Every so often, like it or not, financial advisors are pulled into a client’s divorce proceedings. And every so often private equity assets need to be divided during those negotiations.
And every so often it gets tricky, even for separating couples with clear prenuptial agreements.
Private equity assets can be particularly challenging to divide in a divorce due to two key factors: illiquidity and valuation delays. These investments are typically locked up for two to 10 years, meaning the assets aren’t readily accessible or easily liquidated at the time of divorce.
“Private market valuations are often delayed and can fluctuate significantly, making it difficult to assign a clear or fair value for equitable distribution. These complexities often require careful structuring and expert guidance to navigate,” said Lauren Britt, wealth advisor at Quotient Wealth.
Carried interest is hard to value at any point in time because it is dependent on successful exits from the investments made by the private equity or venture capital fund.
“Depending on where the fund is in its life, the payouts and resulting carried interest may not happen for over a decade. It would be hard to put a value on this with any level of certainty,” said Tony Blagrove, CEO and founder of Traveka Wealth.
Valuing illiquid or hard-to-measure assets is hard enough without a time constraint, but advisors say the pressure can often rise to a whole new level during divorce settlement talks. Without a liquid market for these assets, one needs to engage with a third party that specializes in valuations of these types of alternatives.
Blagrove points out that a burgeoning space within the private asset market is secondary transactions. Limited partners - and sometimes general partners - are selling their ownership in funds to another party. This sets a price which is observable and could be used during settlement talks.
When clients are navigating divorce, Britt says she collaborates closely with private investment managers to obtain the most accurate and up-to-date valuations possible. These assets often lack transparency, making it critical to engage with experts early in the process.
“Divorce is a team effort, and proactively educating clients about their assets and associated risks helps to reduce surprises and confusion in the future, especially in what can be an emotionally charged and complex time,” Britt said.
For clients going through divorce, Britt said she generally acts as the financial quarterback, supporting them through every stage of the process, from gathering information to executing the divorce decree. That means working closely with divorce attorneys to ensure clients feel comfortable and ask the right questions.
For situations with truly complex financial holdings, however, Britt said she acts as more “the bridge between attorney and investment manager, helping to facilitate communication, clarify details, and move the settlement process forward.”
Should the divorcing spouse be in need of immediate liquidity, Blagrove said these private assets will not be useful and they will need to plan around that.
“Since the carried interest can be a very valuable component to these investments and taxed very favorably under current tax law, I would make sure any marital separation agreement takes these assets and their future cash flows into account,” Blagrove said.
“In other words, I would lean towards splitting these assets, as opposed to getting cashed out by the other spouse, so that each spouse retains an ownership stake in the fund as well as any future carried interest payments,” Blagrove said.
By working with a trusted wealth advisor with expertise in complex financial assets, a divorcing spouse can level the playing field and have a partner to walk through the divorce process alongside them. More importantly, said Britt, an advisor can help a client look beyond the divorce itself and toward the next chapter with confidence and a clear plan.
“Divorcing a partner with deep expertise in private equity can feel daunting, especially when it comes to understanding and dividing complex assets. This is why it is important to engage on this topic and ensure an equitable division,” Britt said.
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