Established domicile favorites Delaware, Luxembourg and the Cayman Islands are proving difficult to knock from their perch. While they remain predominant, there are changes taking place, just as there are in the regulatory sphere, prompted in good part by increased emphasis on ESG considerations.

The top three remain in place

The strength of Delaware, Luxembourg and the Cayman Islands was illustrated by a recent survey carried out by PERE and RBC. It found that 46 percent of fund managers nominated the US East Coast state as a leading destination when choosing where to launch a new fund, as compared with 36 percent for Luxembourg and 27 percent for the Cayman Islands.

“There are good reasons for Luxembourg, Delaware and Cayman Islands as being favored jurisdictions for managers to establish their private funds,” says Clare Baker, investment funds partner at law firm Linklaters. “In addition to the tax and regulatory advantages, they are well known by institutional investors.”

A combination of established guidance and confidence in the growth of the investor base is helping to shore up Delaware’s place at the top. “The first thing is we have a court system, the Court of Chancery, which is modeled after the English courts,” says Elissa Habbart, founder and director at the Delaware Counsel Group. “In contrast to most other states, here sophisticated business disputes get heard before a judge rather than a jury.”

For Luxembourg, the tax regime may be less favorable than either Delaware or the Cayman Islands, but the Grand Duchy still draws from a deep well of experience and expertise to entice fund managers. “Luxembourg remains an attractive jurisdiction, as it always was,” says Simon Vardon, global head of real assets at corporate services group Sanne. “Luxembourg offers a mature financial market with a stable regulatory environment. It also offers tax certainty, which is very important, and it has a good range of fund products.”

“While ESG is an important consideration for our clients, so far, generally we haven’t seen [them] treating [it] as a key consideration in selecting their fund jurisdiction ”

Emma Danforth, Allen & Overy

Jurisdictions that come with an abundance of accountants, lawyers and custody banks make for a natural fit when it comes to domiciling funds. And post-Brexit, the UK is taking steps to join the party.

“We are starting to see some renewed interest in the UK,” says Jonathan Bray, London funds partner at law firm Clifford Chance. “Whilst it’s 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.”

It’s time to re-think regulation

Regulatory change is always a hot topic for private fund managers, regardless of geography. Change at the top of the US SEC has proved a significant factor in the reform process of how private fund markets should be governed.

“One of the first signs we saw of this were the amendments to the Advertising Rule, now renamed the Marketing Rule, which applies to all marketing by investment advisers up and down the spectrum; private fund managers get picked up in that as well,” says Robert Sutton, partner and member of the private funds group at Proskauer.

Investment advisers have previously complied with disclosure rules but been less bound to prescriptive frameworks, unlike in the US retail market. And part of the impetus for the latest shake up has been the perceived failure of disclosures and enforcement action to prevent errant industry practices.

“That is what’s motivated what we’ve seen in the amendments to the Marketing Rule at the end of the Clayton administration. And this comes through particularly clearly in the proposed Private Fund Adviser Rules, which is what has made the biggest splash recently,” says Sutton.

Despite the shift in the US, disclosures remain ubiquitous in Europe. The EU’s Sustainable Finance Disclosure Regulation (SFDR), which obliges fund managers to weigh their exposure to climate change, came into force earlier in the year. And while the sector is conscious of addressing greenwashing, it is still very early days for sustainability reporting.

“The industry is still trying to work out exactly what compliance with the SFDR will entail,” highlights Steven Cowins, partner at law firm Greenberg Traurig and co-chair of its global real estate fund practice.

Similarly, Asia-Pacific is not immune to the ascendancy of ESG. Tony Horrell, head of global capital markets at broker Colliers, stresses that “ESG has become a strong focus in APAC, as it will soon be a priority in the office sector as government and corporate tenants pressure owners to get their ratings up.”

For Edward Tran, partner at law firm Katten Muchin Rosenman UK, when it comes to regulating sustainability investments in the real estate space, “it’s too easy to say [the US and Europe] are ahead, [Asia] is behind.”

Sustainability’s importance is growing

“Regulators are adopting different approaches when it comes to ESG, which presents difficulties for the investor community,” says Kiran Patel, chief investment officer at Savills Investment Management. “It’s early days. We’re all learning, and I’m sure the regulator is learning as well.”

New regulations like Europe’s SFDR and variances in how best to benchmark sustainability across different jurisdictions pose fresh challenges to real estate fund managers, especially when choosing where to domicile funds. “If you look at Luxembourg – one of the most popular domicile markets in Europe – it doesn’t have a minimum asset threshold for funds to be considered sustainable, investors don’t have to follow an exclusions policy and regulators don’t mandate a particular scoring methodology,” adds Patel, pointing to just one regional difference.

ESG is also no doubt playing an increasing role in decision making. A 2021 survey from BNP Paribas found that 21 percent of institutional investors thought ESG at the core of their business, compared with 10 percent in 2019. And further regulations loom over the horizon. As a case in point, from 2025 the Task Force on Climate-related Financial Disclosures will make reporting sustainability liability mandatory across the UK economy.

But ESG overlap and the global push for acceptable reporting is also creating plenty of common ground. “While ESG is an important consideration for our clients, so far, generally we haven’t seen [them] treating [it] as a key consideration in selecting their fund jurisdiction,” explains Emma Danforth, partner at law firm Allen & Overy, a point echoed by others.

“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,” says Bray.