The rise of Luxembourg-Cayman parallel fund structures

The rise of Luxembourg-Cayman parallel fund structures

In an article published recently on FundEye, partners Anne-Gaëlle Delabye and Joanne Huckle explored the continued and growing interest generated by Luxembourg-Cayman parallel funds structures.

Luxembourg-Cayman parallel fund structures have been generating strong interest from US and Asian fund sponsors over the course of 2019 and, as law firms continue to answer this with sophisticated solutions, the trend is likely to continue into 2020 and beyond.

There is an increasing desire for a global offering which allows sponsors to meet the jurisdiction-specific regulatory demands of investors from different countries;  parallel funds answer this call.

They also represent a growing trend in the funds industry because of the tailored solutions they offer potential investors and the possibility for fund sponsors to establish sizeable funds to reach a much larger investor base for any given investment strategy.

Turnkey solutions for fund sponsors looking to accommodate the demands of professional and institutional investors and the increasingly complex regulatory environment for global offerings, are being developed across the investment funds spectrum.

Parallel fund structures  make it possible to meet the needs of specific investors on a targeted basis, they represent a true opportunity for agile fund sponsors who position themselves as early adopters of this new trend, enabling them to expand their investor reach.

The combined advantages of established jurisdictions

Using one or more parallel funds allows for each to be co-managed and target the same portfolio while meeting the different requirements of investors in different jurisdictions. Luxembourg and Cayman are well established funds jurisdictions, each dedicated to maintaining the highest global governance standards and so remain attractive to institutional investors.

There are also a number of similarities between the Cayman exempted limited partnership and the Luxembourg special limited partnership, in particular the flexibility inherent to each, which provides added comfort for a manager looking to operate the funds in parallel in the context of familiarity with the product(s) under its purview and an ability to easily align the fund documentation.

Cayman is a familiar jurisdiction for US and Asian investors and sponsors and has a sophisticated and deeply entrenched fund ecosystem. Cayman also has the joint advantages of its tax neutrality, a flexibility of structuring options and a government that is reactive to industry requirements and keen to embrace evolution within the industry.

Luxembourg’s investment vehicles toolbox and sponsor friendly limited partnerships are among the reasons most often cited for the popularity of the country as a choice destination for fund domiciliation, making it Europe’s preferred jurisdiction for fund sponsors seeking to access European capital. It also provides access to the European passport for marketing purposes where the fund appoints an authorised AIFM (alternative investment fund manager). With the backdrop of Brexit, a number of Asian and US managers based in the UK are also now choosing Luxembourg as their European base.

One notable feature of the suite of Luxembourg fund products is a RAIF (reserved alternative investment fund). A RAIF can be used within a parallel fund structure and is particularly attractive for sponsors looking to set up an umbrella structure, as it offers the possibility of having segregated compartments, making it a good choice of vehicle if a sponsor envisages several investment strategies targeting different pools of investors and/or different portfolios of assets.

The right team to design the most suitable structure

One way to design the most suitable parallel structure for each fund sponsor and its target investors is to anticipate, discuss and design all aspects of the fund structure – such as voting rights, distribution waterfall, cost and expense allocation – before the launch of the fund and to provide a clean mechanism for each in the fund formation documents.

The right legal team will help sponsors ask the right questions at the right time, anticipate potential pitfalls and regulatory challenges before they materialise, and offer practical solutions at each stage of the structuring process, with the result that post-launch delays and costs can be significantly reduced. We believe that Ogier is that team and our clients and industry bodies seem to agree, recognising us as the Offshore Law Firm of the year in five separate awards over the course of 2019.