PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Graham Sutherland, Responsible Partner, and Sylvia Hartwell, Specialist Partner (Tax), Calderwood & Harkness LLP
TO: Catherine E. Loomis, General Counsel & Chief Compliance Officer, Harrowgate Capital Partners LLC; Jonathan P. Birch, Partner, Head of Operations & Chief Financial Officer, Harrowgate Capital Partners LLC
DATE: April 14, 2025
RE: Recommended Fund Structure — Harrowgate Private Equity Fund V LP and Related Vehicles
MATTER NO.: 1003-00002
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I. EXECUTIVE SUMMARY
This memorandum sets forth Calderwood & Harkness LLP's ("C&H" or "we") recommended structural framework for Harrowgate Private Equity Fund V LP ("HPE Fund V" or "Fund V"), the fifth flagship buyout fund sponsored by Harrowgate Capital Partners LLC ("HCP" or the "Sponsor"). Fund V targets a hard cap of $2,000,000,000 (two billion dollars) in aggregate commitments across all fund vehicles, which would represent HCP's largest fundraise to date and a meaningful step-up from the $1.45 billion raised in HPE Fund IV (2021 vintage).
After extensive analysis of the anticipated investor base, the applicable tax, securities, and regulatory regimes, and the operational infrastructure of HCP's fund platform, we recommend a structure comprising five entities:
1. The Main Fund — Harrowgate Private Equity Fund V LP, a Delaware limited partnership, serving as the primary investment vehicle for the majority of limited partners.
2. The Parallel Fund — Harrowgate Fund V Parallel LP, a Delaware limited partnership, serving as a parallel investment vehicle for certain tax-exempt and non-U.S. limited partners requiring structural separation from the Main Fund.
3. The Offshore Feeder — Harrowgate Fund V Offshore SLP, a Cayman Islands exempted limited partnership, serving as the offshore vehicle for non-U.S. investors who prefer a Cayman Islands-domiciled investment vehicle.
4. The blocker Corporation — HGF V blocker Corp., a Delaware C corporation, serving as a blocker entity to mitigate unrelated business taxable income ("UBTI") for certain U.S. tax-exempt investors.
5. The General Partner — Harrowgate Fund V GP LLC, a Delaware limited liability company, serving as the general partner of all three fund vehicles.
This structure is designed to accommodate the diverse investor base anticipated for Fund V. Based on preliminary discussions with HCP's investor relations team and the exclusive placement agent, Osprey Capital Markets LLC, the anticipated investor base includes:
• U.S. taxable investors, including Velthorn Family Office LLC (anticipated commitment of $50,000,000) and Stonewall Partners Fund of Funds III LP (anticipated commitment of $75,000,000);
• U.S. tax-exempt investors, including The Kingsbridge Endowment Fund, a 501(c)(3) endowment (anticipated commitment of $100,000,000), and Northmoor State Pension System, a governmental pension plan (anticipated commitment of $200,000,000);
• Non-U.S. investors, including Tidewater Sovereign Investment Authority ("TSIA"), a sovereign wealth fund (anticipated commitment of $175,000,000), and Edgecombe Insurance Group Ltd., a Bermuda-domiciled insurance holding company (anticipated commitment of $150,000,000).
The recommended structure balances tax efficiency, regulatory compliance, operational simplicity, and investor-driven requirements. It is consistent in its fundamental architecture with the approach used in HPE Funds III and IV (2018 and 2021 vintages, respectively), while incorporating certain refinements to address the evolving regulatory and tax landscape, including developments under IRC § 1061 and SEC private fund adviser rules.
The minimum First Close target is $750,000,000. As set forth in the investor allocation table in Section IX below, the total identified investor pipeline across six anchor and prospective limited partners equals $750,000,000, which, if fully committed, would satisfy the minimum First Close threshold.
Fund V's investment strategy will focus on North American mid-market and upper-mid-market buyouts in HCP's core sectors: industrials, business services, healthcare services, and technology-enabled services. The Fund will target equity checks of $75,000,000 to $250,000,000 per transaction, consistent with the investment parameters of HPE Fund IV but reflecting the larger fund size.
The balance of this memorandum describes each entity in the recommended structure, the relationships among them, the key economic and governance terms, and the principal tax, regulatory, and operational considerations. This memorandum is intended to serve as the foundational structuring document for the fund formation process. Separate memoranda addressing (i) detailed tax structuring, (ii) ERISA compliance, and (iii) IRC § 1061 carried interest issues will follow on the timeline set forth in Section XIV.
II. OVERVIEW OF RECOMMENDED FUND STRUCTURE
A. Structural Diagram (Narrative Description)
The recommended five-entity structure is organized as follows, with the relationships among the entities described narratively (a graphical structural diagram will be included in the private placement memorandum):
At the apex of the structure sits Harrowgate Capital Partners LLC, the Sponsor, which is the SEC-registered investment adviser (File No. 801-79223; CRD No. 298417) that manages all Harrowgate private equity funds. HCP is the sole member of Harrowgate Fund V GP LLC, the General Partner entity. The GP entity is a Delaware limited liability company organized solely for the purpose of serving as the general partner of the Fund V vehicles. Because HCP is the sole member of the GP entity, management authority over the Fund V vehicles flows from HCP through the GP entity.
The General Partner entity, Harrowgate Fund V GP LLC, serves as the general partner of each of the three fund vehicles:
• Harrowgate Private Equity Fund V LP (the "Main Fund"), a Delaware limited partnership serving as the primary investment vehicle. The Main Fund will hold the largest share of aggregate commitments and will serve as the reference vehicle for economic terms, investment restrictions, and governance provisions.
