Kim Kardashian is expanding her business empire and taking a leap into the world of private equity. Ms Kardashian recently announced that she is launching a new private equity firm, "SKKY Partners". She has teamed up with Jay Sammons, a former executive from the Carlyle Group, a global investment firm. Ms Kardashian and Mr Sammons will be co-managing partners, although Mr Sammons is taking on the day-to-day control of the firm, according to reports. Kris Jenner, Ms Kardashian's mother, is also reported to be a partner.

Ms Kardashian is not the first celebrity to dive into the private equity world. Other big names such as LeBron James, Serena Williams and Will Smith have turned some of their attention towards private equity. Why is it such a popular trend among the rich and famous? In short, it is a relatively secure way of making a profit. However, A-listers can also be an important asset for a private equity firm. Celebrities can offer a unique perspective on consumer trends and can then use their platforms to boost the publicity of the new companies in which they have invested. Ms Kardashian will be particularly useful in this context, as her influence has global reach. She is, undoubtedly, one of the most famous people in the world. As a new private equity firm starting to think about fund structures, it is interesting to think about some of the legal issues new private equity funds present. As Ms Kardashian is also at the beginning of her legal career, having recently passed the "baby bar" exam, she may well be thinking about these issues too. 

Legal form of the fund 

The most common vehicle for private equity funds in the UK is a limited partnership (LP). An LP has two distinct categories of partners: at least one general partner (GP) who is typically in charge of the day-to-day running of the LP and has unlimited liability. The GP will often be a limited company, to minimise the consequences of this unlimited liability. The other category is limited partners. Limited partners will put capital into the investment fund but will not have any involvement in the day-to-day running of the firm. In return for the lack of hands-on control, limited partners are only liable to the value of the capital they have injected into the fund. There will also be an investment manager, which can either be the GP or an independent third party. The manager will take a hands-on role in what the firm invests in, in return for a management fee. The fund will invest in a portfolio of opportunities that meet the identified investment strategy. For SKKY Partners, the firm strategy is centred around "consumer products, digital and e-commerce, consumer media, hospitality and luxury" according to a tweet from the firm. 

Principal legal documents

If Ms Kardashian and Mr Sammons were to decide to make use of the LP structure, a limited partnership agreement would be required. This is the key foundational document that outlines how the LP will operate and what the responsibilities of the different partners will be. It also sets out how any profits will be divided. 

To get more investors on board, an offering document/memorandum may be produced (and may, in fact, be required). This is a type of disclosure document that essentially states the objectives of the fund, along with any risks that may be attached to it. It will also typically set out the financial projections so that investors are able to do the necessary due diligence. A subscription agreement is either attached or, more commonly, provided separately alongside the memorandum.  The subscription agreement acts as a contract between the firm/GP and any investor. This will spell out the terms of the relationship between the firm and the investor and, once signed, the investor will become a "subscriber". 

Remuneration

Ms Kardashian is famously entrepreneurial. But how exactly will she achieve a financial return through SKKY Partners? This will depend on the exact role she takes within the firm, but there are a number of different ways that private equity managers typically make a return. 

A common form of remuneration for a manager of a fund is a management fee, which is typically around 2% of assets under management. This is a payment for the service of managing the day-to-day running of the fund.

You may hear people talking about the private equity "waterfall". First, the investors receive a return equal to the capital they originally put into the fund. This is paid out first, so that the limited partners are not left in a worse position than when they began. Then comes the "preferred return", which is usually around 5-8%. This is additional profit given to limited partners on top of their returned capital. This typically needs to be paid out before any further profits can be divided.

After the limited partners have received their invested money back and their preferred return, the manager or GP can receive a "catch-up". The percentage that a manager can receive by way of a catch-up is open to negotiation, but it acts as an incentive to ensure a maximum return on the investments made. 

Finally, there is the remaining "carried interest". This constitutes the remaining profit (all going well), and the GP will take a large proportion (usually around 20%), while the limited partners will split the remaining 80% amongst themselves pro rata. The fund manager may also invest in the fund itself ("skin in the game"), in which case it may also share in that 80% pot. As you can see, it can be a lucrative business.

Other considerations

There are a number of other considerations that Ms Kardashian and Mr Sammons need to think about when setting up a private equity fund. One important consideration is where their private equity fund will be domiciled, as this has a number of knock-on effects, particularly in regard to the tax treatment of any profits. The domicile will also have implications on how the firm is regulated and by which authority. The founders will also need to consider how the fund is marketed and where, as different jurisdictions have different rules in this regard.

Financial promotions

Ms Kardashian will have to take care when promoting SKKY Partners. On 3 October 2022, it was reported that she had been fined US$1.26 million by the Securities and Exchange Commission in the US for promoting cryptocurrency without disclosing that she had been paid US$250,000 to do so. The fine came with a warning from the SEC chair, Gary Gensler, who noted that the situation "is a reminder that, when celebrities or influencers endorse investment opportunities…it doesn't mean that those investment products are right for all investors". 

In the UK, under the FCA rules, there is a basic restriction on financial promotion which states that "a person must not, in the course of business, communicate an invitation or inducement to engage in investment activities unless: (1) he is an authorised person; or (2) the content of the communication is approved…by an authorised person; or (3) the communication is exempt under an order made by the Treasury". If Ms Kardashian and her firm were UK-based, or promoting the financial products in the UK, promoting the investment opportunities of SKKY Partners on social media would need to comply with the UK financial promotions regime. 

Conclusion

Ms Kardashian has already proven herself as an extremely savvy businesswoman. She can take her unique expertise of consumer markets and trends, coupled with her ability to influence said trends, and use it to guide the firm's investment decisions. We should keep an eye on SKKY Partners, as Ms Kardashian and Mr Sammons could well be a winning combination.