European investor appetite for Cayman Islands and Delaware fund structures has been waning for more than a decade. However, the 2013 introduction of the Alternative Investment Fund Manager's Directive (AIFMD) was a game changer for the European Funds market. It imposed an EU-wide framework on hedge, private equity and real estate funds, with greater regulation and compliance requirements. The directive was also implemented to increase investor protection.
Following a consultation period which ended on 29 January 2021, a revised AIFMD is due from the European Commission by the third quarter of this year. 'AIFMD II' is expected to strengthen the rules and expand the scope to include smaller Alternative Investment Fund Managers (AIFMs). The issue of equitable treatment of non-EU alternative investment funds, a wider choice for investors and the lack of a passport for depositaries should also be addressed.
As plenty of dry powder sits idle with European investors, US managers have a lot to gain by establishing a parallel fund in Europe and appointing an AIFM.
Investment peace of mind
Investors are increasingly looking exclusively for the AIFMD regulation for distribution. A fund domiciled in the EU and managed by an AIFM provides certainty on risk management, portfolio processes and reporting. Fund of funds, pension funds and insurance companies see this concept as tried and tested. Knowing it's a fund managed by a fully regulated AIFM gives them peace of mind. US managers also take comfort in knowing that the AIFM will handle all regulatory reporting and other local complexities, which can be difficult to navigate.
Premier financial centre
Whilst Ireland is increasing in its attractiveness as a European financial services centre, managers entering the market for the first time see Luxembourg as the stand-out jurisdiction for funds and SPVs. The second-largest fund centre behind the USA, Luxembourg is a AAA-rated country that covers not only alternative investment funds but the entire standard fund market. Asset managers will find virtually all fund structures familiar to them, including limited partnerships, which correspond to the USA's LLP.
Luxembourg's regulatory requirements have increased in recent years, but the CSSF –Commission de Surveillance du Secteur Financier – is known for being approachable and consistent. The country's base principles on taxation and company trading remain relatively stable – regardless of the colour of the government of the day.
Choosing the right administrative partner
With strong competition from approximately 140 different fund administration companies, choosing the right service provider in Luxembourg can be a daunting task.
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