The days of thinking about single jurisdictions are long gone. When structuring a large private equity fund, for example, it is likely going to contain international investors (the US, Europe, Asia) and is, in effect, a commercial deal between all interested parties to draw down the money. The reality is, different investors have different preferences.
As James Bermingham (pictured), counsel at Ogier (Luxembourg) explains: "Sovereign wealth funds want the most efficient funds possible and are prepared to have no tax leakage. When you start talking to European investors, say German insurance groups who are subject to Solvency II, they want to invest in a regulated fund in Luxembourg.
"This is because investor regulation in the EU embeds financial advantage in investing through European fund structures so European investors are steered to allocate to European funds."
These international nuances can work to Luxembourg's advantage by virtue of it being the hub of the European funds industry and a nexus for global funds distribution. Rather than solely structuring an offshore vehicle, PE groups are instructing lawyers to establish multiple parallel vehicles across multiple jurisdictions.
"One example I could offer is a prominent management group where the limited partnerships are Cayman vehicles, the General Partner is in Jersey, and effectively speaking the carry arrangements are structured through offshore trusts. The manager has also set up a parallel Luxembourg limited partnership in the form of an SCSp that is bolted on to the side of the fund. In total, the fund comprises five parallel limited partnerships, of which Luxembourg is the fifth, and invests in parallel with the other limited partnerships in an efficient manner," explains Bermingham.
This particular fund invests predominantly through Luxembourg holding companies that then feed in to the underlying investments. Ogier Luxembourg has its heritage rooted in offshore law and is able to help onshore law firms set up their clients' investment funds such that every LP is happy with the arrangement. Getting the right blend of flavours is not possible using one jurisdiction. Bermingham points out that the increasing alignment of international laws means that it is now possible to "replicate economics of a single fund across diverse pools internationally".
"Sophisticated global investment funds can be used to tackle the regulatory barriers that are being created internationally and achieve much greater efficiencies than traditional funds based in a single domicile. No one jurisdiction has all the answers," says Bermingham.
Bermingam notes that while real estate funds, and more recently institutional debt funds, have become part of the fabric, private equity funds are the new player on the street in Luxembourg.
"The big continental PE names are keen to use Luxembourg because their investors like it. We are now beginning to see a good number of international mid-sized PE funds being established in Luxembourg. They are coming here, but not just here. Luxembourg supplements rather than replaces the traditional fund structure."
“PE groups don’t come here to get better tax treatment though as the rules are the same as other EU jurisdictions. Luxembourg is simply more straightforward and in being so, its use has become benchmark for industry. This in turn, has given rise to a broad support industry locking in the advantages that the jurisdiction offers,” concludes Bermingham.
That is why large PE names like Carlyle Group LP and Blackstone Group LP are choosing to set up offices in Luxembourg, not least also to preserve passporting capabilities for European investors in wake of last year’s Brexit decision.
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