Parallel universe: lure of the Cayman-Lux
The lure of tailored solutions for potential investors coupled with a growing desire for an international offering indicates interest in Luxembourg-Cayman parallel fund structures is likely to grow as we take our first steps into a new decade.
The structures generated strong interest from US and Asian fund sponsors over the course of 2019 and law firms answered the call with the development of sophisticated solutions, allowing sponsors to meet the jurisdiction-specific regulatory demands of investors from different countries while establishing sizeable funds to reach a much larger investor base for any given investment strategy.
Agile fund sponsors can now choose products that accommodate the demands of professional and institutional investors while also meeting the needs of an increasingly complex regulatory environment for global offerings.
Luxembourg and Cayman are well established funds jurisdictions, maintaining the highest global governance standards. Cayman is a familiar jurisdiction for US and Asian investors and sponsors, has a sophisticated and well-established fund ecosystem and the advantages of its tax neutrality, a flexibility of structuring options and a government that is reactive to industry requirements and keen to embrace innovation in financial services.
Luxembourg’s investment vehicles’ toolbox and sponsor friendly limited partnerships are among the reasons why it remains Europe’s preferred jurisdiction for fund sponsors seeking to access European capital. It provides access to the European passport for marketing purposes where the fund appoints an authorised AIFM (alternative investment fund manager). With the backdrop of Brexit, a number of Asian and US managers based in the UK are also now choosing Luxembourg as their European base.
There are a number of similarities between the Cayman exempted limited partnership and the Luxembourg special limited partnership, in particular their flexibility, which provide comfort for a manager looking to operate the funds in parallel in the context of familiarity with the product(s) and easy alignment of the fund documentation.
Luxembourg’s suite of fund products also includes the RAIF (reserved alternative investment fund). A RAIF can be used within a parallel fund structure and is particularly attractive for sponsors looking to set up an umbrella structure. It offers the possibility of segregated compartments, making it a good choice of vehicle if a sponsor envisages several investment strategies targeting different pools of investors and/or different portfolios of assets.
Designing the most suitable parallel structure for each fund sponsor and its target investors means anticipating, discussing and developing all aspects of the fund structure – such as voting rights, distribution waterfall, cost and expense allocation – with the right legal team before the launch of the fund so that the sponsors ask the right questions at the right time.
Anticipating potential pitfalls and regulatory challenges before they materialise, offering practical solutions at each stage of the structuring process will significantly reduce the prospect of post-launch delays and costs.
By Ogier’s Cayman partner Joanne Huckle and Luxembourg partner Anne-Gaëlle Delabye