The starting point is always the investors. Who, where? Often no more than an educated guess at the start of a fundraise, thinking it through can help ensure that the structure has maximum investor appeal and save pain later.
Investor preferences are rarely cast in stone: most sophisticated investors can cope with most things to a degree.
However, they may have a larger allocation for something that will give them a better regulatory capital or tax treatment, or is perceived as safer. It is worth re-validating these points even when talking to existing LPs about a new fund. Things change, so why not push against the door with least resistance? The more diverse the investor base, the greater the likelihood that a range of different structures will be needed, whether organized as feeders or in parallel. Below is a quick round-up:
Delaware: The default choice for many US sponsors who fundraise predominantly in the US. It is also used by non-US sponsors, usually in parallel with other vehicles (it is not attractive to many investors outside the US).
Cayman: Sponsors and investors worldwide are familiar with Cayman, and for good reason, its private fund credentials are first rate. However, some investors (e.g. certain investors in Europe who are themselves regulated; some institutions and some private individuals) just have a problem with it.
Guernsey / Jersey: Very popular with UK managers for a range of reasons, these jurisdictions also have a broader international appeal. European investors who are wobbly about Cayman may be happier with these funds. However, as with Cayman, they do not reconcile well with some European tax codes or preferences.
UK: UK limited partnership legislation now looks antiquated compared with other jurisdictions (though this may change soon), but these vehicles are a solid choice particularly if the fundraise is more domestically focused.
Luxembourg: Favoured by some continental European investors (including in Germany, Spain, Italy and France). The jurisdiction offers great flexibility with a range of different vehicles (enhanced by recent changes to partnership legislation).
Others: There are workable structures in other jurisdictions, with both domestic and international appeal. We have recently established private debt funds in Ireland, France and Germany, amongst others.
There are many other factors to consider, here are three:
Distribution. If many investors will be in Europe, will a parallel, passported-EEA vehicle be less hassle and more appealing than registered private placements?
Banking regulation. This is already relevant to domicile choice for loan origination strategies, and we are only likely see more regulatory attention paid to the sector in future.
Substance. Is there merit in co-locating the fund and downstream structure, or otherwise building out “substance” in the fund jurisdiction? Given their sensitivity to withholding tax on income streams, this could be a significant issue for many debt funds. Tax initiatives such as BEPS are taking shape and could challenge existing structures. Some jurisdictions are easier to build substance in than others.
In summary, whenever you last came to market, the world is a more regulated and taxed place now than then and this trajectory is continuing. It pays to re-validate old assumptions and keep an open mind.