Comparing Private Equity

Fund Domiciles

26 April 2012

Introduction

• AIFMD, more politics and jurisdictional competition• Private equity focus• Parallels are not easy:

o different laws and different needso different industrieso beware simple comparisons:

o a fund is not a fundo when is regulation regulation?

Introduction (cont.)

• Subjective criteria can be decisive:o locationo investor sentimento market trendso the preference of particular advisers

• Fiduciary responsibility o multi-jurisdiction businesses o product improvement

• Focussing on factso understanding contexto making a direct comparison

Understanding Context

Understanding Context (cont.)

No offering or capital raising

Risk transparency

Transparent costs and proper pricing

Operational analysis: Promoter model

Understanding Context (cont.)

Operational analysis: Banking model

Problems:

1.Competition2.Conflicts3.Secret profits4.Skewed pricing

Systemic risks:

1.Shadow directorship2.Cells3.Pooled management4.Custody and illiquid assets

(Beware too much control!)

Understanding Context (cont.)

Promoter Model

UK

Traditional UK Industry(Tax neutral)

Traditional Continental Industry(Tax negative)

Banking Model

CI AIFUCITS

Derivatives

Risk free / transparent Systemic risks / opaque

The PE funds’ spectrum

  UK*2 Guernsey Jersey Luxembourg

Market Established Established Established New EntrantReputation of Domicile

Onshore Offshore (IMF / FATF / OECD Top Ratings)

Offshore (IMF / FATF / OECD Top Ratings)

Onshore-EU

Existing Popularity High High High Low (a market for structured products)

Admin Efficiency and Transparency

Medium High High Medium / Low

Political / Economic Environment

Mixed / EU Supportive / Good Supportive / Good Mixed / EU

Applicable Law Common Law / EU Law Common Law Influence / Freedom of

Contract

Common Law Influence / Freedom of Contract

Civil Law / EU Law

Legislation General Laws General Laws General Laws Specific LawsAIFMD Impact Probably Applicable N/A / Equivalence N/A / Equivalence Potentially ApplicableTypical Product(s) Limited Partnership

(with or without personality)

Limited Partnership (with or without personality)

Limited Partnership (full spectrum)

SCA-SICAR’s, SCS-SICAR’s, SICAV-SIF’s and

FCP-SIF’s (no Limited Partnership yet)

Characters GP, LP’s, Operator and Auditor

GP, LP’s, Administrator and Auditor

GP, LP’s, Administrator and Auditor

Management Company, Custodian, Investors, Central

Administrator, Transfer Agent, Domiciliation Agent

and AuditorProduct Certainty Medium High High LowFlexibility High Medium Medium Low

This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.

Making a comparison*1

*1 Before implementation & AIFMD. AIFMD will have a massive impact.*2 The “UK” represents a union of England, Wales and Scotland!

  UK Guernsey Jersey Luxembourg

Establishment Costs Medium / High Medium Medium Medium / Low

Establishment Ease Medium / High High (from 72 hours if self-assess)

High (from 72 hours if self-assess)

Low (up to 6-9 months, worst case)

Operational Model Promoter Model Hybrid Model or Banking Model

Promoter Model, Hybrid Model or Banking Model

Banking Model

Operational Complexity Medium Low / Medium Low Medium / High

Operational Costs Low Medium Medium High

Typical Operational Model

In-house In-house/Substance Office/Outsource

In-house/Substance Office/Outsource

Substance Office/Outsource

Ease of Liquidation (if no architecture)

High High High High

Regulatory Status Regulated Manager / Unregulated Fund with

Operator

Regulated GP / Regulated Fund

Regulated or Unregulated GP / Regulated or Unregulated Fund

Unregulated or Regulated Manager / Regulated

Holding Company or Fund

Level of Fund Regulation None Medium-Flexible None/Light or Medium-Flexible

Medium

Promoter Test(for regulated products)

