RBC survey: Stable fund domiciles in a shifting environment

In a complex investment market, managers are sticking with traditional fund domiciles and opting to outsource more operational functions, survey findings reveal.

Private fund managers are increasingly opting to domicile funds in Luxembourg, our exclusive survey carried out in conjunction with RBC Investor & Treasury Services reveals.

The top three jurisdictions remain consistent with a similar survey we conducted last year (in which we polled only private equity real estate fund managers), with Delaware, Luxembourg and the Cayman Islands well ahead of rivals elsewhere. But this year’s survey, which includes the views of private equity real estate, private equity and private debt funds managers, suggests the popularity of Luxembourg has risen over the past year to match Cayman.

Delaware retains top domicile status

When asked which domicile private fund managers would choose for their next private fund launch, Delaware emerges as a clear leader, with 45 percent of respondents choosing this as a jurisdiction and 36 percent opting for Luxembourg, with the same proportion selecting Cayman. All three are highly rated for their optimal conditions for doing business and for their regulatory and tax framework.

This is quite a turnaround in a relatively short space of time. “If you rolled back a few years, the UK and Channel Islands would have appeared among the top jurisdictions for private funds,” says Leith Moghli, a partner at Reed Smith. “While they are still relevant, Luxembourg’s development as a fund center has largely been to their detriment.”

Luxembourg’s appeal rises

Luxembourg has increasingly become a hub for AIFMD compliance among those seeking capital from European investors. The 2013 launch of the SCSp, or special limited partnership – a limited partnership agreement that is effectively a copy and paste of Delaware and UK limited partnership documents – was the start of Luxembourg’s rise. But developments since have boosted its popularity, including the UK’s vote to leave the EU, the implementation of BEPS and increasing LP concerns about using offshore structures following the Panama Papers and Paradise Papers leaks, and the marketing passport available for AIFMD-compliant private funds.

A large part of Luxembourg’s growing allure comes down to the parallel structures being established by US managers. Proskauer partner Edward Lee points out: “In our own analysis of European funds, we’ve seen a big shift in Luxembourg’s favor over the past 12 months, in particular among UK funds – a move that is clearly Brexit-related. However, we are also seeing a number of US managers establish parallel structures in Luxembourg, where they either establish their own AIFM or use third-party AIFM service providers and delegate back to the US.”

“Luxembourg is a relatively easy place for US fund managers to do business,” adds Stephen Meli, partner at Proskauer. “In key ways, it’s becoming the Delaware of Europe for US managers. The entities Luxembourg offers are similar to those available in Delaware and the Cayman Islands for fund structures and the documentation is similar, even down to the way the documents read. There’s also a network effect, where every additional US manager that establishes a parallel vehicle there helps attract others.”

LPs are also gaining comfort that Luxembourg’s regulatory regime and its requirement for depositary services under AIFMD offer them added protection – a trend also noted by Nicolas Fermaud, head of the New York office at Elvinger Hoss. “Where firms have had parallel structures for two to three years, we have noticed a disproportionate increase of the commitments collected through the Luxembourg structure,” he says. “In part, managers are raising more capital from European LPs, but it’s also because LPs globally are becoming increasingly comfortable with Luxembourg as a jurisdiction. For firms that equalize costs across their platforms, the Luxembourg set-up with its depositary and regulatory regime is clearly more attractive for many LPs.”

Private fund managers are also eyeing fairly significant growth in assets under management. Over one-fourth anticipate between 10 and 20 percent growth in the next year and more than half expect over 20 percent in the coming decade.

This increase will come from a wider variety of investors from a broader range of geographies. The majority of respondents (88 percent) expect to increase the proportion of LPs from Asia (excluding China), 81 percent anticipate a rise in North American investors and 53 percent predict that capital from Central and South American LPs will make up a higher proportion of their AUM.

Outsourcing increasingly popular

All this adds up to increased complexity when it comes to managing private fund businesses. Many respondents are looking to outsource parts of their operations: 51 percent are seeking to outsource at least half of the fund administration part of their business and a third want to outsource at least 50 percent of their technology function, with 28 percent and 20 percent saying the same about legal and regulatory services, respectively.

“Outsourcing among fund managers is clearly being driven by a desire to optimize their operations and focus on what they do best,” said Dirk Holz, private capital lead at RBC. “It’s also a way for them to manage certain risks, such as regulatory risk, given that it’s challenging to keep up with regulations across the different markets they are operating in.”

Disruptive concerns

Big data, automation and artificial intelligence rank top among respondents for their potential to disrupt private capital investment in the next three years, yet over a quarter are not planning or implementing these technologies, and many report having little expertise in this area.

Less disruptive technologies could however help private funds streamline their processes without the need for high levels of investment. Priya Nair, managing director and global head of product management for private capital services at RBC, says: “Smart contracts, for example, can help create base templates where there are a lot of similarities, such as liability frameworks, without the need to have a large element of involvement from lawyers. Regtech has a lot of potential for helping firms monitor regulatory developments globally and ensure firms can stay ahead of the game – it could streamline passporting, for example, and be applied to AML and KYC compliance.”

For those that invest in deploying technologies like big data, the prize could be access to better dealflow. “Firms are looking at how they digitize their internal processes at a time when there is a lot of dry powder in the private markets space,” says Nair. “They need to differentiate themselves around how they originate and how they create value in their portfolio.”

And being able to differentiate from the competition is uppermost in respondents’ minds. While the biggest barrier they perceive to achieving their objectives in 2019 is the economic environment (mentioned by 72 percent), competition is second for 42 percent of respondents.

Tapping new demand for private equity

With 74 percent of private equity funds in our survey expecting an increase in AUM of at least 20 percent over the next decade, including more than two-thirds expecting to achieve this within half that time, investor relations and fundraising teams in this part of the alternative assets space are set for a busy time.

There is clearly demand from institutional investors as fund sizes have increasingly crept up over the years since the 2007-08 global financial crisis.

Yet private equity funds also have their eye on the retail market, our survey shows. Nearly half of respondents expect to increase retail investors in their investor base mix, including 19 percent predicting a large increase.

There has been some movement in this space, according to Reed Smith’s Moghli. “Over the past 12 months, I’ve seen the launch of a handful of fully fledged private equity operating platforms aimed at retail investors that provide fully automated administration processes,” he said.

“However, they aren’t targeting the average person on the street – they generally require minimum income levels of around £100,000 ($127,000; €112,000) and assume a certain amount of investment sophistication.”

Yet major developments look some way off, especially in Europe where regulations are currently not well tailored to the needs of private equity.


Sister publication PEI surveyed 82 private fund managers about a range of fund domicile and regulatory issues. Answers were given on a strictly anonymous basis and the results aggregated.