Below is an example of an Orphaned Private Investment.
- Your firm invested $3,000,000 in Series B Preferred shares of HitechCo.
- The company has gone sideways for years, barely breaking even on a cash basis. Your position has been heavily diluted due to a play-to-play recap. The $3,000,000 position, which was converted to common in the recap, is now worth $50,000 with no liquidity in sight.
- The partner who sponsored the deal has left your firm, leaving you an orphaned private investment in a firm with poor prospects of generating a decent return. Everyone at your firm is too busy to invest time in HitechCo as the position is small and all the partners have more important time commitments.
- Your fund that invested in HitechCo is nearing the end of its life. You’d like to close out this position orphaned private investment position.
- You have $7 million in gains from other investments in your fund this year.
- So you sell CapGain Solutions one hundred percent of your position in HitechCo for $1,000. Thus, you realize a net loss of $2,999,000.
- The loss offsets a portion of your other gains, thereby shielding a significant part of the gains on your distributions to your Limited Partners (and yourself as a General Partner).