Dechert LLP: Funds and European Regulation Update

A constructive outlook for Europe’s hedge fund industry

Hamlin Lovell

The Hedge Fund Journal spoke to three of Dechert’s London office partners, who highlighted notable trends and issues in the often inter-related areas of fund formation; domiciles; global fund distribution; credit funds; multi-manager structures; fee structures; MiFID II; PRIIPS, and derivatives reporting.

Dechert offers ‘jurisdiction-neutral’ advice, by virtue of its global network of offices (and relationships with law firms from other domiciles).

European domiciles: Ireland, Luxembourg and others

Dechert received The Hedge Fund Journal Awards 2018 award for ‘Leading European Practice – London, Dublin, Luxembourg, Frankfurt & Paris’. In all of these locations and many more, Dechert’s corporate, regulatory and tax lawyers advise managers and funds on optimal structures and domiciles. Dechert partner, Chris Gardner, who specialises in credit, private equity and real estate funds says: “For credit funds, for instance, the OECD’s BEPS initiative can strengthen the case for having both fund and downstream structures in the same domicile. Hence, Luxembourg has picked up many structures, as it has a good Double Tax Treaty network, and is popular with continental European investors. Some private equity and credit funds have opened offices in Luxembourg with several staff, and they expect to be there for the long term”. Dechert partner, Abigail Bell, who featured in The Hedge Fund Journal’s ‘50 Leading Women in Hedge Funds 2017’ report in association with EY, agrees: “Luxembourg is the natural place to set up credit strategies, with a flexible partnership structure and the optionality to add downstream structuring to assist in managing the tax position”.

Ireland has not historically had the same presence in credit, but more flexible rules for loan origination funds now allow them to hold non-debt instruments. “The previous restrictions were quite constraining,” reflects Gardner.

“For European funds marketed cross-border, most structures use Ireland or Luxembourg,” Gardner finds, though there are exceptions. “Dechert has also been doing work with a Maltese angle for more than ten years,” he reveals. In the onshore space, we have seen increased deal level activity and investor interest in both France and Germany. Gardner points out that “In France, a loan origination fund has to use a domestic French structure or a European Long-Term Investment Fund (ELTIF). Our Paris office has been helpful in creating such funds”. Gardner notes that German pension funds and insurance companies have special tax and regulatory requirements, which Dechert’s network of German offices can advise on, in addition to setting up domestic German structures.

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