Comparing Private Equity
Fund Domiciles
26 April 2012
Introduction
• AIFMD, more politics and jurisdictional competition• Private equity focus• Parallels are not easy:
o different laws and different needso different industrieso beware simple comparisons:
o a fund is not a fundo when is regulation regulation?
Introduction (cont.)
• Subjective criteria can be decisive:o locationo investor sentimento market trendso the preference of particular advisers
• Fiduciary responsibility o multi-jurisdiction businesses o product improvement
• Focussing on factso understanding contexto making a direct comparison
Understanding Context
Understanding Context (cont.)
No offering or capital raising
Risk transparency
Transparent costs and proper pricing
Operational analysis: Promoter model
Understanding Context (cont.)
Operational analysis: Banking model
Problems:
1.Competition2.Conflicts3.Secret profits4.Skewed pricing
Systemic risks:
1.Shadow directorship2.Cells3.Pooled management4.Custody and illiquid assets
(Beware too much control!)
Understanding Context (cont.)
Promoter Model
UK
Traditional UK Industry(Tax neutral)
Traditional Continental Industry(Tax negative)
Banking Model
CI AIFUCITS
Derivatives
Risk free / transparent Systemic risks / opaque
The PE funds’ spectrum
UK*2 Guernsey Jersey Luxembourg
Market Established Established Established New EntrantReputation of Domicile
Onshore Offshore (IMF / FATF / OECD Top Ratings)
Offshore (IMF / FATF / OECD Top Ratings)
Onshore-EU
Existing Popularity High High High Low (a market for structured products)
Admin Efficiency and Transparency
Medium High High Medium / Low
Political / Economic Environment
Mixed / EU Supportive / Good Supportive / Good Mixed / EU
Applicable Law Common Law / EU Law Common Law Influence / Freedom of
Contract
Common Law Influence / Freedom of Contract
Civil Law / EU Law
Legislation General Laws General Laws General Laws Specific LawsAIFMD Impact Probably Applicable N/A / Equivalence N/A / Equivalence Potentially ApplicableTypical Product(s) Limited Partnership
(with or without personality)
Limited Partnership (with or without personality)
Limited Partnership (full spectrum)
SCA-SICAR’s, SCS-SICAR’s, SICAV-SIF’s and
FCP-SIF’s (no Limited Partnership yet)
Characters GP, LP’s, Operator and Auditor
GP, LP’s, Administrator and Auditor
GP, LP’s, Administrator and Auditor
Management Company, Custodian, Investors, Central
Administrator, Transfer Agent, Domiciliation Agent
and AuditorProduct Certainty Medium High High LowFlexibility High Medium Medium Low
This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.
Making a comparison*1
*1 Before implementation & AIFMD. AIFMD will have a massive impact.*2 The “UK” represents a union of England, Wales and Scotland!
UK Guernsey Jersey Luxembourg
Establishment Costs Medium / High Medium Medium Medium / Low
Establishment Ease Medium / High High (from 72 hours if self-assess)
High (from 72 hours if self-assess)
Low (up to 6-9 months, worst case)
Operational Model Promoter Model Hybrid Model or Banking Model
Promoter Model, Hybrid Model or Banking Model
Banking Model
Operational Complexity Medium Low / Medium Low Medium / High
Operational Costs Low Medium Medium High
Typical Operational Model
In-house In-house/Substance Office/Outsource
In-house/Substance Office/Outsource
Substance Office/Outsource
Ease of Liquidation (if no architecture)
High High High High
Regulatory Status Regulated Manager / Unregulated Fund with
Operator
Regulated GP / Regulated Fund
Regulated or Unregulated GP / Regulated or Unregulated Fund
Unregulated or Regulated Manager / Regulated
Holding Company or Fund
Level of Fund Regulation None Medium-Flexible None/Light or Medium-Flexible
Medium
Promoter Test(for regulated products)
N/A Yes/Restrictive Yes Vetting
Tax Status of Fund Tax Transparent Tax Neutral Tax Neutral Efficient
Tax Status of GP Taxable / Grouping N/A N/A Taxable / Efficient
Withholding Taxes on Income Receipts
Low Efficiency Low Efficiency Low Efficiency Variable Efficiency
VAT Medium Efficiency High Efficiency High Efficiency Low Efficiency (plus risk)
Tax Risk CFC / Carried Interest / EU Risk
Mind and Management Mind and Management Substance / CFC / EU Risk / Duchy Risk
Carry Vehicles Complex Environment Freedom and Ease of Structuring, Tax Neutrality
Freedom and Ease of Structuring, Tax Neutrality
Reasonable (SPF or Sarl)
Orphan Vehicles [Trust or 25% cross ownership]
Trust or Foundation Trust or Foundation Dutch Foundation
This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.