• Harrowgate Fund V Parallel LP (the "Parallel Fund"), a Delaware limited partnership that invests alongside the Main Fund in all portfolio investments on a pari passu, pro rata basis. The Parallel Fund is principally designed for certain tax-exempt and non-U.S. limited partners requiring structural separation from the Main Fund for tax, regulatory, or operational reasons.
• Harrowgate Fund V Offshore SLP (the "Offshore Feeder"), a Cayman Islands exempted limited partnership that invests directly alongside the Main Fund and Parallel Fund in portfolio investments on a pari passu, pro rata basis. The Offshore Feeder is designed primarily for non-U.S. investors, including sovereign wealth funds, who prefer a Cayman Islands-domiciled vehicle.
In addition, HGF V blocker Corp. (the "Blocker"), a Delaware C corporation, interposes between certain U.S. tax-exempt limited partners and the Main Fund or Parallel Fund. The blocker's equity is held by the tax-exempt investor(s), and the blocker holds an LP interest in the Main Fund or Parallel Fund. The blocker serves to shield tax-exempt investors from UBTI that would otherwise arise from the leveraged buyout activities of the Fund.
All three fund vehicles — the Main Fund, the Parallel Fund, and the Offshore Feeder — invest on a pari passu, pro rata basis in the same portfolio investments. The pro rata allocation is determined by each vehicle's share of aggregate commitments across all vehicles. This ensures that all investors, regardless of which vehicle they invest through, participate in the same investment program and receive the same economic returns (subject to vehicle-level tax consequences and the corporate-level tax cost applicable to the blocker).
The GP entity serves as general partner of all three fund vehicles and has full management authority over investment decisions, capital calls, distributions, and fund operations, subject to the governance provisions set forth in the respective limited partnership agreements.
B. Summary Table of Entities
The following table summarizes the five entities comprising the Fund V structure:
Each of these entities is described in detail in Sections III through VII below.
III. THE MAIN FUND — HARROWGATE PRIVATE EQUITY FUND V LP
A. Entity Type and Jurisdiction
The Main Fund will be organized as a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. ("DRULPA"). Delaware is the standard jurisdiction for U.S. private equity fund formation and offers a well-developed body of partnership law, significant judicial expertise in the Delaware Court of Chancery, and broad freedom of contract in partnership agreement drafting.
A Certificate of Limited Partnership will be filed with the Delaware Secretary of State, Division of Corporations, upon authorization from HCP. The filing number will be assigned upon acceptance of the Certificate. The Certificate will identify Harrowgate Fund V GP LLC as the sole general partner.
The registered agent for the Main Fund in Delaware will be Calderwood & Harkness LLP, 400 South Ashbury Asset Advisors, Suite 3000, Wilmington, Delaware 19801. C&H maintains its registered agent services through its Wilmington office and will provide ongoing registered agent services for all Delaware entities in the Fund V structure.
B. Role in the Structure
The Main Fund is the primary investment vehicle in the Fund V structure and is expected to hold the largest share of aggregate commitments. The Main Fund will make investments directly in portfolio companies (or through intermediate holding entities as appropriate for tax, regulatory, or operational purposes) and will serve as the reference vehicle for economic terms, investment restrictions, and governance provisions. The limited partnership agreements for the Parallel Fund and the Offshore Feeder will cross-reference the Main Fund's limited partnership agreement (the "Main Fund LPA") for substantive provisions to ensure consistency across vehicles.
Based on preliminary investor pipeline discussions, the following investors are expected to invest directly in the Main Fund:
• Velthorn Family Office LLC — anticipated commitment of $50,000,000. Velthorn is a U.S. taxable family office that has invested in each of HCP's predecessor funds. As a taxable investor, Velthorn does not require UBTI mitigation or offshore structuring and will invest directly in the Main Fund.
• Stonewall Partners Fund of Funds III LP — anticipated commitment of $75,000,000. Stonewall is a U.S.-based fund-of-funds vehicle and a new relationship for HCP. As a U.S. taxable entity (treated as a partnership for U.S. tax purposes), Stonewall will invest directly in the Main Fund.
• Northmoor State Pension System — anticipated commitment of $200,000,000. Northmoor is a governmental pension plan established under the laws of the State of Pennsylvania. As a governmental plan, Northmoor is generally exempt from ERISA and from UBIT under IRC § 115. Accordingly, Northmoor does not require the blocker structure and may invest directly in the Main Fund. Northmoor has been a limited partner in HPE Funds III and IV and has expressed a strong interest in an increased commitment for Fund V.
• Edgecombe Insurance Group Ltd. — anticipated commitment of $150,000,000. Edgecombe is a Bermuda-domiciled insurance holding company. Subject to confirmation regarding Bermuda Monetary Authority regulatory reporting requirements (discussed further below), Edgecombe is expected to invest directly in the Main Fund, with insurance-specific reporting accommodations to be provided through a side letter.
C. Key Economic Terms (Summary)
The following table summarizes the principal economic terms for Fund V. These terms apply across all fund vehicles on a consistent basis (unless otherwise noted) and are subject to negotiation with anchor limited partners during the fundraising process.
Target Size and Commitments:
• Target size (hard cap): $2,000,000,000 in aggregate commitments across all vehicles (Main Fund, Parallel Fund, and Offshore Feeder, on a combined basis).
• Minimum First Close: $750,000,000 in aggregate commitments.
