Insight into North American Fund Managers’ Growing Interest in European Alternatives

Authored by: Alex Di Santo, Head of Private Equity, Europe
Updated on: April 30, 2024

Originally Published in Private Fund CFO

In the dynamic global financial landscape, North American fund managers in particular 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.

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

In terms of preferred European domiciles, North American managers showed a preference for Luxembourg (50%) and Ireland (50%), followed by the Channel Islands (25%), for those looking to launch a fund over the next 12 months.

For several years now, Ireland has been gradually chipping away at Luxembourg's market position and the fact that North American fund managers are now just as likely to establish their funds in Ireland as in Luxembourg, is an interesting development in itself. This represents a subtle yet significant shift, suggesting that Ireland has become the default alternative to Luxembourg for North American fund managers.

This shift underscores Ireland's growing prominence as a hub for alternatives, a trend that's likely to continue given the country's transparent and well-regulated funds environment, a proven track record in alternative investments, and a 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’s reflected in the conversations we’re having with managers around the world, not least in the US.

Of particular interest to North American alternative fund managers will be the Investment Limited Partnership (ILP) and Qualifying Investor Alternative Investment Fund (QIAIF) fund structures.

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 on partnership terms while providing a high degree of investor protection. It has been designed in large part to appeal to US-based investors. QIAIF is a regulated fund structure aimed at sophisticated 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 (AIFMD) 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.

The 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 oversubscribed for new fund launches, meaning there have not physically been enough staff on the ground to launch all the funds for managers who would have liked to be there. Ireland has naturally been a net beneficiary of this situation.

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% of its financial center. The LPEA counts 183 private equity and venture capital investors and fund managers among its 450 members. The number of private equity funds domiciled in Luxembourg has grown significantly from 199 in 2017 to 1,789 in 2021, representing about 67% of the total European ETF market. 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 regimes 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, the selection of jurisdictions, like Luxembourg, Ireland, and Jersey, which all have clear and established regulatory systems and access to the EU market, is a sensible strategy.

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

Published on: April 30, 2024