For US fund managers looking to expand into Europe, choosing the right fund domiciliation option can be a complex decision. We recently interviewed Paul Spendiff and explored the different fund domiciliation options available to US and non-EU fund managers in Europe.
In this article we explore the key differences between Irish and Luxembourg fund structures.
What are the fund domiciliation options for US fund managers coming to Europe?
Fund managers have two options, either take the private placement route or to obtain a full EU AIFM and EU passport. If they choose the latter, they can select a fund domiciled in any European Union jurisdiction, but the two most popular options over time have typically been Luxembourg and Ireland.
Which type of funds are commonly formed in Luxembourg and Ireland, and why?
The most commonly formed funds, in both Ireland and Luxembourg, are private limited companies (SARLs) and special limited partnerships (SLPs). SARLs are popular as they are straightforward to set up and have a low-cost base, making them ideal for smaller funds. SLPs are favoured by larger funds because of their flexibility and tax transparency.
Additionally, SLPs can be used as a feeder vehicle to master feeder structures, which can be beneficial in certain situations. However, European feeder vehicles that wish to avail of the AIFMD passport must feed into a master fund established in the EU.
What are the other European domiciliation options for fund managers?
The other domiciliation options tend to include Guernsey, Jersey, Canada, and Singapore. These options are suitable for fund managers who do not require the whole pan-European passport and only want to market their funds in one or two specific EU jurisdictions, or jurisdictions which are outside the EU such as the UK and Switzerland. However, these funds will require a national private placement regime marketing strategy.
German-domiciled funds are common, and for France, a French-domiciled AIF is preferred for those managers solely targeting those domiciles.
Dublin and Luxembourg are the most common for managers looking at cross-border EU distribution and therefore intend to make full use of the AIFMD passport.
For those managers distributing primarily or solely outside of the EU, the Cayman Islands and the Channel Islands remain the most common. However, there are other options available for fund managers to consider based on their specific needs or those of their investors.
What are the differences between Irish and Luxembourg fund structures?
Irish and Luxembourg fund structures differ in their regulatory requirements and available partnership types. In Ireland, historically the 1907 limited partnership was used or a corporate structure such as an ICAV. However, the recently introduced Irish Limited Partnership (IPL) is now being utilised by firms requiring a partnership structure for tax reasons. These funds are typically structured as Qualified Investors Alternative Investor Funds (QIAIFs) and are regulated by the Central Bank of Ireland.
Luxembourg operates under a different regime whereby they have bespoke fund vehicles, these include:
- P – a partnership which does not have legal personality
- SCS – a partnership which does have legal personality
- SCA – a company/true corporate
The most common partnership type in Luxembourg is the SCSp. Additionally, Luxembourg has a wrapper called the RAIF (Reserved Alternative Investment Fund) wrapper that can be used to provide sub-funds or compartments, but this has diversification requirements. This diversification is not clearly defined but if it is less than 33% then a look-through obligation to the underlying assets is required by the AIFM to ensure there is an appropriate spread of risk.
Ultimately, the choice between structures will be driven by tax considerations and what is needed for the specific situation. There is also a discussion about whether a US GP using a placement agent can bypass the need for setting up a European AIF, but the answer to that is more related to determining whether to use the passport route or national product placement regime.
However, it is worth noting that even when it is technically possible to market an offshore product there is an increasing demand from and limitation by some EU investors to only be able to invest in European Regulated or Registered in the case of the RAIF, product and in particular those that profess to ESG credentials. These typically include pension funds or government funds in some EU Countries that may only be able to invest into SFDR Article 6, 8 or 9 funds.
In addition, some insurance firms and private banks prefer EU funds because of considerations as to how funds domiciled in different markets are viewed as collateral on their balance sheet.
Does the fund domicile have to be the same domicile as your AIFM?
The fund domicile does not have to be the same as your AIFM. It is possible to have an Irish AIFM managing a Luxembourg fund or vice versa. The choice of fund domicile will depend on various factors such as the target market, tax considerations, regulatory environment, and investor preference.
How can Ocorian help establish fund structures in Europe?
At Ocorian, we have extensive experience in establishing and administering all types of alternative investment fund structures through the lifecycle of your fund.
As an independent fund services provider, we are location agnostic and our in-country team specialists are adept at supporting US fund managers in setting up and establishing funds in Europe. We have teams across all the key fund jurisdictions including the UK, Jersey, Guernsey, Ireland, The Netherlands, Luxembourg and the USA.
We have particular expertise in administering vehicles parallel to existing US or Cayman structures in cases where they may be administered in-house or by other third-party fund administrators.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
