Private Equity Fund domiciling

Considerations when choosing a new home?

When structuring a new fund product, there are a number of considerations to balance. In our latest insights piece, James Milner Head of Growth at Altum Group shares key trends in private equity fund domiciling, highlighting the factors that influence fund managers and their decision-making process.

Tax neutrality & efficiency

Ideally, the structure should be optimised to maximise investor returns with minimal tax leakage at all levels, including the main fund and any SPV entities that are holding the underlying portfolio assets. Consideration should also be given to the carry vehicle to ensure that this is able to operate unhindered. The overarching effect should be as if the LPs had invested directly into the assets themselves, so that all capital and income is repatriated with no impediment prior to taxation in their home jurisdiction.

For private equity, this will usually be a partnership structure such as a Luxembourg SCSp, Cayman Limited Partnership, UK ELP, Jersey/Guernsey Limited Partnership or Irish Investment Limited Partnership (ILP), although take up of the latter has been slower than anticipated by the market.

For some asset classes, such as debt, tax treaty access at the asset level will be a critical factor, and this will see the majority of European focused products situated in Luxembourg or Ireland, so that interest income is funnelled up the structure free of withholding tax.

Investor comfort & marketing access

More importantly, given the current fundraising conditions in the market, investors should be able to recognise your fund product and be comfortable with it. Managers should aim to make life as easy as possible for LPs to invest in their fund, using well-trodden paths where possible. There are a number of other reporting and performance conditions that LPs will spend time negotiating, without forcing them to spend time on an unfamiliar product or jurisdiction.

Usually, emerging managers will be driven by cornerstone investors as to where the fund will be domiciled and what form it will take. Consideration should also be given to the ‘unknown’ investors, however, as a fund established in Gibraltar or Liechtenstein (for example) may struggle to gain traction with the rest of the market. Even jurisdictions falling under AIFMD that are not the traditional powerhouses of Luxembourg and Ireland can be negatively perceived by the market, with compelling reasons required to persuade investors of their use (such as Malta and Cyprus).

Marketing is an important consideration for managers, with regimes varying globally and Europe now being one of the most onerous from a regulatory perspective. If the targeted investor base is spread across several EU countries, then the AIFMD marketing passport will likely be required. If investors are in a small number of European countries, then it is usually possible to use the national private placement regime (NPPR) from outside the EU.

Rather than go through the pain, time and cost of establishing their own European AIFM to take advantage of the marketing passport, Fund Managers can utilise a third party AIFM, such as Altum’s Management Company in Luxembourg. This allows significantly faster access to market at a much reduced cost for fund managers, while still complying with all the necessary regulation. Investors take comfort from independent risk management and oversight, with clients still implementing their investment strategy in the underlying AIF.

Regulatory regime

Depending on the investor base, a certain level of regulation may be preferred. The most typical example is when European institutions (such as German pension funds) want fully AIFMD compliant products. By contrast, North American and Asian investors are frequently comfortable with the lighter touch approach in Cayman. A number of global fund managers use the Channel Islands as a good balance between onshore and offshore, with the private fund regimes being quick to market and indirectly regulated.

Cayman has suffered in the eyes of European investors in recent years due to being placed on the FATF grey list, although that is now be coming to an end. It remains an extremely popular and well-recognised fund jurisdiction for global investors, although the ‘on again/off again’ saga has certainly lessened appetite from European LPs.

Cost of establishment and maintenance

Typically a by-product of the regulatory regime, the costs associated with setting up and then running a fund can vary significantly from jurisdiction to jurisdiction. Running a fund in mainland Europe will usually require depositary fees and potentially 3rd party AIFM fees in addition to fund administration costs whereas offshore funds can be much lighter touch to run. The ‘onshore premium’ for regulation and market access will need to be justified by the target investor base on a cost to benefit basis, as described above.

Let’s connect

From the regulatory landscape to global marketing intricacies, this journey through fund structuring dynamics sheds light on critical considerations. For more insights please connect with James Milner, Group Head of Growth at Altum Group to learn more about our tailored solutions and expert guidance. Let’s navigate this intricate terrain together, shaping your fund’s success.