There are clear trends to do with the Alternative Investment Fund Managers Directive (AIFMD) and the setting up of EU funds that benefit from its passport and, in parallel, the establishment of EU-regulated alternative investment fund managers is growing fast, particularly outside the UK, post-Brexit. After the AIFMD came into force in 2013, a number of alternative managers decided to remain out of its scope, considering it overly demanding. They continued to market offshore vehicles to European investors under private placement regimes or through reverse solicitation.
However, today a growing number of European investors are expressing a preference to invest in European-based funds. With the administrative burdens of private placements and the legal uncertainty of reverse solicitation, this has prompted several managers to create European vehicles.
There is a trend for an EU fund to be structured as a parallel fund to the main offshore fund, with both investing through a common holding structure – though one should ensure that the set-up does not constitute a master-feeder structure, as this would deprive the EU fund of its AIFMD passport.
Ideally, the EU fund’s documentation should mirror the main fund as closely as possible. In that respect, Luxembourg special limited partnerships (SLP) offer optimal flexibility.
Certain large players have decided to equalise the costs of the parallel funds (in particular the cost of the European depositary) and to require European investors to invest in the EU fund. That allows the main fund to stay out of scope of the EU regulations.
In order to benefit from the AIFMD passport, the EU fund must appoint an EU-authorised alternative investment fund manager. Third-party solutions are available, though larger groups often prefer setting up their own manager.
A number of firms who were about to set up a regulated alternative investment fund manager in the UK have changed their plans since the Brexit referendum. Those with an existing UK manager are considering alternatives.
Having acquisition structures in the same jurisdiction, a number of funds investing therein as well as an alternative investment fund manager performing key control functions seems to be a promising solution to satisfy the OECD’s Base Erosion and Profit Shifting (Beps) requirements.
For private equity, real estate and debt strategies, Luxembourg is the preferred jurisdiction in Europe, because of its expertise and because of the number of local acquisition vehicles that have historically been used for treaty access.
The establishment of a Luxembourg alternatives manager is subject to a robust approval process requiring that human and technical resources and a series of procedures are in place. It is facilitated, however, by the Luxembourg regulator recognising the possibilities for delegation and outsourcing contemplated by the European regulations. This enables managers to continue to draw on management resources in the UK/US. The regulator is also open to gradual enforcement of the human and technical resources available in Luxembourg.
These trends remain to be confirmed. However, they seem to be as strong as the cocktail that has prompted them.
Jérôme Wigny is partner at Elvinger hoss in Luxembourg
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