• GP Commitment: 2.5% of aggregate commitments, equaling $50,000,000 at hard cap. The GP Commitment will be funded through Harrowgate Fund V GP LLC or directly by the principals and employees of HCP. The GP Commitment is intended to align the interests of the Sponsor and its investment professionals with those of the limited partners and is consistent with institutional investor expectations for a fund of this size. The GP Commitment in Fund IV was 2.0% ($29,000,000); the increase to 2.5% reflects HCP's confidence in the Fund V investment program and feedback received from anchor limited partners.
Management Fee:
• During the Investment Period: 1.75% per annum on committed capital. At full raise ($2.0 billion), this equates to approximately $35,000,000 per year in management fees across all vehicles.
• Post-Investment Period: 1.50% per annum on invested capital (net of realized dispositions), reflecting the step-down customary for buyout funds of this size.
• Early Close discount: A 10 basis point reduction (to 1.65% during the Investment Period) will be offered to limited partners committing at the First Close. This discount is intended to incentivize early commitments and to reward anchor investors who commit during the initial fundraising period.
• Large LP discount: An additional 5 basis point reduction will be available for limited partners committing $150,000,000 or more. This discount is cumulative with the Early Close discount, resulting in an effective management fee rate of 1.60% during the Investment Period for qualifying limited partners. Based on the current investor pipeline, Northmoor State Pension System ($200M), Tidewater Sovereign Investment Authority ($175M), and Edgecombe Insurance Group Ltd. ($150M) would each qualify for the Large LP discount.
Carried Interest and Waterfall:
• Carried Interest: 20% of net profits above an 8% preferred return, compounded annually.
• Waterfall: European-style (whole-fund) waterfall. Under this structure, the GP does not receive carried interest until all limited partners have received (i) a return of all contributed capital (including management fees and organizational expenses), and (ii) the 8% preferred return on contributed capital. This structure provides greater downside protection for limited partners compared to a deal-by-deal (American-style) waterfall and has been a consistent feature of HCP's fund terms since HPE Fund III.
• GP Catch-up: After the preferred return has been satisfied, 80% of incremental profits are allocated to the GP (and 20% to the LPs) until the GP has received 20% of cumulative net profits. Thereafter, all remaining profits are split 80% to LPs and 20% to the GP.
• Clawback: The GP's obligation to return excess carried interest (net of taxes actually paid or payable) at the end of the Fund's life, to the extent that cumulative carried interest distributions exceed the amount to which the GP would have been entitled had the waterfall been applied on an aggregate, whole-fund basis. The clawback obligation is guaranteed by the individual principals — Marcus J. Harrowgate, Diana R. Castellano, and Jonathan P. Birch — on a several (not joint) basis, in proportion to their respective carried interest allocations. The several (rather than joint) nature of the clawback obligation is consistent with market practice and with the approach used in HPE Fund IV.
Fee Offsets and Expense Provisions:
• Transaction Fee Offset: 100% of net transaction fees, monitoring fees, directors' fees, and break-up fees received by the GP, HCP, or their affiliates from portfolio companies will be offset against the management fee. This is consistent with the approach in HPE Fund IV and reflects current institutional investor expectations.
• Organizational Expenses Cap: Organizational expenses (including legal fees for fund formation, filing fees, printing costs, and similar costs) will be borne by the Fund up to a cap of $3,500,000. Any organizational expenses in excess of this cap will be borne by the Sponsor. This cap represents an increase from the $2,750,000 cap in HPE Fund IV, reflecting the larger fund size and more complex multi-vehicle structure.
Investment Restrictions:
• Concentration Limit: No single portfolio investment may exceed 20% of aggregate commitments across all vehicles ($400,000,000 at hard cap). This limit is consistent with HPE Fund IV and provides appropriate portfolio diversification for a fund of this size.
• Investment Period: Five (5) years from the date of the Final Close. During the Investment Period, the Fund may make new investments and follow-on investments. After the expiration of the Investment Period, the Fund may make follow-on investments (up to a specified percentage of aggregate commitments, to be determined) and may complete investments for which binding commitments were made during the Investment Period.
• Fund Term: Ten (10) years from the date of the Final Close, with two (2) one-year extensions at the discretion of the GP and one (1) additional one-year extension with the approval of the LPAC.
D. Governance Features
The governance provisions of the Main Fund LPA will include the following key features:
Key Person Provisions:
The designated Key Persons for Fund V are Marcus J. Harrowgate, Managing Partner and Chief Investment Officer of HCP, and Diana R. Castellano, Partner and Co-Head of Investments of HCP. A "Key Person Event" will be triggered if either Key Person ceases to devote substantially all of his or her professional time and attention to the investment activities of the Fund. Upon the occurrence of a Key Person Event, the Investment Period will be automatically suspended, and the Fund will not make any new investments (other than follow-on investments in existing portfolio companies and investments for which binding commitments have been made) until the Key Person Event is cured (e.g., by the designation of a replacement Key Person approved by a majority-in-interest of the limited partners) or waived by a majority-in-interest of the limited partners (excluding GP-affiliated commitments).
GP Removal Rights:
• No-Fault Removal: The GP may be removed without cause by a vote of 75% in interest of the limited partners (excluding GP-affiliated commitments). Upon a no-fault removal, the Investment Period will terminate, and the GP will be entitled to receive its carried interest on a modified basis (typically with a discount or modified calculation) to be negotiated in the LPA.
• For-Cause Removal: The GP may be removed for cause by a vote of a majority in interest of the limited partners (excluding GP-affiliated commitments). "Cause" will be defined to include fraud, willful misconduct, gross negligence in the performance of duties, material breach of the LPA, or the bankruptcy or insolvency of the GP or HCP.
