This is the first Snippet in a series regarding the insourcing of management and administrative functions of a Luxembourg fund and its Luxembourg acquisition vehicles.
US fund managers often turn to Luxembourg when targeting EU investors and/or EU assets. This preference is driven by EU investors' comfort with Luxembourg fund vehicles and the practical benefits of Luxembourg asset acquisition structures.
Luxembourg funds typically acquire EU assets through a Luxembourg holding structure that often consists of multiple layers of Luxembourg limited liability companies (HoldCos). This caters to the needs of lenders, joint venture partners, co-investors and/or may lead to tax optimization.
US fund managers must decide how to manage the Luxembourg fund and the HoldCos.
Most of the managerial and administrative functions required for the maintenance of the HoldCos can easily be outsourced to external service providers located in Luxembourg. The same is true for a Luxembourg fund. For example, fund management can be conducted by a Luxembourg-based "host" authorized alternative investment manager (AIFM) and a third party can also be hired as fund administrator.
In practice, US fund managers without any Luxembourg presence consider that the insourcing of AIFM functions is economically viable if the Luxembourg fund(s)' AUM are in the USD 3 - 5 billion range. Of course, factors other than the economic viability may come into play (e.g., efficiency and control reasons). Setting up an in-house AIFM involves a lengthy authorization process (12 – 18 months) with the Luxembourg regulator and requires the recruitment of specialized local staff.
Insourcing the functions of the HoldCos usually occurs earlier as it's less costly and easier to organize. Such insourcing, which generally doesn't require authorization by the Luxembourg regulator, typically becomes attractive when a US fund manager has 15 - 20 HoldCos.
While cost savings are a factor, the primary driver for insourcing HoldCo functions is the need for local experts to navigate European regulations and improve operational control. Additionally, having a local presence may strengthen the HoldCos' entitlement to tax benefits in the countries where they derive their income, enhancing the fund's overall performance.
Insourcing the functions of the fund and/or the HoldCos requires establishing Luxembourg footprint, including office space and staff.
An in-house team handling HoldCo functions usually starts with 2 to 3 full-time employees and grows as needed. The insourced HoldCo functions taken on by the in-house team include accounting, corporate secretarial services, legal and tax coordination and compliance.
The next Snippets in this Series will discuss insourcing of the management and administrative functions of the HoldCos and the Luxembourg fund a in more detail, including the different models applied in practice.
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.
