Introduction AIFMD, more politics and jurisdictional competition Private equity focus Parallels are not easy: o different laws and different needs o different industries o beware simple comparisons: o a fund is not a fund o when is regulation regulation?
Introduction (cont.) Subjective criteria can be decisive: o location o investor sentiment o market trends o the preference of particular advisers Fiduciary responsibility o multi-jurisdiction businesses o product improvement Focussing on facts o understanding context o making a direct comparison
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.Competition 2.Conflicts 3.Secret profits 4.Skewed pricing Systemic risks: 1.Shadow directorship 2.Cells 3.Pooled management 4.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 AIF UCITS Derivatives Risk free / transparentSystemic risks / opaque The PE funds’ spectrum
UK *2 GuernseyJerseyLuxembourg MarketEstablished New Entrant Reputation of Domicile Onshore Offshore (IMF / FATF / OECD Top Ratings) Onshore-EU Existing PopularityHigh Low (a market for structured products) Admin Efficiency and Transparency MediumHigh Medium / Low Political / Economic Environment Mixed / EUSupportive / Good Mixed / EU Applicable LawCommon Law / EU Law Common Law Influence / Freedom of Contract Civil Law / EU Law LegislationGeneral Laws Specific Laws AIFMD ImpactProbably ApplicableN/A / Equivalence Potentially Applicable Typical Product(s) 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 Management Company, Custodian, Investors, Central Administrator, Transfer Agent, Domiciliation Agent and Auditor Product CertaintyMediumHigh Low FlexibilityHighMedium 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!
UKGuernseyJerseyLuxembourg Establishment CostsMedium / HighMedium Medium / Low Establishment EaseMedium / High High (from 72 hours if self- assess) Low (up to 6-9 months, worst case) Operational ModelPromoter Model Hybrid Model or Banking Model Promoter Model, Hybrid Model or Banking Model Banking Model Operational ComplexityMediumLow / MediumLowMedium / High Operational CostsLowMedium High Typical Operational Model In-house In-house/Substance Office/Outsource Substance Office/Outsource Ease of Liquidation (if no architecture) 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 RegulationNoneMedium-Flexible None/Light or Medium-Flexible Medium Promoter Test (for regulated products) N/AYes/RestrictiveYesVetting Tax Status of FundTax TransparentTax Neutral Efficient Tax Status of GPTaxable / GroupingN/A Taxable / Efficient Withholding Taxes on Income Receipts Low Efficiency Variable Efficiency VATMedium EfficiencyHigh Efficiency Low Efficiency (plus risk) Tax Risk CFC / Carried Interest / EU Risk Mind and Management Substance / CFC / EU Risk / Duchy Risk Carry VehiclesComplex Environment Freedom and Ease of Structuring, Tax Neutrality Reasonable (SPF or Sarl) Orphan Vehicles[Trust or 25% cross ownership] 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.)
UKGuernseyJerseyLuxembourg Co-Investment Vehicles Unproblematic Unproblematic / wide choice Tax Efficient SPV’s Dutch or Lux-cos or Quoted Eurobonds 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 classes o products Nothing happens by chance The equation is always changing No room for jurisdictional hubris, focus on: o efficiency and established benefits o service standards and integrity o a proportionate, internationally acceptable framework
Contact details James Bermingham Tel: +352 24 616 000 Email: firstname.lastname@example.org Aztec Financial Services (Luxembourg) S.A. 9A, Rue Gabriel Lippmann L-5365, Munsbach Grand-Duché de Luxembourg Visit our website for more information: www.aztecgroup.co.uk