a performance payment after the invested capital and the hurdle rate is paid to the investors. after the investors are paid,  the excess is split between  the general partners and  the investors. The formula is often 20% to the General Partners and 80% to the limited partners.

Waterfall dictates the distribution of money realized from the sale of the portfolio companies held by the fund. It is the profit distribution mechanism. There are two different types of waterfalls.

1. The American Waterfall distributes money on a deal by deal basis. The general partner receives its percentage of profit distribution after each company is sold. the distributions paid under the American Waterfall are subject to a claw back.
2. The European Waterfalldistributes money at the end of the investment period and after it is known exactly how all each of the portfolio companies performed. General Partners prefer the American Waterfall and investors prefer the European Waterfall.

Generally, it is not practical to attempt to value alternative investments and thus, the parties often co-own the investments. The party in whose name the investment is vested holds the Alt as a constructive trustee for the other party and is subject to all fiduciary duties until the investment is fully liquidated and distributed.

Most of the funds value their assets quarterly or annually. parties could elect to use those values to assign the investment in full to one party. However, the values used by the funds are not necessarily up to date or accurate. Many of the funds value the assets internally while others use independent third parties to complete the valuations. It should also be noted that during the first several years of the investment period, most Alts will show a negative value in that investments may have been made but have not generated a profit. This is referred to as the hockey stick effect.

The co-ownership of an alternative investment can involve a number of complications.  In that many Alts are not fully funded on the purchase date, there are capital calls during the investment period. Capital is called in the first several years by the fund as investments are made. A family law judgment must address how to resolve a failure by one party to timely pay a capital call.

Conclusion

Hire the family law attorney that Orange County trusts. Call Minyard Morris at (949) 724-1111 or use our online submission form. Choosing the right Orange County family law attorney is more than just legal expertise – it’s about finding a supportive team to help you move on to the next chapter of your life.