Making a comparison (cont.)
UK Guernsey Jersey LuxembourgCo-Investment Vehicles
Unproblematic Unproblematic / wide choice
Unproblematic / wide choice
Unproblematic / wide choice
Tax Efficient SPV’s Dutch or Lux-cos or Quoted Eurobonds
Dutch or Lux-cos or Quoted Eurobonds / Branches?
Dutch or Lux-cos or Quoted Eurobonds / Branches?
Same Jurisdiction Flexibility and Efficiency
Natural Market (1) UK Promoters (in particular sub £200m
funds); (2) UK Investing Funds and
(3) Offshore Restricted Investors
Strong since 1987, but declining for some
time.
(1) Independent Promoters (2) Institutional and Multinational Investors, (3) Capital Returns,
and (4) Funds with High Operational Costs and Asymmetric Processes.
Arguably, the most established domicile.
(1) Independent Promoters (2) Institutional and
Multinational Investors, (3) Capital Returns, and
(4) Funds with High Operational Costs and Asymmetric Processes.
Arguably, it has a slight real estate bias versus
Guernsey.
(1) Institutional Promoters, (2) HNW’s, (3) Income
Generating Funds (Requiring SPV’s) and (4) Special
Purposes (Re-packaging).
Best understood as a market for structured products.
Weaknesses (1) FSA Authorisation, (2) No Governance, (3)
Declining VAT Efficiency, (4) Product Risk (AIFMD)
and (5) Increasing Disclosure
(1) No Passport (AIFMD), (2) Increasing Scrutiny, (3) Tight
Regulation and (4) Non Common Law
(1) No Passport (AIFMD), (2) Increasing Scrutiny and (3)
Non Common Law
(1) Operational Inefficiency, (2) High Costs, (3) Product
Risk (Civil and Specific Laws / AIFMD), (4) Fiscal
Risks and (5) Systemic Risks (Custody and Platform)
This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.
Making a comparison (cont.)
Conclusion Subject to AIFMD, better profile and interesting features if managed outside the EU. The Scottish LP providing the perfect onshore/offshore hybrid.
The traditional third country product favoured by the industry. There is very little real difference between the jurisdictions.
The SCS-SICAR best replicates the PE model. An SCS-SIF however seems quicker in practice to establish. Thought needs to be given to custody and VAT issues in particular.
Arguably the best at present - (1) Jersey is more flexible than Guernsey; and (2) possibly slightly cheaper.
Real Estate
(More diverse investors)
(Less risk)
Conclusion• Comparisons are not easy • No clear answers, no winners• Established patterns exist
o asset classeso products
• Nothing happens by chance• The equation is always changing• No room for jurisdictional hubris, focus on:
o efficiency and established benefitso service standards and integrityo a proportionate, internationally acceptable framework
Contact details
James BerminghamTel: +352 24 616 000Email: [email protected]
Aztec Financial Services (Luxembourg) S.A.9A, Rue Gabriel LippmannL-5365, MunsbachGrand-Duché de Luxembourg
Visit our website for more information: www.aztecgroup.co.uk
www.aztecgroup.co.uk