Optimizing U.S. Entity Formation, Administration, and Compliance for Private Capital

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Christy: Hello, everyone, and welcome to today's webinar, "Optimizing U.S. Entity Formation, Administration, and Compliance for Private Capital." My name is Christy DeMaio Ziegler, and I will be your moderator.

Joining us today is Myrna Reijnders and Michael Campaignio. Myrna is the head of Corporation Solutions North America. She helps private capital and multinationals with their global business administration and compliance needs. Myrna is focused on U.S. inbound and outbound corporation services and guides clients through the incorporation and ongoing maintenance of their global legal entities. Michael is the CSC Director of Client Accounting, overseeing SPV accounting and cash management services across the Americas. With nearly three decades of experience in the finance industry, he leads the team in accounting, operations, compliance, and project management, consistently prioritizing operational efficiencies and effectiveness.

And with that, let's welcome Myrna and Michael.

Mike: Thank you, Christy, for the introduction, and good afternoon to all of our attendees. So in today's presentation, we'll start out with a brief overview about CSC, who we are and what we do. We'll then dive into the U.S. private capital market trends for 2024. Thereafter, we'll move to considerations for expansion into the U.S. accompanied by identifying client challenges and how CSC can ultimately assist in addressing those challenges. At the conclusion of our presentation, we'll hold a brief Q&A. With that said, let me turn it over to Myrna.

Myrna: Thanks so much, Mike. So with this slide, we would love to introduce you to CSC. CSC is the world's leading provider of business administration and compliance solutions. We're privately owned and have been in business for over 125 years. Our shareholders have been able to invest into our people and technology, which results in the ability to offer world-class client service.

We have 8,000, well, over 8,000 employees all over the world and capabilities in over 145 jurisdictions. And for that reason, we are the trusted partner of choice for 90% of the Fortune 500, 70% of the PEI 300, and over 10,000 law firms all over the globe. Our founding fathers were the co-writers of Delaware corporate law, which made Delaware the most popular state to domicile in. So during this webinar, we will showcase our further capabilities and direct you towards how CSC can partner with you and add value to your U.S. operations and investments.

With this slide, we would like to give you further insight in the market trends for private capital we've seen across our portfolio of clients. In line with Bain & Company's M&A Midyear Report, the global market for strategic M&A showcase an increase in value and volume activity as the overall deal value rose by 24% against numbers in '23. Private equity and venture capital appear to have reached the lowest level and luckily are starting to show improvements. VCs are up with 18%, and financial investors up with 35%.

The total market value and dry powder in the market is $3.7 trillion. But financial sponsors haven't been fully able to exploit it due to those high borrowing costs, slower exit pays, and fundraising challenges. And in that respect, as the macro environment of higher interest rates, continuous inflation, and geopolitical risk continues to place headwinds and challenges on those companies, new deals, however, are showing more flexibility in the type of deals and variety in asset classes, such as, well, private credit being so popular nowadays, and also showcasing more flexibility on how those deals are getting done.

Companies are looking to meet those long-term strategic goals while delivering cost synergies and growth at the same time. So it's not one or the other. Preqin observed that the markets' assets under management also continue to grow and actually are forecast to rise at a 12% compound annual growth rate until '27.

Even though fundraising was slow, with lower aggregate capital raised and fund closes, the average fund size actually increased from $375 million to $550 million. Private equity, real estate, and infrastructure actually also benefit from dislocation opportunities as the assets under management for PE and infra both grew at 11%. The assets under management for real estate grew at 7%. So for example, if we would look further on private equity, the decrease in deal activity reduced quite some upward pressure on valuation, leaving attractive opportunities to invest in, for example, sectors such as financial services, technology, health care, and renewable energy.

In relation to real estate, as the Fed started finally to decrease those interest rates, the deal activity slowdown have reset property valuations from those peaks, offering significant investment opportunities, from mid-'24, particularly in those commercial real estate areas. For infrastructure, the valuation have luckily remained quite resilient in this cycle agnostic asset class, supported by stable cash flows and inflation pass-through features.