Limited Partner Advisory Committee (LPAC):
The LPAC will consist of five (5) members. Three (3) LPAC members will be designated at the First Close, with the remaining two (2) members to be designated at or after subsequent closes as the investor base grows. The anticipated initial LPAC members are:
1. Northmoor State Pension System (governmental pension plan; $200M commitment);
2. Edgecombe Insurance Group Ltd. (Bermuda insurance company; $150M commitment); and
3. The Kingsbridge Endowment Fund (501(c)(3) endowment; $100M commitment).
The LPAC will have customary advisory functions, including review and approval of conflicts of interest, valuation disputes, extension of the Fund Term, and certain GP affiliate transactions. The LPAC is advisory in nature and does not have fiduciary duties to the limited partners. LPAC members will be required to execute confidentiality agreements.
Most Favored Nation (MFN) Provisions:
Side letter terms granted to any limited partner will be disclosed (on an anonymized basis, if the granting LP so requires) to all limited partners committing $50,000,000 or more. Qualifying limited partners will have a 30-day election period following the Final Close to elect to receive the benefit of any disclosed side letter term (subject to any terms that are investor-specific or based on regulatory requirements applicable only to the granting LP).
Minimum LP Commitment:
The minimum commitment for any limited partner is $10,000,000, subject to waiver by the GP in its sole discretion.
E. Regulatory Framework
Securities Law Exemptions:
The offering of limited partnership interests in the Main Fund will be conducted in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder. No general solicitation or general advertising will be used in connection with the offering. All investors will be required to represent and warrant that they are "accredited investors" within the meaning of Rule 501(a) of Regulation D.
Investment Company Act Exclusion:
The Main Fund will rely on the exclusion from the definition of "investment company" under Section 3(c)(7) of the Investment Company Act of 1940, as amended. Accordingly, all investors must be "qualified purchasers" as defined in Section 2(a)(51) of the Investment Company Act. The subscription agreement will require each investor to represent and warrant its qualified purchaser status.
Regulatory Filings:
• A Form D (Notice of Exempt Offering of Securities) will be filed with the SEC within 15 days of the First Close.
• Blue sky notice filings will be made in all U.S. states in which limited partners are domiciled, in accordance with applicable state securities laws. The specific filing requirements vary by state and will be coordinated by C&H's blue sky team.
Investment Adviser Registration:
HCP is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (File No. 801-79223; CRD No. 298417). Fund V will be treated as a "private fund" under the Advisers Act, and HCP is subject to SEC examination, Form ADV disclosure obligations, and comprehensive recordkeeping requirements in connection with its management of the Fund.
ERISA Compliance:
The Fund intends to limit "benefit plan investors" (as defined under the U.S. Department of Labor's plan asset regulations, 29 C.F.R. § 2510.3-101(f)) to less than 25% of each class of equity interests in each fund vehicle, in order to avoid treatment of the Fund's assets as "plan assets" under ERISA. If the Fund's assets were treated as plan assets, the GP and HCP would be subject to ERISA's fiduciary duty and prohibited transaction rules, which would significantly constrain Fund operations. The 25% threshold and its application to the Fund V investor base are discussed in greater detail in Section XI below.
F. Governing Law and Dispute Resolution
The Main Fund LPA will be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to conflicts of law principles. The parties will submit to the exclusive jurisdiction of the Delaware Court of Chancery (or, if the Court of Chancery determines that it lacks subject matter jurisdiction, the Superior Court of Delaware, New Castle County) for the resolution of any disputes arising under or in connection with the LPA.
G. Fiscal Year and Tax Reporting
The Main Fund's fiscal year will be the calendar year (January 1 through December 31). The Main Fund will file IRS Form 1065 (U.S. Return of Partnership Income) for each taxable year and will furnish Schedule K-1s to each limited partner reflecting the partner's distributive share of Fund income, gains, losses, deductions, and credits. Tax reporting will be coordinated by Pinnacle Fund Services LLC in conjunction with the Fund's tax accountants.
IV. THE PARALLEL FUND — HARROWGATE FUND V PARALLEL LP
A. Entity Type and Jurisdiction
The Parallel Fund will be organized as a limited partnership formed under the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. A Certificate of Limited Partnership will be filed with the Delaware Secretary of State, Division of Corporations, identifying Harrowgate Fund V GP LLC as the sole general partner. The registered agent for the Parallel Fund in Delaware will be Calderwood & Harkness LLP, 400 South Ashbury Asset Advisors, Suite 3000, Wilmington, Delaware 19801.
B. Rationale for the Parallel Fund
The Parallel Fund is principally designed to accommodate certain tax-exempt and non-U.S. limited partners that require structural separation from the Main Fund for tax, regulatory, or operational reasons. Specifically, a separate parallel vehicle may be needed in the following circumstances:
(a) Tax-exempt investors desiring UBTI avoidance at the fund level. Certain 501(c)(3) organizations and other tax-exempt entities may prefer to invest through a vehicle that avoids investments generating UBTI at the fund level or that structures investments to minimize effectively connected income ("ECI") exposure. The Parallel Fund can be structured to hold interests in portfolio companies through alternative structures (e.g., through the blocker or through non-leveraged holding structures) to the extent needed to mitigate UBTI for its investors. However, the primary UBTI mitigation tool for Fund V remains the blocker Corporation (discussed in Section VI).
