Fund domiciles: Jockeying for position

Uncertainty may be rife in the Brexit process, but one aspect of Britain’s departure from the EU seems assured: EU-based domiciles will benefit as UK-headquartered fund managers seek to secure passporting rights after Brexit.

Of the domiciles racing to pick up British business, the big winner appears to be Luxembourg, which sits firmly out in front, with Ireland in second, say industry participants.

Blackstone, The Carlyle Group, Intermediate Capital Group and 3i are among GPs to have picked the Grand Duchy for their EU base, while KKR is reportedly looking at Ireland as GPs seek to ensure access to a European marketing passport post-Brexit.

Unpredictability over the terms of the UK’s exit in less than a year, coupled with the characteristics of individual fund structures means there is no clear-cut choice of prefered domicile for UK-based managers weighing up where to secure EU passporting rights under the Alternative Investment Fund Managers Directive.

Amsterdam, Frankfurt and Paris are also in the running. However, taxes are high in the Netherlands, says one London-based GP who describes Frankfurt as “boring” and Paris as “maybe less international” in outlook and suffering from “issues with [an] addressable pool of talent.”

Adding to the complexity of contingency planning, depending on progress toward AIFMD third-country passporting, Guernsey and Jersey – which already sit outside the EU but have been assessed by the regulator as appropriate regimes for passporting – could, in future, edge ahead of London as attractive domiciles. Both are established fund centers already popular among private equity firms.

Offering a level of stability, the Channel Islands’ trading relationships “with both the UK and EU will remain largely unchanged before, during and after the UK’s divorce from the EU”, says Barry McClay, Guernsey-based chief operating officer at Ipes, a private equity fund administrator.

However, movement toward third-country passporting “is tied up with finding a workable equivalence regime for the UK post-Brexit. That will take time and we do not anticipate the creation of a third-country passport any time soon”, he says.

As funds consider their options, no one expects a flood of managers to quit the UK following Brexit.

“Moving everything out of London would be a huge upheaval and it would not be necessary,” says Simon Witney, London-based special counsel at Debevoise & Plimpton.

“You’ll see a delineation between front office and back office,” adds the London-based GP. “Some people will shift back office functions to these other jurisdictions as a first step, because it’s sensible and because if you want to do more later, it gives you that optionality. You won’t see front offices move until there is more clarity on the deal [between the UK and EU]. And if the deal is good, I don’t think you’ll see people move at all.”

Firm acquaintances
Selection of an alternative jurisdiction appears to rely less on fund type and more on how acquainted firms are with the locale. Blackstone has plumped for establishing an Alternative Investment Fund Manager in Luxemburg, where it already employs around 200 staff to oversee its real estate funds. It is adding to its team with about a dozen new hires, while its 300-plus London-based staff stays put.

MORE THAN ONE CHOICE

At 11pm on 29 March 2019 the UK will leave the EU. As the deadline approaches, uncertainty is the norm for UK-based managers. Some may even have become a little complacent, says the London-based GP. “At the non-prepared end people are waiting to panic about it,” he says.

Under the terms of the transition agreement – assuming it remains as it is currently drafted – London-based funds will be able to use their AIFMD passport until December 2020. However, those with large EU-regulated investor bases, or funds contracted to be EU regulated, need to prepare now for life outside the EU, says Simon Witney of Debevoise & Plimpton.

“The approval process to get a regulated entity established is probably between six to 12 months, and there are corporate law and logistical issues around establishing new structures and working out where that should be,” he says.

For large institutions with existing EU outposts, the time and money spent acquiring a new licence may be immaterial. However, for smaller UK-based firms, the bill – ranging from legal fees to office rent – could be prohibitive.

When considering establishing an EU-based AIFM, “it’s balancing the time and expense involved against the alternative of being possibly shut off from the ability to market [in the EU] from next March or later”, says Liam Collins, a Dublin-based partner at Matheson.

For small firms, using a third-party manager might be a solution. “Depending on the size of the GP/private equity manager, we have encountered both [the AIFM and third-party] scenarios,” says McClay.

Another option for firms without a EU presence and a limited pool of European investors would be to simply continue to rely on national private placement regimes and market their funds on a country-by-country basis. In the end, whatever route to market a GP takes will depend on the final details of a financial services deal the UK government reaches with the EU. Should the UK continue to apply European law in order to access European markets, it may be the case that GPs do not have to take any action at all.

As AIFMD-regulated entities, UK-based funds seeking continued access to the European Economic Area would be familiar with the regulatory set up wherever they go. Luxembourg and Ireland have the advantage of being sizable and proven fund centres hosting a plethora of administrators, depositories and other ancillary fund services.

“Both jurisdictions are in the EU and have a well established private equity industry, regulatory framework and favourable tax structure,” says McClay. Luxembourg ranks second to the US as the largest fund centre globally, with “tried and tested LP laws and structures in place to support PE fund managers,” he says.

There are more than 200 licenced AIFMs domiciled in the Grand Duchy, says Tom Theobald, deputy chief executive of government agency Luxembourg for Finance. “Luxembourg has long been a hub for investment structuring but we see more and more activity on the private equity side,” he says.

Speaking the same language
Appealing to Anglo-Saxon managers, the 800-strong multilingual regulator permits funds to conduct activities in English, such as submitting an application and reporting. “This is not because of Brexit. It has been done for the past 25-30 years,” says Theobald.

At the end of February, US-based sponsors accounted for the highest proportion of Luxembourg’s €4.2 trillion of assets under management with 20.4 percent, closely followed by UK funds with 17.6 percent, according to the Association of the Luxembourg Fund Industry.

For its part, Ireland offers “the ability to conduct business efficiently with regards to language, legal system, service culture and cost evidenced by the success of the hedge fund industry there,” says McClay.

However, “the LP legislation requires to be amended to align it to international private equity funds and AIFMD to make it attractive.”

Asset managers across the alternatives spectrum, including private equity, have applied to establish AIFMs in Ireland, says Liam Collins, Dublin-based partner at Matheson. “It’s a well-worn path and allows such AIFMs to avail of the marketing passport for their Irish (and other EU funds). Irish funds are distributed in over 70 countries worldwide.”

Luxembourg’s got talent
As hiring among London-based asset management firms slows in light of Brexit, recruiting in Europe is picking up, according to reports. Theobald and Collins highlight the availability of local talent in their respective jurisdictions.

New roles include in compliance, risk management, and legal and client-facing services, says Theobald. “Luxembourg is small but within an hour’s commute live about five million people. The benefit of the single market is that you don’t have any borders,” he says.

And that is exactly what many UK-based funds are looking for post-Brexit.