Luxembourg, Delaware and the Cayman Islands have long been favored by private fund managers, but are other jurisdictions gaining traction?
ED: While Luxembourg remains the most popular jurisdiction for our clients, they are certainly thinking outside the box much more than they were a few years ago. The two main drivers we see behind this are the increased regulatory focus on substance – which is resulting in clients renewing their focus on jurisdictions where they are confident they have sufficient substance – and the increasing appetite of managers and investors to move away from traditional passive fund structures to more bespoke arrangements such as co-investments, joint ventures and club deals, which by their nature open up the opportunity to consider a wider range of jurisdictions.
Clare Baker, Investment funds partner, Linklaters
Jonathan Bray, London funds partner, Clifford Chance
Emma Danforth, Partner, Allen & Overy
JB: Luxembourg is still generally the default choice for European managers. That said, Clifford Chance is starting to see more interest in Ireland following the overhaul of their Investment Limited Partnership regime. And there is still appetite for non-EU domiciles such as Delaware or the Channel Islands, particularly for managers who are less focused on European LPs.
CB: There are good reasons for Luxembourg, Delaware and Cayman Islands being favored jurisdictions for managers to establish their private funds. In addition to the tax and regulatory advantages, they are well known by institutional investors. Whilst other jurisdictions have tried to gain traction in the PERE market (eg, Ireland, which has tried to streamline its limited partnership laws to make it more attractive as a jurisdiction to establish a PERE fund), we have not seen them make significant inroads in this market.
Which jurisdiction is currently most underappreciated?
JB: This may come as a surprise, but probably the UK! Post-Brexit we are seeing a few UK managers, especially those with a predominantly non-EU investor base, gravitate back to the traditional English limited partnership structure.
CB: We do see domestic products for local markets (eg, in France, Italy and Germany). The UK and the Channel Islands (notably Jersey) continue to be widely used for investing into UK real estate. However, I would not currently call out any specific jurisdiction as being “underappreciated.”
How much does ESG – particularly with regulations such as SFDR now in force – affect domicile choice when setting up a real estate fund?
JB: Less and less. ESG legislation such as SFDR increasingly applies on a cross-border basis, so it is becoming increasingly important to comply, regardless of where you domicile your fund. This is particularly the case given the number of new regulatory regimes on the horizon, such as the SEC’s new proposals.
ED: While ESG is an important consideration for our clients, so far, generally we haven’t seen our clients treating ESG as a key consideration in selecting their fund jurisdiction. However, as the ESG landscape evolves and becomes more complex I wouldn’t be surprised if this changes in the future.
CB: European regulation more broadly is a key structuring driver when considering where to establish a real estate fund. Notably, a fund would need to be established as an EU AIF with an EU AIFM if it wants to have the benefit of the AIFMD marketing passport, for marketing to professional investors across Europe. SFDR forms part of that European regulatory framework and is very relevant in that context.
However, we would not expect SFDR or ESG to be a key driver when considering where to establish a real estate fund. Even if a fund is established outside the EU, and managed by a non-EU AIFM, if it is sold to EU investors under European private placement regimes, SFDR will still apply to the relevant products.
Has Brexit had any impact on the UK’s attractiveness as a fund domicile, particularly when compared with the EU?
CB: Pre-Brexit it would be possible for a fund structured as an English Limited Partnership to have the benefit of the AIFMD marketing passport. Now that is no longer the case, meaning it would be harder to market UK funds across Europe. This has made the UK less attractive for funds that are aimed at European institutional investors. Having said that, we continue to see UK vehicles used in certain circumstances (eg, where the product is particularly targeting UK investors, and/or where the underlying assets are in the UK).
JB: We are starting to see some renewed interest in the UK. While it is true that some European LPs prefer to invest in European-domiciled structures, UK structures can be very efficient for UK managers to administer – and are still attractive due to the UK’s robust regulatory regime and good reputation among global institutional investors. And, for smaller “sub-threshold” managers who previously didn’t qualify for the AIFMD marketing passport, Brexit means that they can now market into the EU on a “national private placement” basis.
ED: Post-Brexit we have seen increased appetite for the UK as a fund domicile, and I expect that trend to continue. The FCA has been clear post-Brexit that it is committed to the UK remaining a competitive and attractive jurisdiction and we are starting to see new regimes such as the qualifying assets holding companies regime as part of that commitment.
Which upcoming changes do managers and investors most need to be aware of?
CB: The ESG landscape continues to be moving apace. The market is more familiar with SFDR. Now with subsequent legislation – such as taxonomy-related regulation in the EU – and wider ESG-related regulation across the UK, US and other jurisdictions across the world in due course, it will be important to keep pace with such regulatory change.
As with all new laws, there will inevitably be questions around how these rules work in practice. Managers, investors and regulators will each need to work through this. Interpretation will also change as the markets develop – what is considered green today may not be considered green tomorrow.
ED: ESG and substance continue to be the key areas of focus for managers and investors, and I don’t see that changing in the medium term.
JB: Where to start? The global regulatory landscape is changing on an almost daily basis. In Europe key areas of focus include SFDR and the AIFMD review, whilst in the US there are the modernized marketing rules, and the SEC’s proposed new rules for private fund advisers. In the UK we are also engaging with our clients on the new National Security and Investment Act and the UK’s new disclosure rules for foreign owners of UK land, which is a particular hot topic for real estate managers.