Podcast: Investment Fund Blockers

The Alternative Edge

In this episode of Weaver: Beyond the Numbers, The Alternative Edge, hosts Zach Anderson and Meghan Matthews discuss using blockers in investment fund structures at the fund level and below. Blocker entities play a crucial role in attracting foreign and tax-exempt investors by helping to manage U.S. tax obligations and creating efficient fund structures. Zach and Meghan explain how investment fund blockers work, when they are beneficial and the key considerations for fund managers when incorporating blockers into their fund structures.

Key Points:

• Blocker entities are C corporations used to block income or expenses from passing through to certain investors.
• Blockers make funds more attractive to foreign and tax-exempt investors by managing tax filings and mitigating effectively connected income (ECI) and unrelated business taxable income (UBTI).
• While blockers provide benefits, they add structural complexity, increase compliance costs and impact fund managers’ carried interest and exit strategies.

Meghan provided a detailed overview of blocker entities, their purpose and their impact in investment fund structures. Blockers are often set up as C corporations in assisting foreign and tax-exempt investors to manage U.S. tax obligations, particularly when funds invest in flow-through entities that generate ECI or UBTI. By preventing certain types of income from flowing through, blockers make funds more appealing and accessible to specific investor groups. But there is an added challenge, explained Meghan.

“While blockers are beneficial for attracting these investors, they do add complexity with additional compliance requirements, like separate tax filings and managing federal and state tax payments. Fund managers need to weigh these challenges against the benefits to determine if blockers are the right solution,” said Meghan.

Zach and Meghan emphasize the complex nature of these structures and the importance of liaising with legal teams in the process. As a cautionary note, they highlight that exit strategies need consideration during the initial stages to optimize tax efficiency.

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