Surrounded by Pennsylvania, New Jersey and Maryland, and occupying almost 2,000 square miles of land on the US eastern seaboard, Delaware has carved itself a deep niche as the US fund domicile of choice. The state’s limited partnership structure, which does not require a promoter to have a substantive connection to the state or disclose fund investors, is the primary vehicle for US managers and therefore managers globally. “Delaware ranks high because of the number of US funds investing in US real estate,” says IQ-EQ group funds and institutional director, Stuart Pinnington.
Unlike its international counterparts, which need to keep a keen watch over the competition, Delaware faces no significant challenger within the US. Fred Steinberg, SANNE Group’s New York-based managing director, notes that the tax-friendly state is so entrenched as the leading US domicile, that while sometimes funds set up in New York, Nevada and other states, he does not envision them displacing Delaware as the leader.
“Delaware has built up its specialism,” agrees Intertrust Group global head of product Patrick O’Brien. “Past rulings and the regulatory and tax environment mean it’s a hub for products.”
Delaware serves as the default because of its “advanced pro-business and enterprise-friendly laws [and] a long history of court precedents,” says Charina Amunategui, executive director business development, MUFG Investor Services. Outside of Delaware, other jurisdictions that funds have considered include New York and Texas, and even Alberta or Ontario in Canada, driven by the anticipated investor pool (ie, Canadian pension plans).
For its part, setting up in Delaware is uncomplicated – the secretary of state’s office is widely perceived as efficient – and the regime is flexible.
“The beauty of Delaware for funds is a clean slate upon which managers can build an entity that works,” comments Ellisa Opstbaum Habbart, founding partner, The Delaware Counsel Group. “Everything may be customized in the contract. The challenge is you need to know what you are doing. Drafting the documentation can be complex.”
An established pool of third-party service providers is on hand to help, including “an entire infrastructure and network of legal counsels, registered agents, tax preparers, auditors, banking providers and fund administrators that are well established and seasoned working with Delaware funds,” says Amunategui. “A new manager can easily leverage this network’s experience enabling a seamless fund start-up process in a matter of weeks and straightforward fund maintenance operations in the future.”
And should a dispute arise, a key advantage is the bench of appointed judges that sit in Delaware’s juryless Court of Chancery, which has substantial experience in commercial matters, Habbart adds, highlighting the role of Delaware’s Corporation Law Council of 26 lawyers that keeps an eye on possible annual updates to the Delaware Revised Uniform Limited Partnership Act.