In order to maintain uninterrupted business and access to international capital, managers today are expected to effectively navigate these regulatory transformations, which often requires a change in operations, such as moving domiciliation locations or implementing new compliance frameworks.
Stability and familiarity, which should ultimately mitigate operational difficulties, are key for all investors, but especially US alternative fund managers with an international investor base that have to navigate multiple regulatory regimes.
Future-Proofing of Operational Models
Due to proliferating uncertainty in the regulatory space, the future-proofing of operational models has become more important for managers. While they can’t control changes in global regulation, managers can limit the impact these changes have on their ability to conduct business through their choice of jurisdiction and the use of reliable structures, such as the LLC for example.
In an effort to solve operational complications, many jurisdictions, such as Jersey, Cayman, and Delaware, have developed limited liability company legislation, which, especially in Jersey’s case, is specifically designed with investors whose activity takes place internationally in mind. US private equity, venture capital, and other alternative fund professionals should find this framework simple to understand and implement.
As global regulation changes, so too does the available list of jurisdictions in which firms can issue securities vehicles, and domicile funds. In 2022, there was a significant migration of managers changing jurisdictions following shifts in EU regulation, which prohibited European investors from allocating capital to black and grey-listed financial centres. To avoid subsequent changes to their domiciliation, these managers are prioritising the future-proofing of their businesses.
Reliable jurisdictions offer stability through a collaborative approach between government, regulators, and the financial industry, while maintaining the flexibility of a reliable LLC operating agreement.
Offshore LLC structures are unique in their ability to offer a future-proofed solution to marketing under the Alternative Fund Managers Directive (AIFMD) and other European directives, which have most recently caused disruption in the cross-border financial space.
Offshore structures are able to bridge a gap between US and EU markets, allowing firms to market internationally within a reliable and cost-efficient system, via private placement regimes. These jurisdictions are also able to facilitate this work in the absence of full onshore AIFMD compliance requirements. When combined with strong internal regulatory infrastructure, this adds to the stability of a jurisdiction and provides a limited change outlook for managers. Figures from Preqin show that 55% of European investors in alternative real estate and 62% in private equity are based in the UK, Switzerland or the Netherlands. Since January 2021, only one of these three countries is now in the EU, therefore the ongoing onerous regulation and expense in order to access only one or two EU Member States is disproportionate when a simpler alternative is available. The reality is that few managers need blanket access to all EU Member States. In cases where they do, then an onshore option works best, but with European Commission figures suggesting that 97% of managers actually market to three EU markets or less, then private placement offers a very credible, fast, cost-effective and sensible option.
The introduction of the full LLC framework provides US managers and sophisticated investors a familiar way to meet their global marketing needs through quick and easy access into Europe, particularly through the National Private Placement Regimes (NPPR), which lowers the costs and increases the speed of marketing. This provides certainty for US managers looking to fundraise within the EU, which has become increasingly complicated.
Managers looking to future-proof their businesses and maintain access to global capital and strategy should look to jurisdictions which employ familiar and reliable structures, that offer long-term operational solutions. Stability in a manager’s underlying operational structure is also paramount in navigating continued transformations in the regulatory environment and in ensuring that businesses are able to react and adapt to these changes effectively.
This article was first published in Value Walk.