Mike would like to continue with the market trends per region.

Mike: Thank you, Myrna, for the excellent overview of market trends. So as we look at this next slide, trends from a regional lens, we see the Americas, Europe, Middle East, and Africa are experiencing a return to dealmaking. However the Asia-Pacific region is still in the midst of another down year due to many of the reasons mentioned by Myrna in the previous slide. Do keep in mind, though, that these metrics are as of midyear 2024.

So let's shift gears to the third quarter of 2024. According to a Private Equity International's fundraising report, there are close to 6,000 funds seeking nearly $1.15 trillion in fundraising. North America alone represents 41%, followed by multi-regional at 35%, and then APAC, Europe, and the rest of the world totaling a combined 24%. While not shown here, strategic deal valuations have moved up a bit, hinting that pricing may have seen a bottom. However, there's still a bit of a bottleneck. While there's a willingness for firms to pay for solid businesses that reinforces strategic priorities, skepticism remains on most assets. At the same time, sellers are holding out as evidenced by the unsteady return of the IPO market and private equities' lengthening holding periods.

What does this mean for the future? Given the current level of dry powder in the market and if favorable conditions exist, we may witness a significant acceleration in deal activity in 2025.

So this year, we at CSC surveyed market executives to determine what were the key areas they consider for outsourcing since the majority of them strongly felt that outsourcing arrangements with administrators would increase in the coming one to two years. The most significant consideration is finding qualified staff in terms of setting up and running an SPV. That was followed by both technology and reporting. And then finally, rapid onboarding and bank account opening are considered vital to selecting an administrator.

So what are the takeaways here? Corporate administrators who have expertise in setting up SPVs, keeping them in compliance with jurisdictional regulations, and offering robust technology and reporting platforms are highly-valued partners for private market executives. Furthermore, survey participants indicated that they expect to have three or more outsourcing partners in five years' time. So this is up from two on average today. This fact alone presents its own difficulties. As we can imagine, having to deal with multiple outsourcing partners has its challenges, particularly having to communicate with multiple providers and then integrate reporting from all of them.

So what's the good news here? CSC's global reach and expertise as a corporate service provider in the private market space means that executives can partner with one administrator, creating efficiencies from a communication, reporting, and technological perspective.

With that said, let me hand it back over to Myrna for the next slide.

Myrna: Great. Well, thanks so much, Mike. In this second section, we would like to go through the considerations for expansion. So we'll deep dive in the variety of phases of U.S. investments and legal entity management. We'll highlight some of the key challenges that Mike was so kind to introduce us about, and addressing, of course, the solutions on how best to handle it.

This slide sets out the phases for U.S. investment and legal entity management. So what are the four phases for making those decisions?

The first phase consists of the planning and structuring elements. So once you have determined that you wish to invest into the U.S., you'll need to look at a target company and/or an asset that will drive that return on investment. The second one is to find funding, of course, whether it's via direct lending or finding investors and their partners. By defining the business goals, asset class or industry, size, potential for growth, plans for raising capital, you will be able to find the most appropriate and fitting legal entity that services your needs.

So a couple of questions to consider. What level of liability protection do you need? How to receive funding? Would you like to go via outside investor, such as going through venture capital and/or private equity? Do you intend to hire employees? Will you need to issue shares or employee stock? And what are your tax preferences, whether it's through a pass-through entity or a corporate tax vehicle? So by answering these type of questions, you will be able to determine whether an LLC, C corp, S Corp, partnership, or sole proprietorship will be the most suitable entity for your needs.

So that is the planning and structuring phase, the first pillar. The second one will be a matter of implementing the structure that you have planned for. This implementation phase consists of eight steps in total, so please bear with me.

The first step is to secure a business name and to ensure that it's legally available and protected. You can consider to register that business name by doing a name search by the relevant secretary of state and/or going through the U.S. Patent and Trademark Office to check if the name is not already in use or trademarked. If you wish, you can also file for a doing business as name if you're using a different name from the registered entity name.

