16 September 2019

Luxembourg versus Cayman

  

Fund domiciles: Luxembourg vs Cayman

 

Luxembourg is now the domicile of choice for Alternative Investment Funds

 

The Cayman Islands and British Virgin Islands have long been top of the list for Alternative Investment Fund Managers looking to set up a new fund to host a new project or a new strategy, including private equity, real estate, credit, fund of funds, derivatives, crypto, hedge funds or collectibles.

These domiciles have subtle differences but many of the same core characteristics, including a favourable tax environment, flexible legal system, short time to market and a low cost of establishing a vehicle.

Luxembourg is increasingly disrupting the traditional order. It offers fund managers many similar benefits as well as an excellent reputation, location and internationalism. It is fast becoming one of the most important homes for Alternative Investment Funds in the world.

 

Waning dominance of traditional fund domiciles


Many managers are facing distribution challenges for shares of offshore vehicles.

Some investors are simply not allowed to invest in such offshore fund based in ‘tax heaven’ jurisdictions and many require their investment to be situated in a more reputable jurisdictions.

The reputational risks of being a shareholder in a vehicle based in a low level reporting country is seen by many as a significant hurdle to investing.

 

What many managers have not realised is that the same speed, efficiency and quality of service is available, in a jurisdiction with an extremely friendly tax and legal environment and excellent international connections, much closer to home. Luxembourg is situated in the heart of the European Union. It is easily accessible, a member of the Eurozone and the GAFI and well known for its stability as an AAA-rated country.

 

Rise of Luxembourg as a home for alternative assets

 

Luxembourg first established itself in the traditional, regulated fund management space as a domicile for the UCITS structure, experiencing a dramatic growth in popularity over a period of more than 20 years. By contrast, Luxembourg’s popularity as an alternative fund jurisdiction came later, but has been much quicker to blossom.

The creation of structures such as the SICAR (Société d’Investissement en Capital à Risque) and SIF (Specialised Investment Fund) have seen Luxembourg become a leading alternative domicile in little over a decade.

 

Nowadays, other more flexible vehicles have been created to host all types of Alternative Investment strategies including:

  • The Reserved Alternative Investment Fund

  • The Special Limited Partnership (AIF)

  • The Actively Managed Certificate

  • Securitisation funds

  • The Tracker Certificate

 

 

Advantages of the SLP, the Special Limited Partnership

 

Few investors are aware that Luxembourg’s structures, which are very similar to those in the Caymans, are so cost effective. One particularly attractive example is the Special Limited Partnership (SLP), a general partner / limited partner structure set up as an Alternative Investment Fund vehicle under the AIFMD.

 

Some interesting features of the SLP structure are:

  • Unregulated fund (AIF)

  • The manager does not need to be regulated up to a fund size up €100m for liquid strategies and €500m for strategies with a lockup period of at least five years

  • A wide range of eligible strategies including private equity, real estate, hedge funds, crypto funds, venture capital, fund of funds

  • No restrictions on the types of asset that can be invested in

  • Time to market can be as short as two weeks

  • No audit requirements

 

There is also no requirement for an auditor or a depository bank in Luxembourg. An SLP can be set up as a Special Purpose Vehicle (SPV), a co-investment entity for institutional investors or a co-ownership investment structure for family offices and HNWIs. It is not subject to risk spreading requirements.

The SLP (AIF) is not taxable in Luxembourg and the manager and its investment advisers can be situated abroad. An SLP can be set up with several share classes and can invest across multiple portfolios.

Management and performance fees can be flexibly tailored to the manager’s requirements and necessary liquidity measures, programmes or gates can be built in as necessary. The fund can be structured to issue shares with a Luxembourg ISIN number and can be cleared via Clearstream’s Vestima or Euroclear Bank’s FundSettle platform.

 

The SLP can be listed on the Luxembourg stock exchange or any other exchange. The setup costs start at €25.000 and the annual costs are the same as for Caymans domiciled funds at around €20,000 all in.

 

Looking to the future

 

Luxembourg’s popularity as a fund domicile for alternative assets will continue to rise quickly as Alternative Investment Fund Managers respond to the quality of its service providers, the high levels of efficiency and service that they offer, and the attractiveness of the jurisdiction and its fund structures. The Grand Duchy is now the true alternative home to the Cayman Islands and British Virgin Islands.

Luxembourg has become a hub for everything from the more classic mainstream alternative strategies managed by larger fund players, down to more niche and esoteric strategies managed by smaller institutions and family offices targeting truly diversified investment opportunities. As the hunt for alternative returns in challenging market conditions continues, the need for flexible, efficient and low cost fund structures will only rise.

 

Creatrust provides a one-stop-shop service for the setup and administration of Alternative Investment Fund vehicles based in Luxembourg. For more information visit https://www.creatrust.com/investments-funds or contact us here or by emailing info@creatrust.com.

 

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