North American managers eye Europe for alternative capital

In the dynamic global financial landscape, North American fund managers are increasingly setting their sights on Europe as a promising source of alternative capital, domiciling new funds there at the fastest rate we’ve seen in recent years.

The latest Crestbridge data shows that over the last 12 months, North American fund managers that launched a fund in the US also domiciled a fund in Europe 60 percent of the time. This suggests a growing recognition of the benefits offered by European fund jurisdictions, such as robust regulatory frameworks and access to European investors and investments. Indeed, many see Europe as an opportunity to diversify their investor base.

In terms of European domiciles, North American managers looking to launch a fund in the next 12 months showed a preference for Luxembourg (50 percent) and Ireland (50 percent), followed by the Channel Islands (25 percent). The UK is also seen as a very viable option.

Ireland has now become a viable alternative to Luxembourg for closed ended private equity fund structures given the changes made to the limited partnership law recently. For North American fund managers looking for an EU domicile, Ireland has become the default alternative to Luxembourg.

This shift underscores Ireland’s growing prominence as a hub for illiquid alternatives, a trend that’s likely to continue given the country’s transparent and well-regulated funds environment, proven track record in alternative investments and deep talent pool experienced in setting up and running alternative funds. Its position within the EU does make it a compelling alternative to Luxembourg for many, and that is reflected in the conversations we’re having with managers around the world, not least in the US.

Structures of interest

Of particular interest to North American alternative fund managers will be the investment limited partnership (ILP) authorized as a Qualifying Investor Alternative Investment fund (QIAIF).

The ILP is a common law partnership structure that is particularly suited to private equity, real estate and other closed-ended alternative investment strategies. It is a regulated vehicle with a flexible framework that allows for contractual freedom to agree partnership terms while providing a high degree of investor protection.

The QIAIF is a regulated fund structure aimed at professional and institutional investors. It has no investment or borrowing restrictions, making it a flexible choice for alternative investment strategies, including private equity, real estate, private debt and other types of alternative investment funds.

For US fund managers, the QIAIF offers several advantages. First, it can be marketed across the EU via the Alternative Investment Fund Managers Directive passport. Second, it has a fast-track regulatory approval process, with authorization typically granted by the Central Bank of Ireland within 24 hours of application, provided they have an authorized AIFM. Third, it can avail of Ireland’s extensive network of double taxation treaties, which can provide for reduced rates of withholding tax on income received by the QIAIF.

QIAIFs can be established in various legal forms and can be open-ended, limited liquidity, or closed-ended, offering structural flexibility to cater to diverse investment needs and strategies. We believe the ILP structured as a QIAIF is a very appealing product for US managers seeking to establish a typical private equity fund in Europe.

Competing jurisdictions

The relatively recent amendments to Ireland’s Alternative Investment Fund (AIF) rulebook, coupled with the enactment of the ILP Act, have boosted the adaptability and allure of Irish fund structures. The allure of Ireland is boosted as Luxembourg has recently been saturated with fund launches resulting in significant job vacancies in the fund management and fund administration space and the challenges of attracting and retaining talent. We expect Ireland to naturally be a net beneficiary of this situation.

However, Luxembourg is still the largest fund domicile in Europe and one of the most popular worldwide.

According to May 2023 data from the Luxembourg Private Equity Association (LPEA), Luxembourg hosts over €500 billion ($590 billion) in private equity assets, making up 8.6 percent of its financial center. The LPEA counts 183 private equity and venture capital investors and fund managers among its 450 members and the most common types of funds are Fund of Funds and Buyout funds, primarily originating from the UK, Switzerland and the US.

The UK, despite Brexit, remains an attractive destination, offering a well-established framework for alternative fund managers. The UK has been proactive in making itself a more appealing location to manage alternative investment funds, with the relatively new Long Term Asset Fund and Qualifying Asset Holding Company products serving as examples.

Jersey, while not part of the EU, is another well-regarded domicile for alternative investment funds. The island’s political and economic stability, coupled with a wide range of fund structuring options, make it very attractive for managers and investors alike. The Jersey private fund structure, for instance, offers easy and cost-effective marketing into the EU through National Private Placement Regimes, although it may not provide the full range of benefits associated with an EU passport.

When it comes to investment strategies, North American managers are particularly optimistic about growth capital and buyout strategies, planning to increase their allocations in these areas over the next 12 months. With regulatory compliance weighing heavily on fund managers, exploring the selection of jurisdictions, like Luxembourg, Ireland, Jersey and the UK, which all have clear and established regulatory systems and access to the EU market, is a sensible strategy.

This strategic choices of domicile by North American managers, their focus on growth capital, buyout and other strategies and their cognizance of regulatory compliance requirements collectively exhibit a dynamic adaptability. These factors are undoubtedly going to influence future trends and directions in global fund management.

Alex Di Santo is group head of private equity at private equity services provider Crestbridge. He is based in Jersey.