Second one is to legally form that business entity. Of course, once you have determined the state to domicile in, you will need to file those formation documents, aka the certificate of formation or the articles of incorporation, with the relevant secretary of state. Thereafter, it's crucial to create those internal governance documents, which will define the internal rules and operating structures, such as your decision-making processes, your profit distributions, and/or how you want to resolve potential disputes.

Third step, once you've set up the entity, make sure that you obtain an employee identification number required by the IRS in case, for example, you want to open a bank account and/or hire employees. So that's the fourth step immediately, also to open that bank account if you want or if you expect some funds from customers, clients, and so forth.

Fifth step is making sure to comply with federal, state, and local tax regulations. By means of a check-the-box selection, you can choose how, from a tax perspective, the IRS will look towards your entity. And thereafter, also make sure that you, for example, register for state income tax if that might be applicable, sales tax if you're selling taxable goods or service, and state unemployment insurance and workers' compensation if you have any employees.

Sixth step, we're almost there, to obtain the business licenses and permits. Depending on your business type and location, you may need to research what federal, state, and local licenses might apply to your specific business type. For example, restaurant permits, health department approvals, professional licensing are important. And also make sure that you apply for the relevant permits based on that business activity, for example, sales tax permits apply, health and safety inspection, zoning permits, etc. And finally, check also the industry-specific certifications, for example, those that apply towards financial services and health care.

The seventh one is to make sure that you set up your internal bookkeeping and accounting system. And Mike will further guide you through that part into further detail.

And the final and eighth item is if you're going to hire employees, make sure that you register with the IRS to obtain that EIN number and also register with state tax authorities to withhold employee taxes. Set up your payroll system and administration, and make sure that your employees will get those benefits.

So those eight steps will conclude the implementation phase. And don't worry, e we're experts. We're happy to guide you throughout that process together with our trusted partners.

So the third phase for your U.S. and legal entity management is the ongoing maintenance. Of course, you want to make sure that you stay compliant with all those business, legal, tax, and regulatory requirements, things like filing annual reports, maintaining records, regularly review and update the business structure. For example, if you want to implement director and officer changes, make sure you file your tax obligations with state and also federal tax. And, of course, make sure that you comply with employee requirements and renew those business licenses on time.

So then concluding with the fourth and final phase is when you go and think about the exit and growth to achieve the return on investment. Items like, hey, when to sell, or when to go and do an IPO. Ultimately, potentially dissolving, terminating, and liquidating the entities are items to consider.

So with that, I would like to hand it over to Mike to address the top challenges in managing these entities.

Mike: Thank you, Myrna. So regardless of the reason for establishing an SPV, we can conclude that the SPV space will grow, the landscape will become more sophisticated and complex to manage. So what we did here is identify top challenges that private market managers will face.

So the first one, finding local resources and expertise. This is really covered in all phases, from planning to exit and everything in between. The next one, governance considerations, firms need to ensure they're maximizing value while protecting the interest of investors, which involves balancing interests of various stakeholders, such as directors, managers, and shareholders. Then we have complying with legal, business, and tax requirements. Ensuring the entity complies with these various requirements is vital for ongoing operations.

Let's move forward with dealing with multiple stakeholders in different states. Having various third-party stakeholders in different jurisdictions is a major challenge. So having one partner who can provide high quality key services for entities across jurisdictions is vital. Managers want a one-stop shop.

Navigating the compliance deadlines across multiple states. Compliance and regulations are constantly evolving and becoming increasingly complex. It is critical for an entity to remain in good standing with regulators in order to continue operating.

And then, finally, we have data management. Having timely and accurate data is vital for making business decisions and reporting to stakeholders. The ability to provide granular data from a centralized location with ease of access is crucial.

Myrna: We would like actually to continue with how CSC is able to help and the types of solutions we are able to offer to support your business and investments in the U.S. This slide actually ties back to the previously discussed four phases of U.S. investments and legal entity management, where CSC is able to offer that one-stop shop enabling you to focus on your own investments and operations. And we are here to keep your legal entity in good legal standing.

