Berlin calling

Brexit will blunt impact of UK PFLP
Brexit will prevent non-British fund managers domiciling in the country and restrict their uptake of the recently-launched simplified private funds limited partnership structure, delegates said.

Just 5 percent said their firm was considering domiciling its next fund in the UK. This compared with 47 percent that said they were considering Luxembourg and 12 percent eyeing the Netherlands.

There was consensus that other jurisdictions were more attractive choices than the UK, despite the revision of the UK’s limited partnership law, which brings the country’s rules in line with those in neighboring jurisdictions and reduces the administrative burden on fund managers.

“The UK was one of the pre-eminent fund destinations, and the PFLP dealt with its ‘quirky’ partnership law that didn’t compare favorably with those of other countries. But in light of Brexit, it’s unlikely to be used much by any fund manager from outside the UK,” a UK-based general counsel from a private equity advisory firm said during a panel discussion.

While Brexit isn’t the most important consideration among fund managers choosing where to domicile their next fund, the panel of European CFOs said it is impacting the decision-making process. “It’s still very much wait and see, but I still can’t see fund managers from outside the UK choosing to domicile there at the moment,” the general counsel said. “The question of Brexit is likely to become more pressing as the exit negotiations progress.”

Solvency II template helps reporting standardization
The template used by private equity managers to report to insurance company investors was touted as the industry’s most successful attempt to standardize reporting so far. Panelists said the Tripartite Template for Solvency II reporting was a “huge step forward”.

The 126-field template allows an insurance company to calculate whether its holdings meet the solvency capital requirements of the EU’s Solvency II directive.
Lamenting a lack of standardization in the industry, panelists said they had been using a combination of other available reporting templates to meet investor demands for more detailed fund information, including the Institutional Limited Partners Association’s fee reporting template and Invest Europe’s [Solvency II] model.

European CFOs split on fund leverage
Attendees were split over whether fund leverage should be encouraged as the practice evolves and investors become increasingly focused on its deployment.
Half said fund leverage is both a useful working capital tool and a welcome way to enhance the returns of a fund, with the remainder saying it should be discouraged and reserved for exceptional circumstances.

While fund leverage is not a new practice, it has come under scrutiny because some fund managers are perceived to be abusing credit facilities. 

“There are examples of GPs making investments, funding them through the credit facility, rolling the loan over and exiting the investment all without drawing down any cash from investors,” one CFO said.

The practice is not creating an issue yet, the CFO added, but there’s a chance it could become problematic. “Investors are still sitting on a lot of cash, are getting distributions and can cover future calls. If we get to a position like 2009 where investors were getting no distributions and capital is still being called up, then it could become an issue and there will be no money to pay back the loans,” the CFO said. 

A second GP, from a Europe-focused private equity firm, said there was support for fund leverage among LPs, despite a geographical divide in attitude.

But the LP on the panel had a different view. While investors generally support “prudent” use of short-term fund leverage because it reduces the frequency of drawdowns, extending the loan period increases their risk exposure and causes transparency issues, the LP said.

“The risk for the investor begins when the investment is made, not when it gives the fund manager the capital. If a manager takes out a loan for six to 12 months and then pays it back, that’s fine. But LPs in general are not supporting the longer-term loans. They may boost the IRR for the GP, but it doesn’t help the investor,” the LP said.

‘Expensive’ Luxembourg is Brexit winner 

Fund managers are willing to put up with the perceived high cost of domiciling in Luxembourg because of the country’s service provision, regulatory regime and attractive tax system. 

Just under half of delegates said they were considering domiciling their next fund in Luxembourg, despite 57 percent saying they thought it was the most expensive jurisdiction in which to run a fund.

“There is a perception Luxembourg is an expensive place to set up and run a fund, but really, it’s the cost of the Alternative Investment Fund Managers Directive; it’s not Luxembourg-specific,” a senior vice-president from a Swiss private equity and infrastructure manager said.

Fund managers are used to dealing with offshore and non-regulated funds which are, in comparison, much cheaper to run, the panelist added.

On Luxembourg’s appeal as a fund domicile, one manager who has been running a Luxembourg fund for a few years said the country’s regulatory stability, favorable tax regime, availability of service providers and forward-looking attitude to the AIFMD from the outset has helped it establish itself as a domicile of choice in Europe.