(b) Non-U.S. investors seeking FIRPTA planning or treaty-based benefits. Certain non-U.S. investors may benefit from investing through a vehicle that facilitates compliance with FIRPTA (the Foreign Investment in Real Property Tax Act, IRC §§ 897 and 1445) or that enables the investor to claim benefits under an applicable income tax treaty. The Parallel Fund may serve as an intermediate vehicle for structuring investments in a manner that reduces FIRPTA withholding or that enables treaty benefits.
(c) Insurance company investors with regulatory look-through or asset-class reporting requirements. Insurance companies, particularly those domiciled in Bermuda or other offshore jurisdictions, may have regulatory obligations that require asset-level transparency or specific reporting formats. Edgecombe Insurance Group Ltd., as a Bermuda-domiciled insurance holding company regulated by the Bermuda Monetary Authority ("BMA"), may require enhanced reporting on the composition and risk characteristics of underlying portfolio investments. A separate vehicle can facilitate the provision of such reporting without disclosing information to the broader investor base. We note, however, that Edgecombe may also invest directly in the Main Fund with insurance-specific reporting accommodations provided through a side letter; this is an open item for confirmation by HCP.
The Kingsbridge Endowment Fund ($100,000,000 anticipated commitment), as a 501(c)(3) tax-exempt endowment, may invest through the Parallel Fund for certain investments that do not generate UBTI, while investing through the blocker for leveraged investments that would generate debt-financed income. The allocation between the Parallel Fund and the blocker for Kingsbridge is an open item to be confirmed by HCP based on discussions with Kingsbridge's investment team and tax advisers.
C. Investment Mechanics — Parallel and Pro Rata
The Parallel Fund will invest alongside the Main Fund in all portfolio investments on a pari passu, pro rata basis. The pro rata allocation will be determined by each vehicle's relative share of aggregate commitments across the Main Fund, the Parallel Fund, and the Offshore Feeder. This ensures that all investors participate in the same investment program and that no vehicle is advantaged or disadvantaged relative to another.
The Parallel Fund will have the same economic terms as the Main Fund, including the management fee rate schedule, carried interest percentage, preferred return, waterfall structure, and clawback provisions. The limited partnership agreement for the Parallel Fund (the "Parallel Fund LPA") will cross-reference the Main Fund LPA for substantive provisions, including investment restrictions, governance provisions, Key Person provisions, GP removal rights, and LPAC representation.
The GP entity, Harrowgate Fund V GP LLC, serves as general partner of both the Main Fund and the Parallel Fund. There is no separate general partner for the Parallel Fund. This structure ensures unified management authority across vehicles and avoids the administrative complexity that would arise from maintaining separate general partner entities.
Aggregate commitment calculations for purposes of fund-level limits — including the 20% concentration limit, fund-level leverage limits, and subscription credit facility borrowing base — are computed across the Main Fund, the Parallel Fund, and the Offshore Feeder on a combined basis. This ensures that the aggregate investment program operates within the parameters set forth in the fund documents, regardless of how commitments are allocated among vehicles.
D. Operational Considerations
The operational administration of the Parallel Fund will be coordinated with the Main Fund to ensure consistency, efficiency, and simultaneous execution:
• Capital Calls and Distributions: Capital calls to investors in the Parallel Fund will be issued simultaneously with capital calls to investors in the Main Fund and the Offshore Feeder. Similarly, distributions will be made simultaneously across all vehicles. This coordination is essential to maintaining the pro rata allocation and economic parity across vehicles.
• Investment Committee: All investment decisions will be made by a single investment committee of HCP, led by Marcus J. Harrowgate and Diana R. Castellano. There is no separate decision-making process for the Parallel Fund. The allocation of each investment across vehicles is determined formulaically based on relative commitments, not by investment committee discretion.
• Fund Administrator: Pinnacle Fund Services LLC (contact: David L. Prentiss) will serve as the fund administrator for both the Main Fund and the Parallel Fund. Pinnacle will be responsible for NAV calculation, investor reporting, capital call and distribution processing, AML/KYC verification, and other administrative functions for both vehicles.
• Auditor: Caldwell, Fitch & Hartley LLP (contact: Robert A. Fonseca) will serve as the independent auditor for both the Main Fund and the Parallel Fund. Separate audited financial statements will be prepared for each vehicle, as required under the respective limited partnership agreements and applicable regulatory requirements.
• Custodian: Ridgeway Trust Company (contact: Thomas B. Chandler) will serve as the custodian for both the Main Fund and the Parallel Fund, holding cash and securities on behalf of each vehicle in accordance with applicable custody rules.
V. THE OFFSHORE FEEDER — HARROWGATE FUND V OFFSHORE SLP
A. Entity Type and Jurisdiction
The Offshore Feeder will be organized as an exempted limited partnership formed under the Cayman Islands Exempted Limited Partnership Act (as revised). The Cayman Islands is the most widely used offshore jurisdiction for private equity fund vehicles and offers a stable legal framework, tax neutrality, and well-developed service provider infrastructure.
The Offshore Feeder will be registered with the Cayman Islands Monetary Authority ("CIMA") as a regulated mutual fund under the Mutual Funds Act (as revised). Registration with CIMA is required for Cayman Islands entities that accept subscriptions from investors in exchange for partnership interests and whose partnership interests are redeemable at the option of the investor (though private equity funds with lock-up structures typically qualify for registration under the simplified "registered" category rather than the more burdensome "licensed" category).
B. Rationale for the Offshore Feeder
The Offshore Feeder is designed primarily for non-U.S. investors who prefer a Cayman Islands-domiciled vehicle for tax, regulatory, or operational reasons. The primary anticipated investor in the Offshore Feeder is Tidewater Sovereign Investment Authority ("TSIA"), a sovereign wealth fund with an anticipated commitment of $175,000,000.
