Now it's time to enter the Anglo-Saxon system that means to discover the other format used in the word to manage private equity investors. As we said in the beginning, the Anglo-Saxon framework is related to the US and UK. We’ll start from United States as they are the largest market in the world for private equity. If we approach the US market, we have to go through this market in different ways compared to Europe. In Europe we started from the two big directives regulating the financial systems. In the US case we have to see what are the ad hoc rules, the special laws, and tax system regulating private equity investment. And combining all these elements, we can say that in the United States we have evidence of five different vehicles running private equity investment: the first one, venture capital funds; the second, SBICs (small business investment companies); the third one, banks; number four, corporate venture; and the number five, business angels. As in Europe, one of the vehicles is the most relevant for the entire system; and in the US case, the most relevant is represented by venture capital funds, VCFs. Before entering this kind of vehicle investing in private equity, we have to clarify two aspects. We say venture capital fund, but the label venture capital is just simply related to the tradition that means that venture capital fund operating and kind of the six businesses of private equity. The second aspect we have to consider we use the term fund, but the word fund is used in a different way compared to Europe. Having said that, we can start to discover Venture Capital Fund. which is the most relevant vehicle or private equity and the largest market of private equity in the world. That means we are actually analyzing the key legal entity in the entire system of a private equity. A Venture capital fund is not a legal entity, it is just simply a definition. The legal entity is the limited partnership, or just simply the LP. First of all, we have to understand what is a limited partnership. A limited partnership in the US system is a legal entity characterized by the presence of two different groups of shareholders. The two groups of shareholders are named limited partners and general partners. Limited partners must have 99% of shares and the general partners must have 1% of shares. Limited partners or just simply LPs are pure investors, that means they can not manage the venture capital fund they just simply put money and they are limited liable. Limited liable means the worst case for them would be to lose 100% of money, hopefully not, but no more. General partners, or just simply, GPs must manage the vehicle, so they are not pure investors. They are the managers, and they are fully liable. All together and case by case, that means on an individual basis. To be fully liable is a very tough aspect. This presence of LPs and GPs is perfectly suited for private equity investments, because if you remember in closed-end funds, we had two different groups of people: people managing, that means the AMC, and people investing, that means investors investing in the closed-end fund, but in a venture capital fund it’s exactly the same same legal entity because LPs are investors and GPs are the managers. The difference compared to Europe is that GPs can only invest 1%, while in Europe the AMC has to invest 2% of the value of the fund. What is quite relevant in the US regulation is that if a limited partnership is going to invest only in private equity and the maturity of the vehicle is ten years, the vehicle is tax transparent. That’s great because it means that the legal entity, the limited partnership doesn't pay taxes, and taxes are paid by GPs and LPs. A last aspect to clarify the whole picture: LPs and GPs have to regulate their relationship, or we can say their life together. While in Europe, we have an internal code of activity regulating the relationship between investors and managers, in the US, since we don't have a supervisor, LPs and GPs must write a contract. And the contract is named the LPA (Limited Partnership Agreement). In the LPA, we find evidence of all the rules that are characteristic of private equity: the size of the vehicle, the class in which they want to invest, the amount of the management fee, the amount of the carried interest. Because obviously, general partners, like the people managing the business, will receive a management fee exactly like it happens in Europe for the AMC, and they will receive a carried interest exactly with the same formula we find in Europe. So the legal entities are completely different in US and Europe, but the core of the business is exactly the same. A last remark, the concept to be fully liable, this is a huge difference between the US and Europe. General partners, because they are fully liable, want to protect themselves. The solution which is common practice in the US is that general partners create an LLP. LLP is a limited liability partnership and they act as limited partners of the LLP. In this case the LLP represents the management company, and is the fully liable LLP. That means if the limited partnership wants to collect debt and to absolutely cease the practice we have in United States, the LLP must have the guarantee that collateral appropriated to receive financing from the banking system. In this case we can say that the usage of leverage makes LPs very similar to investment firms, but completely different from closed-end funds, as closed-end funds, as you know, cannot leverage.