N/A Yes/Restrictive Yes Vetting

Tax Status of Fund Tax Transparent Tax Neutral Tax Neutral Efficient

Tax Status of GP Taxable / Grouping N/A N/A Taxable / Efficient

Withholding Taxes on Income Receipts

Low Efficiency Low Efficiency Low Efficiency Variable Efficiency

VAT Medium Efficiency High Efficiency High Efficiency Low Efficiency (plus risk)

Tax Risk CFC / Carried Interest / EU Risk

Mind and Management Mind and Management Substance / CFC / EU Risk / Duchy Risk

Carry Vehicles Complex Environment Freedom and Ease of Structuring, Tax Neutrality

Freedom and Ease of Structuring, Tax Neutrality

Reasonable (SPF or Sarl)

Orphan Vehicles [Trust or 25% cross ownership]

Trust or Foundation Trust or Foundation Dutch Foundation

This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.

Making a comparison (cont.)

  UK Guernsey Jersey LuxembourgCo-Investment Vehicles

Unproblematic Unproblematic / wide choice

Unproblematic / wide choice

Unproblematic / wide choice

Tax Efficient SPV’s Dutch or Lux-cos or Quoted Eurobonds

Dutch or Lux-cos or Quoted Eurobonds / Branches?

Dutch or Lux-cos or Quoted Eurobonds / Branches?

Same Jurisdiction Flexibility and Efficiency

Natural Market (1) UK Promoters (in particular sub £200m

funds); (2) UK Investing Funds and

(3) Offshore Restricted Investors

Strong since 1987, but declining for some

time.

(1) Independent Promoters (2) Institutional and Multinational Investors, (3) Capital Returns,

and (4) Funds with High Operational Costs and Asymmetric Processes.

Arguably, the most established domicile.

(1) Independent Promoters (2) Institutional and

Multinational Investors, (3) Capital Returns, and

(4) Funds with High Operational Costs and Asymmetric Processes.

Arguably, it has a slight real estate bias versus

Guernsey.

(1) Institutional Promoters, (2) HNW’s, (3) Income

Generating Funds (Requiring SPV’s) and (4) Special

Purposes (Re-packaging).

Best understood as a market for structured products.

Weaknesses (1) FSA Authorisation, (2) No Governance, (3)

Declining VAT Efficiency, (4) Product Risk (AIFMD)

and (5) Increasing Disclosure

(1) No Passport (AIFMD), (2) Increasing Scrutiny, (3) Tight

Regulation and (4) Non Common Law

(1) No Passport (AIFMD), (2) Increasing Scrutiny and (3)

Non Common Law

(1) Operational Inefficiency, (2) High Costs, (3) Product

Risk (Civil and Specific Laws / AIFMD), (4) Fiscal

Risks and (5) Systemic Risks (Custody and Platform)

This comparison describes complex issues in very brief terms and should not be considered a comprehensive analysis.

Making a comparison (cont.)

Conclusion Subject to AIFMD, better profile and interesting features if managed outside the EU. The Scottish LP providing the perfect onshore/offshore hybrid.

The traditional third country product favoured by the industry. There is very little real difference between the jurisdictions.

The SCS-SICAR best replicates the PE model. An SCS-SIF however seems quicker in practice to establish. Thought needs to be given to custody and VAT issues in particular.

Arguably the best at present - (1) Jersey is more flexible than Guernsey; and (2) possibly slightly cheaper.

Real Estate

(More diverse investors)

(Less risk)

Conclusion• Comparisons are not easy • No clear answers, no winners• Established patterns exist

o asset classeso products

• Nothing happens by chance• The equation is always changing• No room for jurisdictional hubris, focus on:

o efficiency and established benefitso service standards and integrityo a proportionate, internationally acceptable framework

Contact details

James BerminghamTel: +352 24 616 000Email: james.bermingham@aztecgroup.co.uk

Aztec Financial Services (Luxembourg) S.A.9A, Rue Gabriel LippmannL-5365, MunsbachGrand-Duché de Luxembourg

Visit our website for more information: www.aztecgroup.co.uk

www.aztecgroup.co.uk