Legal and Tax Advisory for Search Fund Investors

Our work covers the legal and tax structuring of investment vehicles, investments in search capital and acquisition capital, co-investments and additional equity for individual acquisitions.

Professional Search Fund investors may deploy proprietary capital through an investment company or holding company across multiple Search Funds and acquisitions. Funds of Search Funds pool capital from their own investors and invest across multiple Traditional Search Funds. Investors may also participate directly in individual acquisitions or through co-investment arrangements.

A Fund of Search Funds sits at investor level. The Traditional Search Fund is the searcher-led search and acquisition model into which the capital is invested.

The legal and tax structure needs to reflect the relevant investment activity. This includes the investment vehicle, the participation of its own investors, and the governance and decision-making processes for individual investments.

Where capital is pooled from multiple investors, classification under the German Capital Investment Code may become relevant. Relevant factors include the actual raising of capital, a defined investment strategy, the investor base and the activities of the investment vehicle. Statutory exclusions and the specific legal structure also need to be taken into account.

The investment vehicle provides the legal and tax framework for investments across multiple Search Funds and acquisitions.

CLIQ advises on the corporate and tax structuring of this investment level. This includes the ownership structure, governance, investor rights and the legal and tax treatment of investments into individual Search Funds.

The structure also needs to accommodate investments in individual acquisitions. Search capital and acquisition capital relate to different investment decisions and may require different participation and financing arrangements.

Search capital finances the search phase, including the costs of the search and the searcher's activities.

A search capital investment can confer different contractual and corporate rights. These may include information and consent rights, rights to participate in the subsequent acquisition capital financing and economic rights arising from the funding of the search. Step-up or conversion mechanisms may also be agreed for a successful acquisition.

The specific terms determine the investor's legal position during the search phase and the rights available in relation to a subsequent acquisition.

CLIQ reviews and structures search capital investments from the investor's perspective and aligns the corporate and tax arrangements with the relevant investment structure.

Acquisition capital refers to capital provided by Search Fund investors for the equity component of a specific acquisition.

Depending on the investment structure, the legal implementation may involve different participation and financing instruments. The investment amount, investment instrument, governance and economic rights are determined by the specific transaction.

Bank debt, seller financing and other debt remain separate components of the acquisition financing. They affect the required equity amount and therefore the structure of the acquisition capital investment.

CLIQ advises on the legal and tax structuring of the acquisition capital investment and its implementation at investor and acquisition-structure level.

An equity gap can arise within the equity financing of a specific acquisition where the investors originally expected to provide the equity do not cover the full required amount.

Equity gap financing refers to the provision of the additional equity required to complete that financing. It describes the function of the additional equity funding and is not a separate standardised financing instrument.

The gap can be filled through additional commitments from existing investors or capital from new investors. A separate participation vehicle may be used to implement the investment. The source of funding remains the capital contributed by the relevant investors.

Investment terms, the form of participation, governance and information rights of new investors need to fit within the existing ownership and acquisition structure.

Equity gap financing can form part of the acquisition capital financing for the specific transaction. CLIQ advises on the legal and tax structuring of these additional equity investments.

A co-investment involves multiple investors participating together in a specific investment opportunity.

The investment may be made directly, through existing investment companies or through a separate co-investment vehicle. The appropriate implementation depends on the investor group, capital requirement and existing ownership structure.

A co-investment may be used to fill an equity gap or to finance an acquisition jointly for other investment reasons.

The corporate analysis covers investor rights, governance and integration into the existing acquisition structure. The tax analysis needs to align the relevant investment vehicles and the participation in the acquisition structure.

A professional Search Fund investor may provide search capital and later participate in the specific acquisition.

The documentation needs to reflect the relevant investment stages. Information rights, consent rights and economic rights need to be clearly defined for each investment.

For a Fund of Search Funds, governance at the level of its own investment vehicle also matters. Investment decisions relating to individual Search Funds need to be consistent with the rights of its own investors and its internal decision-making arrangements.

The tax structure of a professional Search Fund investor may involve several levels of participation.

These may include the investment vehicle of the professional investor or Fund of Search Funds, the search vehicle of the relevant Traditional Search Fund, the acquisition vehicle and the operating target company. Depending on the structure, these functions may sit in separate entities or within an existing structure.

Relevant tax matters include the investments between these levels, subsequent distributions, further financing and disposals.

Co-investments and additional participation vehicles can create further investment relationships that need to be integrated into the existing tax structure.

The tax treatment depends on the specific ownership structure, the legal forms involved and the applicable tax rules.

Professional Search Fund investors deploy capital across multiple investments.

New search capital investments, acquisition capital investments, co-investments and additional equity financings create recurring legal and tax structuring requirements. Corporate actions, distributions, follow-on financings and subsequent exits add further matters over the investment lifecycle.

CLIQ advises Search Fund investors on the corporate and tax structuring of their investment vehicles and on individual investments in Search Funds and their acquisitions. For specific business acquisitions, this investor-side work connects with our M&A legal advice and transaction tax advisory.