CSC is not a legal advisor. We typically work very closely with legal and tax advisors as our trusted partners on that first planning and structuring phase. So for example, while setting up the entity, legal advice is recommended to consider what type of entity to incorporate, whether it's a corp, an LLC, or an LP, depending on your business plan and strategic goals, and also to answer the question on what type of state or in what state to register and qualify to do business. But also items like, hey, how to manage and contract those third parties, such as the customers, the vendors, and the employees.

The tax advisor will further advise on, hey, what is an efficient structure and how to create an efficient way of funding, considering withholding tax, corporate income tax, double tax treaties, and also local tax substance. And that tax advisor would also be able to handle a potential check-the-box selection should you choose to do so.

So the middle pillar would actually tackle the implementation phase and the ongoing maintenance, where, of course, CSC can handle all of those legal, financial, and regulatory requirements by means of our U.S. Corporate Services. And we'll go into further depth in the next slide.

Highlighting the fact that we also, during that ongoing maintenance, work very closely with the trusted business partners. For example, when you're considering opening a U.S. bank account, of course we work with the local banks. If you're required to conduct an audit, we very closely work with those reputable audit firms. Same goes for tax compliance. And if you have any employees, the providers to help with EOR, PEO, and/or HR services.

Finally, also during that exit phase, the fourth phase of your legal entity management, which is if, for example, you're considering to do a merger, a dissolution, a liquidation, or a termination, we're able to handle and make sure that that process is handled and also filed with the relevant authorities.

All right. So moving forward to our key slide, our menu of our U.S. Corporate Services, offering a one-stop shop through one team, one process, one contract, and also one technology where we are able to centralize and offer all of those corporate governance, business administration, and compliance matters to our clients. For those new clients that are entering into the U.S. markets or, for example, international clients that are looking to set foot for the first time in the U.S., it might be helpful that we are able to offer all of these types of services, which we can. On the other hand, we also offer these type of services on an à la carte menu, where there's more flexibility, so to speak, to tailor-make the solution based on your exact needs.

So let's further deep dive on the left-hand side, where starting with the formation and the implementation, of course, CSC as the largest registered agent provider in the U.S., we have direct links with all secretaries of state in all the U.S. states, including all of those 50, where we're able to help form the entity, to act as the registered agent delivering same-day service of process, which is minimally required to set up an entity in a certain state. We can also help with the further qualification if you want to further scale up your operations in the U.S. And finally, if you are required to obtain that EIN number, also happy to complete the specific form and file it with the IRS.

The second item is the corporate and transaction filings. Items to think of are those annual reports preparation and filings with all the variety of states that you're active in, making sure that we pay all the required annual franchise taxes or costs to keep that entity in good legal standing. Other items are CTA, the Corporate Transparency Act beneficial ownership filing, which we will further discuss later on as well, doing business as, certificate of good standing, document retrieval, the Universal Commercial Code filings. You name it, we've got you.

Last item on the left-hand side are corporate secretarial services, whereby CSC is able to set up the internal governance, for example by helping draft the operating agreement for an LLC, the bylaws for a corporation, but also maintaining the books and records by, for example, creating those directors registers and shareholders ledgers to make sure that everything is kept up to speed and in good legal standing. We could step in and support you by preparing, organizing, and hosting board and shareholders meetings, drafting the agenda, making the appropriate arrangements, creating board and shareholder packs, and of course also drafting the minutes and action items thereafter. CSC also is able to help you with any resolutions. So, for example, capital contributions, resolutions, director changes, name changes, address changes, any consents, we're here to help.

So the second item in this paragraph is the business address. And especially if you don't have a principal place of business in the U.S., it's crucial that you will have at least an office address to make sure that IRS or third-party vendors, local banks are able to forward you mail. And we will make sure that we will handle the mail and forward it to your attention so you'll be able to act upon it.

Last item that I wanted to address is also the fact that we're able to help to act as independent director to meet any legal, tax, and/or regulatory requirements, such as local tax substance. But we can also step in, in any type of officer role. For example, if you need an authorized representative by means of a proxy or an authorized signatory, we can definitely take on and support you in that respect.

