Luxembourg is typically categorized as a UCITS fund hub whereas Ireland is often seen as a premier onshore hedge fund domicile. Both markets are now looking to diversify and expand into new asset classes.
The Private Capital opportunity
Key insights
- Luxembourg and Ireland aim to service a more diversified range of fund classes and both regimes see the growing private capital market as an excellent opportunity
- Both markets are endowed with flexible private capital regulatory regimes and will likely win business as managers re-domicile post-Brexit
Private capital, which comprises private equity, real estate, infrastructure and private debt is a natural starting point for both domiciles, as the asset class continues to experience rapid growth. Private equity, for example, is seeing robust flows and PwC anticipates it will grow multi-fold to reach USD 10.1 trillion, and account for half of all global alternative assets by 20251, while private debt is expected to top USD 2.5 trillion within a decade.2
Positive growth has also been observed in real estate. PwC noted the asset class attracted just under USD 900 billion in capital flows in 2017.3 Infrastructure managers are also winning mandates, raising USD 50.6 billion in the period leading up to October 2017, eclipsing the USD 63.1 billion amassed during 2016, bringing global assets under management to USD 425.72 billion.4
Selecting a fund domicile is driven by a number of core criteria, including flexible and robust regulatory, taxation and legal regimes that adhere to international standards and support the requirements of institutional clients and their private capital managers.
It is also pivotal that any fund centre has a deep talent pool of experienced service providers such as administrators, lawyers, auditors and professional directors, strengths which both Luxembourg and Ireland possess.
The Luxembourg option
Luxembourg has a successful track record servicing private capital and is the domicile for approximately EUR 73.7 billion in regulated private equity funds, while its real estate market has also expanded.5 Private capital firms have several fund structures in Luxembourg to choose from, including Alternative Investment Funds (AIFs), Specialized Investment Fund (SIF), Societe d'investissement en Capital a Risque (SICAR), Reserved Alternative Investment Fund(RAIF) and the European Venture Capital Fund (EUVECA).6
Luxembourg is a popular domicile for private capital managers looking to enhance their EU footprint
While most firms are structured as SIFs, RAIFs are becoming more common due to their simplicity. RAIFs, which are very similar to AIFs, do not need to obtain approval from the Luxembourg regulator the Commission de Surveillance du Secteur Financier before launch. “This permits the achievement of a significantly enhanced time-to market for new fund launches," according to ALFI, a fund industry association in Luxembourg.7
Luxembourg has an extensive double tax treaty network and high standards around tax transparency, as evidenced by its proactive compliance efforts with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPs) initiative.8 Luxembourg is viewed as a market that follows best practices and international standards, helping to solidify its credentials among conservative and onshore European Union (EU) institutional investors.
It is also a popular domicile for private capital managers looking to enhance their EU footprint. For example, EU managers with funds that are fully compliant with the Alternative Investment Fund Managers Directive (AIFMD) can passport across all 28 Member States, as can non-EU firms, provided they appoint a Luxembourg-based Management Company to delegate portfolio and risk-related activities back to the manager.
Brexit is provoking much uncertainty, and some private capital managers in the UK see Luxembourg as a preferred destination to locate their EU subsidiaries when Single Market access is lost,9 in order to continue passporting their products into EU Member States.
Irish innovation
Ireland has an equally strong reputation, with a number of UCITS funds, AIFs and exchange-traded funds (ETFs) presently domiciled in the local market, collectively running more than USD 2 trillion.10 The country is increasingly targeting private capital business through innovative fund structuring solutions.
Created in 2015, the Irish Collective Asset Management Vehicle (ICAV) is a flexible corporate structure aimed at funds established in Ireland.11 The ICAV is a concerted effort by regulators to draw in additional and diverse asset classes. One of the ICAV's primary attractions for asset managers is that it “checks the box" and is treated as a partnership for US tax purposes.12
Ireland is likely to see growing fund domiciliation activity as UK private capital managers look to maintain EU investor access post-Brexit
The ICAV is highly flexible and can be wrapped around funds being distributed to both professional and retail investors, including UCITS funds and AIFs. It is also available to vehicles across the liquidity spectrum, including private equity, infrastructure, lending funds and hybrid structures.13
As with Luxembourg, Ireland is likely to see growing fund domiciliation activity as UK private capital managers look to maintain EU investor access post-Brexit. Experts cite Ireland's deep-rooted expertise across multiple asset classes, its zero percent tax on funds and low corporation tax on fund service providers, which is set at 12.5 percent,14 as being the primary incentives for any re-domiciliation activities post-Brexit.15
Despite its low taxation regime, Ireland is a leader in industry best practices. Ireland was an early adopter of the OECD's BEPs recommendations and was one of the first jurisdictions to sign an intergovernmental agreement (IGA) with the US under the Foreign Account Tax Compliance Act (FATCA).16 Ireland has also implemented OECD guidelines on automatic information exchange and enacted the EU's directive on the automatic sharing of tax rulings.17
Cayman Islands: the offshore alternative
- The Cayman Islands has a long track record servicing private capital vehicles. A number of different fund vehicles exist for managers of private capital in the Cayman Islands, including the Exempted Limited Partnership (ELP), the Limited Liability Company (LLC)18 and the Segregated Portfolio Company (SPC).19
- The British Overseas Territory has also introduced significant reforms around tax information exchange and transparency by signing up to the US20 and UK FATCA regimes,21 and implementing the OECD's Common Reporting Standard.22 As a result of these material improvements, the Cayman Islands has been given a “largely compliant" rating on its tax transparency by the Global Forum on Transparency and Exchange of Information for Tax Purposes, putting it on a level peg with Canada and Australia.23
- Brexit has had an impact on the Cayman Islands, mainly because it deferred the European Securities and Markets Authority's decision on whether the country's funds would be eligible for passporting under the AIFMD. For now, there will be little change as National Private Placement Regimes are still open, but that may not be the case in the future.