Reverse Engineering the Domicile Where to Set Up a European Investment Fund  

One of the main challenges for US fund managers interested in raising capital from investors in Europe lies in choosing the right European member state for the establishment of a European investment fund. This is a very delicate choice. Nowadays relocation of investment funds has become a possibility both within Europe and from abroad and is called in jargon re-domiciliation. Whilst possible, re-domiciliation remains a cumbersome process with its own perils. It is always better to get the domicile right from the outset for the establishment of your European investment fund.  

The costs involved in building and operating a fully-fledged investment fund in Europe are indeed discouraging for certain managers. However, deciding to set up an investment fund onshore in Europe offers undoubtedly advantages. One of these being the ability to use the marketing passport and reach investors across all the member states in Europe.  

Domicile shopping in Europe to set up an investment fund is complicated. There isn’t one member state that ticks all the boxes for any fund launch project in any given scenario. Also, different European member states have their own strengths and weaknesses. As the European single market evolved, some member states consolidated their position and reputation as centres of excellence for the establishment of investment funds. These are known in jargon as European gateways. 

Selection Process at the Inception of the Single Market 

In the early days of the single market in Europe, when the marketing passport for European investment funds was just introduced, the decision on the domicile of an investment fund would be made entirely at the discretion of the investment groups promoting the launch of a fund. The selection process would be based on a set of tangible variables like local tax and legal regimes, practices of local supervisory authorities, existence of language barriers, local customs as well as general cost and easiness of business. A new intangible variable made its way to the top of the list of criteria for European domicile selection by the end of the 90’s – investor demand. Over time, investor demand ended up having a very considerable influence in the decision-making process relative to the selection of the member states where to establish a European investment fund.  

Even though investment funds established in any European member state all benefit from the marketing passport and the ability to be sold cross-border in Europe, this does not mean that investment funds established in any given European member state are deemed equal in the eyes of investors.  

Inevitably European client base preference plays a pivotal role when choosing the domicile for the setup of an investment fund in Europe. European authorities have now recognised the importance of reverse engineering the choice of the domicile for a European investment fund based on investor preference. With the formal introduction across Europe of the AIFMD premarketing, under certain conditions, there are now legal ways to test appetite for investment ideas and strategies and at the same time gather intelligence on the most suitable member state for the establishment of a European investment fund.    

Pan-European or local? 

One of the most distinguished features of the single market in Europe is the freedom of movement of goods. European investment funds are considered goods of a financial nature and can move freely across the entire single market by virtue of the marketing passport. When choosing the member state where to domicile a European investment fund it is also very important to foresee the distribution footprint of specific investment strategies. This will be another guiding element when choosing the most appropriate European domicile.  

Where investment strategies conceived with a pan-European outlook for distribution are better domiciled in certain member states in Europe, the so-called European Gateways, the same might not be true for other investment strategies where investors might be concentrated in very few member states if not one only. In these circumstances, when a strategy is offered to investors in a handful of member states, there is always a common choice of neighboring domicile that works for all. In cases where investors are concentrated in one European member state only, it makes better sense to establish a local fund.  

The European Gateways 

Whilst European member states like Malta and other states in geographical Europe like the Channel Islands have increasingly established their reputation as fund hubs, the first stops for each and any project to establish and European investment fund remain Luxembourg and Ireland. They are called the European Gateways. Both member states can offer a wealth of on-the-ground expertise and have developed sufficient capabilities and workforce at all levels to support the needs of an established industry and service sophisticated investment strategies alike.  

For public markets type of investment strategies, the one that would also fit into a retail type of fund, there is virtually no difference between the two European gateways in terms of broad market perception for investment funds established in either member states. In these cases, with few exceptions, US and UK fund managers alike have had historically a preference for Ireland as a gateway to access Europe. This is because of the lack of a language barrier and the forthcoming approach of the local supervisory authorities. Continental and southern European managers, when faced with the choice for a more international European domicile for the establishment of investment funds, have always been biased towards Luxembourg. Here French is the preferred language. Also, supervisory authorities usually adopt a more formal approach and timelines for fund authorizations might not be as compressed as we would want them to be. For what concerns investor preference, Irish funds have traditionally been the flavour of Anglo-Saxon and northern European investors, whilst Luxembourg funds instead the one of the ones from continental and southern Europe.  

Slightly different is the case of private markets and alternative investment strategies. Luxembourg introduced revamped partnership like and tax transparent structures that helped gaining some ground over Ireland in the recent past. By way of example, out of the very few European long term investment fund structures launched since inception of the new regime in Europe in 2015, the majority was launched out of Luxembourg. The recent revamp of the corresponding structures will hopefully help re-establish the position of Ireland in this space.