Luxembourg: Q&A – Luxembourg Parallel Structures: Advantages, Challenges And Considerations

Last Updated: 5 December 2018
Article by Anne-Gaelle Delabye

Anne-Gaelle Delabye, a partner in Ogier's Luxembourg investment funds team, discusses the advantages, challenges and considerations to be made when setting up a Luxembourg parallel fund structure.

In terms of why Luxembourg, it's clearly becoming one of the preferred jurisdictions for those seeking to access European capital by way of a parallel fund structure. This is due in no small part to Luxembourg's extensive product toolkit.

Q: What is a parallel fund structure?

A: Parallel funds are those which co-invest and divest alongside the main fund. They co-invest and divest at the same time and on similar terms. This is on a pro-rata basis per their commitments, so a manager has two funds side by side which invest and divest at the same time in a common portfolio of assets. The terms on which the parallel fund operates are similar to the terms of the main fund. This means that the parallel fund has a common investment policy, and common asset targets because they are investing in the same portfolio. The differences between them are mainly due to regulatory or operational reasons.

The size of a main fund and some of its parallel funds may not be the same. For instance, the parallel fund may be larger than the main fund and, in most cases, the AUM of all funds will be aggregated to determine the size of the overall structure. Investors in the main and parallel funds will also be aggregated to determine the voting rights of investors in the structure. This being said, what is quite complicated in a parallel fund is that the main and parallel fund are separate legal entities, and there will need to be a fine balance between the fact that different legal entities are being operated in different jurisdictions and yet these entities are part of the same global asset pool.

Q: Why are the Cayman/Luxembourg parallel funds structures generating such strong interest from US and Asian fund sponsors at this time?

A: When you're an initiator, you have to reconcile the concerns of different types of investors in different jurisdictions. You may need to structure a fund programme with one or more parallel funds which are co-managed by the initiator and that are targeting the same portfolio. Cayman is the natural choice for many US and Asian fund sponsors because they are used to this product and it's efficient from a time to market perspective.

When Asian or US sponsors want to reach European investors, Luxembourg (and in particular its limited partnerships) is considered as the EU equivalent in terms of comprehensible environment enabling the setup of flexible structures, and this is why parallel structures in these jurisdictions pair well together.

Another important point is that when you create a parallel structure, you enable investors to choose between an offshore and onshore jurisdiction, while maintaining the same investment policy.

Q: Why might this matter?

A: It might matter for several reasons: certain investors may have internal guidelines which restrict their ability to invest in an offshore vehicle, or there may be regulatory or tax implications arising from an investment in (either) vehicle. Having the choice between on- and offshore jurisdictions is likely to meet the needs of a greater range of investors.

In terms of why Luxembourg, it's clearly becoming one of the preferred jurisdictions for those seeking to access European capital by way of a parallel fund structure. This is due in no small part to Luxembourg's extensive product toolkit.

One of the products which is important is the Luxembourg limited partnership (LP). This product has comprehensive functionality and is appealing to investors who are accustomed to Anglo Saxon partnerships. It really offers the same flexibility in terms of structuring that is available in a Cayman or UK limited partnership.

The Luxembourg parallel also provides access to the European passport for marketing purposes if the fund appoints an authorised AIFM. Further, in the context of Brexit, some Asian and US managers based in the UK are now choosing Luxembourg as their European base, and we have seen a lot of movement since the Brexit vote result.

Q: What makes parallel structures appealing?

A: They are very flexible. A parallel structure gives a lot of options to investors (and ipso facto to the initiator). Investors have the ability to choose the fund vehicle that will best suit their particular risk profile, regulatory requirements, tax appetite and more -- all very helpful choices in practice.

To a certain extent, the parallel structure also helps overcome certain regulatory barriers. For example, the regulatory costs linked to AIFMD can be restricted in relation to the Luxembourg parallel fund with no financial impact on the non EU main fund ie it is possible to segregate certain regulatory costs.

In terms of efficiency of structure, a larger investment pool means that funds can be managed more efficiently, and has the potential to escalate the speed at which managers are able to meet their investment objectives. The use of multiple domiciles can result in optimisation of the structure. When you use several jurisdictions, you will meet the concerns of more investors, and when you have this form of global asset pooling structure, you will pool assets together and can also increase efficiency in terms of profitability.

Finally, the other notable Luxembourg structure is the RAIF – the reserved alternative investment fund. This is an unregulated product, and we say that it is a 'hybrid' product - it is indirectly regulated at the level of its manager. A RAIF is required to appoint an authorised AIFM, subject to supervision by the European supervisory authority of the AIFM. If the initiator wants to have a product in which they can have an umbrella structure, a RAIF is able to have segregated compartments, making it a good choice of vehicle if an initiator envisages several investment policies targeting different pools of investors.

Q: What are the main challenges of the set-up of Cayman/lux parallel structures in practice?

A: The operational component is a key challenge because when you operate multiple co-investing parallel funds with cross-jurisdictional vehicles, investors will still require equal treatment. In practice, this means that there will be an additional administrative burden and a lot of complexity to deal with. For instance, there may be different base currencies and different reporting obligations of the different vehicles to navigate.

In terms of expenses, it's also important to note that an adequate allocation of costs between the different funds in the structure will be required. You will also have to achieve a fair balance between the voting rights of different investors. Sometimes you may have to rebalance costs from one pool of assets to another, too.

Overall it's vital that the cost and expense allocation mechanism -- the voting rights, distribution waterfall, for instance - are modelled at the structuring stage of the fund to ensure that they will work effectively in practice.

The next challenge may relate to the delegation model. In the offshore world, the sponsor will usually be remediated through an advisory or management fee. This will be the same in a Luxembourg fund but if you, for example, have a Luxembourg fund that needs to appoint an external authorised AIFM to access the European passport, it will have a third-party service provider that will be included in the fee and delegation structure. This may make things difficult because you will need to carefully monitor the flow of fees within both structures, and the delegation structure in each fund may not be the same.

The final key challenge is sustainability. Due to the costs that the structure will generate, it may be a sustainability challenge for smaller funds. This also needs to be carefully studied at the structuring stage of the parallel structure.

This Q&A was first published by HFM.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions