Private Equity: Jargon and Hermeneutics

THE LEGAL INTERPRETATION

Private Equity is the field where lawyers fight on interpretation of contracts.
– Our art is doing such construction of legal expressions. We follow the Literalism (literal text of the Contract): Just read the words: All answers found in the wording, no external sources as support. The Advantage is removing judge’s predisposition: you follow the contract, not what the judge wants the contract to say. Problems with Literalism are Ambiguity, Lack of precision in language itself, Words having different meanings and contexts.
– The second level is searching the Original Intent of parties: To deviate from intent is to change the nature of the Contract. Disadvantages are Lack of complete record about intentions or some sense an intention unknowable.
– The third level is the Doctrinal Approach: follow precedents in interpretation of the Contract. Advantages are Adopting principles and applying to cases with similar circumstances. Disadvantages are Size & diversity of cases/rulings.
– The fourth level is comparing the Competing Interests. Problems are the Lack of standard means of making a decision and Subjective opinion of the interpreter.

The media noise surrounding the credit bubble has helped make private equity, which was once only recognized by the most sophisticated investors, a commonplace word.
In order to be familiar with some of the basic terms, consider Hedge Funds and you will find surprising the richness of expressions.

Think to Limited partners. They are usually institutional or high net worth investors interested in receiving the income and capital gains associated with investing in the private equity fund. Limited partners do not take part in the fund’s active management. They are protected from losses beyond their original investment as well as any legal actions taken against the fund.

General partners are responsible for managing the investments within the private equity fund. The general partners can be legally liable for the actions of the fund. For their services, they earn a management fee, typically 2% of commitments paid annually, although there are exceptions when the rate is less.

Think also to the following terms:

– Preferred Return, Carried Interest and Clawback Provision
The mains clauses are the preferred return provision and the clawback provision. The preferred return, or “hurdle rate”, is basically a minimum annual return that the limited partners are entitled to before the general partners may begin receiving carried interest.

– Committed Capital, Drawdown, Vintage Year and Paid-In Capital
The so called committed capital, is usually not invested immediately. It is “drawn down” and invested over time as investments are identified.
While Drawdowns, or capital calls are issued to limited partners when the general partner has identified a new investment and a portion of the limited partner’s committed capital is required to pay for that investment.

– Cumulative Distribution
The fund’s cumulative distributions is the total amount of cash and stock that has been paid out to the limited partners.

Residual Value
It is the market value of the remaining equity that the limited partners have in the fund.

Private Equity Ratios
The Global Investment Performance Standards (GIPS) require that the following ratios be present when private equity firms present their performance to prospective investors.

Investment Multiple
It is calculated by dividing the fund’s cumulative distributions and residual value by the paid-in capital.

PIC Multiple
The PIC multiple is calculated by dividing paid-in capital by committed capital. This ratio shows a potential investor the percentage of a fund’s committed capital that has actually been drawn down.

 

CONSTRUCTION CRITERIA OF P.E. JARGON APPLY:

  • Literal interpretation
  • Original intent of parties
  • Knowledge of previous cases
  • Comparison of competing interests

 

ROOTS OD TODAY CRITERIA INTO ANCIENT HERMENEUTICS

It is not a mystery that modern legal interpretation comes from an ancient tradition: the Hermeneutics of Bible and the other ancient text of Christian Religion.
For example, we can recall St. Basil the Great (whose own treatise on the creation spoke of the Trinity as ‘one ousía, three hypostáseis). He defined main criteria for interpretation of religious texts, when not enunciating his concept of ‘substance’ (ousía) in the Trinity of God.

The heart of Trinity is the same substance, a so strict love between the Father, the Son and the Spirit, that their persons own the same heart, the same love.

This rapid insight into the theory of Trinity of St. Basil, one of the Cappadocian Fathers (together with Gregory of Nazianzus), wants to show the relationship of such theory with a new Philosophy of Language and of Hermeneutics of texts (which today we find into legal criteria of interpretation, even of Private Equity Contracts).

The same Hermeneutics (using for while a term unknown to that tradition of thought) was transformed when we take account of interpretation of the language of Bible. Although Genesis was not as attractive to Christian interpreters as Job or the Psalms, explicating the creation narrative of Gen. 1:1–26 had been a task of hermeneutics since the great hexameral commentaries of Basil of Caesarea and Ambrose. Here Basil, in analogy with his idea of Trinity and Neoplatonic concept of the One, conceives the creation story in the Bible as having three layers of meaning (three hypostáseis, three personifications of sense, three manifestations of the same Spirit of Love) beyond its literal or ‘historical’ sense:

– Allegorical,
– Tropological and
– Anagocical.

The standard view of Basil’s tradition was that history in the Bible talks about events, but the three layers are:
Allegory, about how one thing is understood from another (for example, it is only an example: this alludes to the Son, the “Word” and the metaphors of the Godspell),
Tropology, discussing morals (the Father and his laws), and
Anagogy, as conceiving the spiritual meaning (the Spirit … that leads to higher things).
It is easy see the connection with our times and of today legal Hermeneutics.