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To what extent are you seeing private equity managers move their funds onshore?
We have seen a number of managers think very carefully about moving funds onshore. Some of those have done so. Others have chosen not to. Others still have decided to move to an alternative finance centre that is better perceived as being onshore.
I think it is very important, after all, to consider what we mean by onshore. Some would interpret moving a Jersey fund to Luxembourg as moving it onshore. Others have a more purist interpretation. For them, onshoring would mean moving a fund from Jersey to the manager’s domestic territory, for example, the UK.
What are the most significant drivers behind managers considering a move onshore?
Without doubt, the biggest drivers behind onshoring are LPs. Some managers will have very significant investors in their previous fund that, when it comes to reupping, explain they are under pressure not to invest offshore. Their commitment may be dependent on the move. A lot of the time, there is no good investment rationale behind it. It is very much about politics and perception.
Is regulation, such as AIFMD and associated third-country passporting rights, also a driver?
I would not say AIFMD is a driver in terms of onshoring. If anything, it is reinforcing some people’s decisions not to onshore, because whilst you do not avoid AIFMD entirely, you can avoid some of the more challenging aspects of that legislation by remaining offshore.
Regulatory environment, in general, however, plays a very significant role in domicile decision-making. Fund managers are setting up private equity funds that are going to last between 10 and 12 years. They want to establish that fund somewhere that has a relatively stable regulatory and political backdrop, somewhere they can have a level of confidence that the reasons they have chosen to domicile there today will still hold true in 10 years’ time.
The traditional offshore territories are highly focused on serving the funds industry and will do everything in their power to keep the regulation as stable and favourable as possible. For onshore territories, on the other hand, the funds industry is unlikely to be a primary focus for political bodies. That means you may see unexpected, and undesirable, changes to regulation during the life of a fund.
What is the typical profile of a manager that looks to onshore?
There are really great fund managers, with exceptional track records, that can pretty much dictate to investors how they are set up and run. Generally those funds will continue with the status quo regardless.
Then you will have managers looking to make a statement, those who use onshoring as a PR coup. Finally, there are the less successful managers, those that find it harder to raise capital and so need to be more receptive to investors’ demands. That is where you really start to see LP pressure cause managers to move into onshore territories.
What, if anything, are the advantages of onshoring, beyond appeasing investors?
It depends on how you onshore. If you are onshoring in your domestic jurisdiction, you have the advantage of a regulatory and legal environment that you are familiar with. You can hold board meetings locally. There is no need to worry about travelling to an offshore centre, so in terms of day-to-day management, there can be obvious benefits. If you are talking about onshoring in an alternative jurisdiction, of course, you still have the burden of travel, securing local directors, etc.
There are advantages to onshoring, certainly, but you need to go into it with eyes wide open. It is not a panacea and there are compromises to be aware of. Those compromises typically come down to this question of political certainty. Offshore centres will do everything they can to protect fund managers. If you onshore somewhere such as France or Spain, the industry just would not have the same level of priority.
Which is why Luxembourg – which marries onshore status with an attractive regulatory environment – is proving so popular. What would you say are the key attractions of that jurisdiction?
Luxembourg has proved a fantastic success story. It is attractively located within continental Europe, with relatively easy travel from most regions. The language is familiar for many. It has a legal and regulatory environment that works to support the fund industry and experienced people to go along with that. They have also been very good at marketing themselves. That is not to say the jurisdiction is without its challenges. Due to their success, resourcing, for example, has become a significant challenge.
WHERE SHOULD I DOMICILE MY FUND?
- Familiar legal and regulatory environment for manager
- Local board meetings, limited travel
- Positive PR, political perception
- Potentially attractive for politically sensitive LPs, a fundraising boom
- Political, fiscal and regulatory risk over life of the fund
- Potentially unfamiliar legal frameworks / language for investors
Alternative onshore finance centre
- Supportive regulatory environment
- Burden of travel and need to source local directors remains
- More attractive for some politically sensitive LPs
- Some stakeholders question onshore status
- Supportive regulatory environment
- Familiar legal frameworks / structures for investors
- Travel and operational complexities
- Potential negative PR, political perception
- Unattractive for politically sensitive LPs, could damage fundraising
What are the legal and tax implications of onshoring?
The advantage of offshore vehicles is that investors know how they work. They understand and are familiar with the legal documents. Moving to a new jurisdicition will mean grappling with a new framework, potentially in a foreign language. There is an education process that has to happen that would not necessarily be the case in traditional fund jurisdictions.
But obviously tax is the big issue at the moment. Tax avoidance is a very dirty word. A lot of these structures are not designed for tax avoidance, of course, they are designed to avoid double taxation. But again, the risk with onshore jurisdictions is political. Even where similar structures are available today, tax laws may change and impact those vehicles.
How is the onshoring trend impacting the fund administration industry itself?
The biggest impact is that you now need to be in multiple jurisdictions, whereas traditionally, a presence in finance centres such as the Channel Islands, Luxembourg, Ireland and the Cayman Islands, etc would have been sufficient. Today, our client base is more likely to have requirements in the UK, Germany, Scandinavia, etc. That comes with the cost of setting up offices and recruiting teams to look after those vehicles. It is a question of scale. You need enough volume in that jurisdiction to justify the investment.
Has that been one of the drivers of all the M&A activity we have seen in the sector?
That is part of it. But M&A is being driven by a number of things. A growing regulatory burden is adding cost for the industry which means it is becoming harder for smaller players to be efficient. As you get bigger, you benefit from economies of scale which mean you can manage processes, invest in technology and have the dedicated compliance functions to react to regulatory changes quickly.
What do you think the future holds in terms of private equity fund domiciling?
A lot of this comes down to the political will to ensure all involved in this industry are paying the right amount of tax. But, in reality, we have rules, such as the Common Reporting Standard, which mean the numbers do get reported back to domestic jurisdictions and many significant investors are vehicles such as pension schemes which are non-tax paying anyway. As governments get increasingly comfortable with their access to that data, as they get answers to questions they feel they cannot currently answer, the pressure to move onshore may alleviate.