Mike will continue with all the services on the right-hand side.

Mike: Thank you, Myrna. So let's dig right into accounting and reporting. So our Accounting team has extensive experience with various types of SPVs, such as U.S. blockers, holding companies, property companies, financial companies just to name a few. We can accommodate various reporting formats, delivery methods, and SLAs. We also prepare our financial statements using U.S. GAAP or IFRS. We assist with coordinating your annual audit engagements and liaise with your tax accountants. Now for foreign entities with a direct investment in the U.S., we can also prepare and file quarterly and annual mandatory surveys with the U.S. Bureau of Economic Analysis, which is part of the Department of Commerce.

So now let's switch gears to payroll services. So our Payroll team will assist from the beginning of the process. So some of the key services included but not limited to are uploading of the payroll input data into a payroll system, management of new starters, leavers, and normal/regular pay rate changes, calculation of tax, Social Security, and net pay, delivery of secure pay slips, financial accounting journals to feed your general ledger or ours if you decide to hire us for accounting and reporting. And then we also have year-end reporting along with employee W 2s. And then, finally, you'll be able to access a consolidated payroll platform with a dashboard and reporting functionality.

So now let's move on to cash management services. Our dedicated Cash Management team also has considerable experience with SPV accounts. We have experience opening up bank accounts. We have robust cash controls and procedures. We offer cash flow management. The team has extensive experience with various banking and custodian portals. And at the very end, we do a month-end bank reconciliation and provide reporting at the backend of that.

So now let's turn to our last section on this slide, which is business license and entity management. So we'll start out with business license. We have a dedicated team to assist with business licensing, covering federal, state, and municipal licensing, which may be required if you conduct certain types of business activities. And just so everyone is aware, there are over 150,000 governmental jurisdictions alone in the U.S., each with their own unique requirements. So what does our team do? Our team will research, request, monitor, and administer your license to ensure it remains in good standing.

And then the last piece here is entity management. We're going to cover this in the technology section, so at this point, I'm going to hand it back over to Myrna.

Myrna: Great. Thank you so much, Mike. With this slide, we'd like to showcase the fact that we are able to offer that one-stop shop with end-to-end fund solution, which showcases the ability to service private capital clients top to bottom. So those 360 administrative services would entail that we would, for example, support the GP and LP fund level with our fund administration. We can help with bespoke outsourcing solutions, investor relations, including investor reporting, maintaining that capital activity and waterfall calculation, or registering, administrating distributions.

For those European funds or when passporting to investors in Europe, we can help out as the AIFM and depositary, where we have licenses to act as such in all relevant European jurisdictions.

For the fund SPV and portfolio companies, we offer a full scope of services to those SPVs on a global basis and to the portfolio companies by means of our Global Subsidiary Management Solution. This 360 Administrative Service offering combined with our extensive U.S. expertise and footprint definitely sets us apart from the other providers in the market.

So now we would like to actually highlight and end with our CSC Entity Management platform, so let me move forward, as we're very proud of our proprietary Entity Management technology, through which your key governance and compliance data can be centralized and kept up to date by our world-class client service. It's an award-winning solution, as we have been named Best Entity Management System, for the last 11 years running, by readers of the "New York Law Journal."

This portal provides very valuable insight into the health and status of your legal entities. You can basically see it as a single source of truth for those vital entity data, corporate documents, your compliance events via our corporate calendar. You can create organizational charts. There's even a document generation function whereby you're able to upload a template and basically extract any other type of relevant resolution from it. There's a DocuSign feature. And it handles all reporting needs.

The technology reduces your need to manually input and/or make errors because it's completely integrated with our Compliance Services. So if CSC is engaged, we will, of course, handle your filings and keep these entities in good legal standing. But in addition to that, also we'll file all the results into our portal so you don't have to worry about that.

Finally, we would also like to highlight that the system has the highest level of security for all applications, including a SOC 2 Type 2 audit, OFAC checks, and other clearances.