The world we live in is constantly changing. It feels as if new regulation is appearing almost every day. With over 400 funds under administration, Augentius, the specialist Private Equity and Real Estate fund administrator, put together a panel to discuss what changes they are currently seeing in the market, if any, and what we are likely to see in the coming months.
Delaware and Cayman Limited Partnerships remain the popular options for both North and South American managers for funds, SPVs and related entities. It’s a “well-trodden” solution and understood by managers and investors alike. In addition some Latin American countries have recently signed double taxation treaties with Canada and this is bringing Ontario into play as a domicile.
The current exclusion of both the US and Cayman domiciled fund structures from “Passporting” under the AIFMD have created some complexities for fund raising in Europe. ESMA, the pan-European regulator is currently reviewing both domiciles but an early outcome is not expected. As a consequence ether the individual country National Private Placement Regimes (NPPRs) need to be used (appears complex and difficult at the outset – but manageable) or a “third party” manager can be set up within Europe and a “Passport” obtained to market the European parallel structure (overall a more expensive and less popular solution). There is increasing recognition that Reverse Solicitation is not the way forward.
As a general rule of thumb, it is only the larger managers that have confronted the fund raising in Europe issue. Applications under NPPRs can be time consuming and a Depositary needs to be appointed to support fund raising in Germany and Holland. However the time and effort has been rewarded and substantial sums raised. Smaller managers have been more content fund raising from their home territories although as the market becomes more comfortable with the processes this is likely to change.
Private Equity and Real Estate funds in Europe have traditionally used The UK and Channel Islands for the domicile of their funds. Luxembourg has always been popular for Special Purpose Vehicles (SPVs) and has become more popular in recent years as a fund domicile, as it has created the concept of Limited Partnerships within its fund laws. Ireland has also gained a little traction in recent months following the creation of an LP structure. Malta and others try hard to compete with the major fund domiciles but have not succeeded in attracting a large number of funds despite attractive legislation and incentives. In addition, recent changes in tax rules in different European countries have also resulted in some managers, particularly in the Nordics, reverting to locally domiciled structures.
Many countries in Europe see the advantage of maintaining/creating a financial services industry. The UK, Channel Islands, Luxembourg and Ireland have all created substantial industries (and employment) around the servicing of funds of all descriptions. To retain a competitive edge, countries often “adjust” their legislation to create an attractive environment for funds, the related structure and of course fund managers. This is exactly what Luxembourg and, more recently, Ireland have done – the result of which is that they are more accommodating to Private Equity and Real Estate funds than they have been in the past. The UK, one of the dominant domiciles in Europe, is currently reviewing its’ LLP legislation – again to ensure that the laws and applicable fund structures are attractive solutions.
As a consequence, fund managers have considerable choice within Europe as to where they can domicile their funds. Some managers selecting “offshore locations” such as the Channel Islands, with others selecting onshore locations such as the UK or Luxembourg.
However with BEPs on the horizon, and in particular the regulators attempting to stop “treaty shopping”, it is highly likely that managers will need to focus on the major jurisdictions that have been tried and tested over the years. Another issue to consider is the potential Brexit of the UK from the European Union. It is difficult to contemplate the ramifications at this early stage but for those managers considering raising a fund within the next few years this is not an issue that can be ignored.
India: GPs have typically used Mauritius to domicile their funds but since the Vodafone case, managers have been looking at alternative domiciles; notably Singapore. Although the treaty with Mauritius was recently ratified, many GPs, in particular the larger and better capitalised ones, have been building out their Singapore platforms domiciling their fund and management companies in Singapore. The country’s large network of double tax treaties and 13x and 13r tax exemptions have made the domicile attractive to many GPs. Investors are very comfortable with the robust regulatory framework put in place by the Monetary Authority of Singapore and there is an abundance of high quality service providers for managers to engage with.
The challenges that some managers face are the costs associated with operating in Singapore brought on by the significant substance requirements and regulatory hurdles. Indian managers will typically use a Singapore corporate entity, a PTE, as a pooling vehicle for offshore investors funds, via which they invest either directly into Indian portfolio companies or into an Indian domiciled investment trust.
China and Hong Kong: Chinese GPs raising USD funds will almost always structure the fund in the form of a Cayman LP. Domestic managers deploying RMB funds will use mainland vehicles such as investment trusts or domestic limited partnerships.
As China opens up its capital markets, we are seeing structures such as Shanghai’s QDLP (Qualified Domestic Limited Partnership) or Shenzhen’s QDIE, (Qualified Domestic Investment Enterprise),
allowing Chinese investors a channel via which to invest into offshore private equity.
Hong Kong based GPs either investing Pan-Asia funds or investing into China are for the most part using Cayman LPs, although with the extension of the profit tax exemption to include offshore Private
Equity funds, we may see more Hong Kong domiciled fund structures being used.
Singapore: The typical fund structure for Singapore based GPs investing into South/South East Asia is a Cayman (more often than not) or Singapore LP (we are seeing this more but not nearly as often as Cayman) with a Singapore master fund (a Singapore corporate) underneath.
This way managers take advantage of having the LP domiciled in a jurisdiction which investors are very familiar with, that has long standing tax benefits and a master fund that allows for a very wide number of double tax treaties to be accessed.
Australia: Domestic GPs will always use Australian open ended unit trusts and occasionally a Cayman LP as a feeder for offshore investors although this is not common.
Malaysia: Labuan, Malaysia’s equivalent of the Channel Islands has a Limited Partnership that we have seen used by some Malaysian GPs, but most continue to use Cayman.
In recent years the Private Equity and Real Estate world has been hit by a flurry of regulation – much of which it is still trying to digest and find the right solutions for. The next large piece of legislation in the form of BEPS is on the very near horizon and is already starting to have an effect on the way funds are structured. Some structures and domiciles may be more appropriate than others in this new environment – and the industry will go through another round of change.
The fund industry is currently in a constant state of flux – and the right structure and domicile used for the last fund isn’t automatically the right structure for the next. Managers and their advisors need to be aware of this and not just automatically “do the same as before”.