The Cayman Islands offers a number of advantages for non-U.S. investors in private equity fund structures:
• Tax neutrality: The Cayman Islands imposes no income tax, capital gains tax, or withholding tax at the vehicle level. This ensures that the Offshore Feeder itself does not create any additional tax burden for its investors. The tax treatment of each investor is determined by reference to the tax laws of the investor's home jurisdiction and the applicable U.S. tax rules (including the rules governing ECI and FIRPTA).
• ECI management: Non-U.S. investors investing through a non-U.S. entity may benefit from structuring flexibility that manages their exposure to U.S. tax on ECI. By investing through the Offshore Feeder on a parallel basis (rather than as a limited partner in a U.S. partnership), non-U.S. investors may avoid the automatic flow-through of ECI that would occur if they were direct partners in the Main Fund.
• FIRPTA compliance: The FIRPTA rules impose U.S. tax and withholding obligations on dispositions of "U.S. real property interests" (USRPIs) by non-U.S. persons. The Offshore Feeder structure provides greater flexibility to manage FIRPTA exposure, particularly in transactions involving portfolio companies with significant U.S. real property holdings.
• Investor mandates and regulatory requirements: Sovereign wealth funds and certain institutional investors in the Middle East, Asia, and other regions may have internal mandate requirements or home-country regulatory requirements that favor investment through a non-U.S. domiciled vehicle. TSIA, for example, has indicated that it prefers a Cayman-domiciled vehicle and may require Sharia compliance screening of the investment portfolio.
C. Structural Options: Feeder vs. Parallel
In designing the Offshore Feeder, we considered two structural approaches:
Option 1 — Feeder Model: Under this approach, the Offshore SLP would invest as a limited partner in the Main Fund (or the Parallel Fund). This approach is operationally simpler because there is a single pool of assets at the portfolio level, and the Offshore SLP participates indirectly through its partnership interest in the domestic fund. However, the feeder model creates significant tax disadvantages for non-U.S. investors. Because the Offshore SLP would be treated as a partner in a U.S. partnership (the Main Fund), its share of the Main Fund's income from U.S. trade or business activities would be automatically characterized as ECI and subject to U.S. tax. This result is generally unacceptable to non-U.S. institutional investors and sovereign wealth funds.
Option 2 — Parallel Model: Under this approach, the Offshore SLP invests directly alongside the Main Fund and the Parallel Fund in each portfolio investment on a pro rata basis, maintaining its own portfolio of investments. This approach provides greater tax flexibility because the Offshore SLP's U.S. tax exposure depends on the character of its own investments (which can be structured to minimize ECI) rather than on the automatic flow-through of income from a U.S. partnership. The parallel model is more complex operationally because it requires coordinated closings, capital calls, and distributions across three vehicles, but this complexity is manageable with an experienced fund administrator.
Recommendation: We recommend the parallel model, consistent with the approach used in HPE Funds III and IV. The Offshore SLP will invest alongside the Main Fund and the Parallel Fund on a pro rata basis in all portfolio investments. This structure provides the most flexibility for managing ECI, FIRPTA, and withholding issues for non-U.S. investors while maintaining economic parity across all vehicles. The additional operational complexity of the parallel model is well within the capabilities of Pinnacle Fund Services LLC, which has administered the Offshore Feeder vehicles for HPE Funds III and IV.
D. Cayman Regulatory Requirements
The Offshore Feeder will be subject to the following regulatory requirements in the Cayman Islands:
• CIMA Registration: The Offshore SLP must be registered with CIMA as a regulated mutual fund under the Mutual Funds Act. This requires the payment of an annual registration fee (currently CI$4,268, approximately US$5,122) and the filing of audited financial statements with CIMA within six months of the end of each fiscal year.
• Auditor: CIMA requires the appointment of an auditor approved or recognized by CIMA. Caldwell, Fitch & Hartley LLP will need to confirm its CIMA recognition; if CFH is not currently recognized, we will arrange for the appointment of a Cayman Islands-recognized affiliate or correspondent firm to serve as auditor of the Offshore Feeder. Alternatively, CFH may apply for recognition from CIMA, which is a relatively straightforward process for major international accounting firms.
• AML/KYC Compliance: The Offshore Feeder must comply with the Cayman Islands Anti-Money Laundering Regulations (as revised) and the Proceeds of Crime Act (as revised). This requires the implementation of AML/KYC procedures for investor onboarding, including verification of investor identity, source of funds, and source of wealth. These requirements are consistent with the AML/KYC procedures already maintained by Pinnacle Fund Services LLC.
• Anti-Money Laundering Officer: CIMA requires the appointment of an AML compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. These roles may be satisfied through arrangements with the fund administrator (Pinnacle Fund Services LLC) or through the appointment of a Cayman Islands-based compliance service provider.
E. Governing Law
The exempted limited partnership agreement of the Offshore Feeder will be governed by and construed in accordance with the laws of the Cayman Islands. The Offshore Feeder LPA will cross-reference the Main Fund LPA for economic terms, investment restrictions, governance provisions, Key Person provisions, and other substantive terms, ensuring consistency across all fund vehicles.
VI. THE BLOCKER — HGF V BLOCKER CORP.
A. Entity Type and Jurisdiction
The blocker will be organized as a C corporation incorporated under the General Corporation Law of the State of Delaware. A Certificate of Incorporation will be filed with the Delaware Secretary of State, Division of Corporations. The blocker is a single-purpose entity incorporated solely to serve as a blocker corporation for U.S. tax-exempt investors in Fund V.
