Divorce settlements for high-net-worth individuals (HNWIs) often present unique complexities, especially when private equity (PE) interests are a part of family wealth.

Unlike cash or publicly traded shares, private equity assets are usually illiquid and tied to investments.

Private equity can be more difficult to divide during divorce settlements and is often subject to stricter transfer restrictions.

These challenges can make valuation and division difficult during divorce proceedings and legal support is often necessary to help protect your finances.

What is private equity?

Private equity professionals often receive their wealth through salaries and bonuses or from investment returns.

The assets most relevant in divorce are:

• Carried interest – A performance-based share of fund profits, often around 20 per cent, that is subject to vesting and performance conditions
• Limited partnership interests – Ownership stakes in funds that can grow in value over time
• Co-investments – Direct investments made alongside the fund, offering potential upside but limited liquidity

The timing of when these interests were acquired, the structure and the contributions made during the marriage are factored in when determining what is involved in the settlement.

Interest arising before marriage or after separation may fall outside of the marital pot, but this is not always the case.

What valuation challenges does private equity bring in divorce?

Valuing private equity is one of the most difficult parts of a high-net-worth divorce as these assets rarely have a clear market value and depend heavily on future performance.

Courts rely on forensic accountants to use discounted cash flow analysis to estimate the present value of these assets.

This estimation incorporates expected returns and discounts for illiquidity and uncertainty, particularly for carried interest.

Once valuations are prepared, the courts may employ several measures to assess the assets and this can include immediate offset.

Immediate offset is when the assets are valued and one spouse receives other property to compensate.

For many separating couples, this allows for a clean break, but it can risk misjudging future performance.

Rather than fixed valuation at the time of the divorce, some courts may use deferred sharing or well sharing, which is when the spouse receives a percentage of the assets if and when it pays out.

This is commonly used for contingent assets and whilst it offers fairness, it may prolong financial ties.

A hybrid approaches that some courts may use is structured payments in which payments are made as the value is realised, but this can be difficult to administer.

Courts will weigh up multiple aspects when determining valuation and seeking early legal advice can help you understand how your assets might be split in your divorce.

How can divorce proceedings affect private equity?

When dividing assets in divorce, there is  often a legal issue of whether private equity interests are classified as marital or non-marital property.

Assets earned during marriage are usually prone to division, while those acquired before marriage or after separation may not be.

Courts will assess the fund timeline, vesting periods and the extent to which the assets reflect current finances and involvement.

Disclosing your assets is crucial in divorce settlements and any attempts to manipulate variations or conceal private equity can lead to freezing orders or costs penalties.

Pre-nuptial and post-nuptial agreements can also offer an effective form of protection if your marriage were to break down  While they are not automatically binding, courts increasingly uphold them when they are fair and clearly drafted and supported by full disclosure.

When building your business or investing in private equity, you might not think about how it will be divided in the future.

Early planning and clear communication of your expectations however, may help save you time and money when dealing with divorce settlements.

How to protect your finances in a divorce?

Private equity can make a divorce even more difficult due to its illiquidity and reliance on future performance.

Preparation can be one of the most effective ways to protect your finances and maintaining clear records of capital contributions, vesting and fund interests is crucial.

With the right legal support, you can understand the valuation and how your private equity will be managed in your divorce settlements.

Our expert Relationship and Corporate teams can help you with your financial records when disclosing assets and advise you on protective measures before a divorce occurs.

If you need any further advice, contact our Head of the Family and Relationship Team, Alison Green on 0207 420 4193 or on alison.green@mackrell.com.