B. Rationale for the blocker Entity
The blocker entity addresses a fundamental tension in private equity fund structures involving U.S. tax-exempt investors. Under the Internal Revenue Code, organizations that are otherwise exempt from federal income tax (such as 501(c)(3) organizations, qualified pension plans, and other entities described in IRC § 501) are nevertheless subject to tax on "unrelated business taxable income" ("UBTI") under IRC §§ 511 through 514.
UBTI generally includes income derived from a trade or business that is "regularly carried on" and is not substantially related to the organization's exempt purpose. In the context of private equity fund investments, two principal sources of UBTI concern arise:
(a) Operating income from portfolio companies. If a tax-exempt LP holds a partnership interest in a fund that owns interests in operating companies (directly or through pass-through entities), the tax-exempt LP's share of the operating income from those companies may constitute UBTI. This risk is particularly acute in buyout funds, where the Fund typically acquires controlling interests in operating businesses.
(b) Debt-financed income under IRC § 514. Even if the underlying income would not otherwise constitute UBTI, income from "debt-financed property" is treated as UBTI under IRC § 514. In a leveraged buyout context, portfolio company acquisitions are typically financed with a combination of equity and debt. To the extent a tax-exempt LP's share of fund income is attributable to debt-financed investments, that income may constitute UBTI regardless of whether the income is derived from a trade or business. This is a particularly significant concern for buyout funds because leverage is a core component of the investment strategy.
The blocker addresses these concerns by interposing a C corporation between the tax-exempt investor and the Fund. The mechanics are straightforward: the tax-exempt investor holds equity in the blocker (typically common stock), and the blocker holds an LP interest in the Main Fund or the Parallel Fund. Income and gains from the Fund flow into the blocker at the corporate level. The blocker is subject to corporate income tax on its share of Fund income. However, when the blocker distributes its after-tax earnings to its tax-exempt shareholders, those distributions are treated as dividends — and dividends received by a tax-exempt organization are generally excluded from UBTI (unless the stock itself is debt-financed). Thus, the blocker effectively "Blocks" the flow-through of UBTI to the tax-exempt investor.
The trade-off inherent in the blocker structure is the cost of corporate-level tax. The blocker will pay federal corporate income tax at the current rate of 21% (plus applicable state and local taxes), which reduces the net returns available for distribution to the tax-exempt investor. However, for large tax-exempt investors in leveraged buyout funds, the UBTI shield typically justifies this cost. The alternative — paying UBIT at the trust tax rates applicable to tax-exempt organizations (which reach a top marginal rate of 37% at relatively low income levels) — is generally more burdensome than the 21% corporate rate, particularly when the tax-exempt investor can claim no offsetting deductions against its UBTI.
C. Anticipated Users
The primary anticipated user of the blocker is The Kingsbridge Endowment Fund, a 501(c)(3) endowment with an anticipated commitment of $100,000,000. As a 501(c)(3) organization, Kingsbridge is subject to UBIT on UBTI and will benefit from the blocker structure for investments that generate debt-financed income or operating income that would constitute UBTI.
It is important to note that Northmoor State Pension System, while also a tax-exempt entity, does not require the blocker structure. Northmoor is a governmental pension plan and is generally exempt from UBIT under IRC § 115, which excludes from gross income amounts derived from the exercise of any essential governmental function and accruing to a state or political subdivision. Governmental pension plans are not subject to UBIT under IRC §§ 511–514 because they are not organizations described in IRC § 501(c). Accordingly, Northmoor is expected to invest directly in the Main Fund without the interposition of a blocker.
Other tax-exempt limited partners admitted in subsequent closes (including potential 501(c)(3) foundations, university endowments, and certain qualified pension plans) may also invest through the blocker, depending on their specific UBTI exposure and tax planning considerations.
D. Structural Mechanics
The structural mechanics of the blocker are as follows:
• HGF V blocker Corp. will hold a limited partnership interest in the Main Fund or the Parallel Fund (or both, depending on the allocation of investments between vehicles). The specific vehicle through which the blocker invests will be determined based on the nature of the underlying investments and the UBTI analysis for each investment.
• The equity of the blocker (common stock) will be held by the tax-exempt LP(s) that elect to invest through the blocker. The blocker may have one or multiple shareholders, depending on the number of tax-exempt investors that utilize the structure.
• Income and gains from the Fund will flow into the blocker at the corporate level. The blocker will report its share of Fund income on its own federal and state corporate income tax returns (IRS Form 1120). The blocker will pay corporate income tax on its taxable income.
• Distributions from the blocker to its tax-exempt shareholders will be characterized as dividends (to the extent of the blocker's current and accumulated earnings and profits) or as returns of capital (to the extent distributions exceed earnings and profits). Dividend income received by a tax-exempt organization is generally not UBTI (unless the stock is debt-financed under IRC § 514), thereby achieving the intended UBTI shield.
• At the end of the Fund's life, upon the final disposition of all portfolio investments and the distribution of all remaining cash, the blocker will be dissolved and its remaining assets (after payment of corporate-level taxes and expenses) will be distributed to its shareholders in liquidation.
E. Tax Considerations for the blocker
The following tax considerations apply to the blocker:
• Corporate Income Tax: The blocker will be subject to federal corporate income tax at the current rate of 21%, plus applicable state and local taxes. Delaware imposes a franchise tax on Delaware corporations (calculated based on authorized shares or assumed par value capital), which will apply to the blocker. Additionally, if the blocker is deemed to be "doing business" in New York (which could occur if Fund activities, GP activities, or portfolio company operations create a nexus with New York), the blocker may be subject to New York State and New York City corporate income taxes.
• Carried Interest: No carried interest flows through the blocker. The blocker participates in the Fund as a limited partner and receives its pro rata share of Fund profits (after the GP's carried interest has been deducted). The blocker's share of Fund profits is subject to corporate income tax in full.
• Section 1061: The IRC § 1061 carried interest holding period rules (which impose a three-year holding period requirement for long-term capital gains treatment on "applicable partnership interests") do not apply directly to the blocker's LP interest, because the blocker holds a limited partnership interest that is not an "applicable partnership interest" within the meaning of Section 1061(c). However, the overall fund economics and waterfall mechanics must be coordinated to ensure that the blocker's share of profits is consistent with the intended economic allocation across vehicles.
• Detailed Tax Analysis: A comprehensive tax analysis of the blocker structure, including a quantitative comparison of the UBTI cost (absent the blocker) versus the corporate-level tax cost (with the blocker), will be provided in the separate Tax Structuring Memorandum to be prepared by Sylvia Hartwell (expected delivery: April 21, 2025).
F. Governance. The blocker will be governed by a Certificate of Incorporation and Bylaws, each to be filed or adopted in connection with the blocker's formation. The board of directors of the blocker will be appointed by Harrowgate Fund V GP LLC (or by Harrowgate Capital Partners LLC as the sole member of the GP). The Bylaws will provide for standard corporate governance appropriate for a single-purpose blocker entity, including provisions governing board meetings, officer appointments, shareholder voting, and corporate dissolution. The blocker's fiscal year will be the calendar year (January 1 through December 31).
VII. THE GENERAL PARTNER — HARROWGATE FUND V GP LLC
A. Entity Type and Jurisdiction
The General Partner entity will be organized as a limited liability company formed under the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 et seq. A Certificate of Formation will be filed with the Delaware Secretary of State, Division of Corporations; the filing number will be assigned upon acceptance of the Certificate. The registered agent for the GP entity in Delaware will be Calderwood & Harkness LLP, 400 South Ashbury Asset Advisors, Suite 3000, Wilmington, Delaware 19801.
B. Ownership. The sole member of Harrowgate Fund V GP LLC is Harrowgate Capital Partners LLC, with its principal office at 1200 Concord Pike, Suite 600, Wilmington, Delaware 19803. No other person or entity will hold a membership interest in the GP entity. The GP entity is a wholly-owned subsidiary of HCP, and all management authority over the Fund vehicles flows through this single-member LLC structure.
This ownership structure is consistent with the approach used for the general partner entities of HPE Funds I through IV. The use of a fund-specific GP entity (rather than having HCP itself serve as the general partner) provides organizational separation between the Sponsor's general operations and its specific role as general partner of Fund V, thereby facilitating liability management and administrative clarity.
C. Role and Authority
Harrowgate Fund V GP LLC will serve as the general partner of each of the three fund vehicles: the Main Fund, the Parallel Fund, and the Offshore Feeder. As general partner, the GP entity will have full management authority over the Fund vehicles, including the authority to:
• Make investment decisions (including the acquisition, management, and disposition of portfolio investments);
• Issue capital calls to limited partners and manage the drawdown process;
• Make distributions of available cash and proceeds to limited partners;
• Negotiate and execute fund-level agreements (including subscription credit facilities, co-investment arrangements, and administrative service agreements);
• Manage the day-to-day operations of the Fund vehicles; and
• Carry out all other activities necessary or appropriate for the conduct of the Fund's business.
The GP entity is responsible for funding the GP Commitment of 2.5% of aggregate commitments ($50,000,000 at the $2.0 billion hard cap). The GP Commitment may be funded directly by the GP entity, or by individual principals and employees of HCP through the GP entity or alongside the GP entity, as determined by the GP in its discretion. The GP Commitment will be invested on the same terms as the limited partners' commitments and will participate in the Fund's investment program on a pro rata basis.
D. Carried Interest and Clawback
The GP entity will receive carried interest equal to 20% of net profits above the 8% preferred return, subject to the European-style whole-fund waterfall and the 80/20 GP catch-up mechanism described in Section III.C above. Carried interest is allocated and distributed to the GP entity in its capacity as general partner of the Fund vehicles.
Carried interest received by the GP entity flows through to HCP as the sole member of the GP entity, and ultimately to the individual principals and employees of HCP in accordance with their respective carried interest allocation percentages. The internal allocation of carried interest among principals and employees is governed by the internal arrangements of HCP and is not specified in the Fund documents.
The clawback obligation — the GP's obligation to return excess carried interest distributions (net of taxes actually paid or payable) at the end of the Fund's life — is guaranteed by the individual principals of HCP: Marcus J. Harrowgate, Diana R. Castellano, and Jonathan P. Birch. The guaranty is on a several (not joint) basis, meaning each principal is liable only for his or her proportionate share of the clawback obligation based on his or her respective carried interest allocation. This several (rather than joint) guaranty structure is consistent with market practice for funds of this size and with the approach used in HPE Fund IV. The maximum clawback obligation of each principal is limited to the net after-tax carried interest distributions received by such principal from Fund V.
E. LLC Agreement
The internal affairs of Harrowgate Fund V GP LLC will be governed by a limited liability company agreement (the "GP Operating Agreement") to be entered into by HCP as the sole member. The GP Operating Agreement will address the following matters:
• Delegation of management authority from HCP to designated officers and investment professionals;