Alternative Managers Place Higher Priority on Domiciles
February 7, 2023 — Boston
New white paper provides best practices for U.S. alternative managers eyeing jurisdictions to raise non-U.S. capital
As private capital assets grow, a wider variety of managers—both legacy alternative manager firms and traditional managers looking to distribute alternatives—will need to focus on fund domiciliation. Jurisdictions where managers can demonstrate substance, offer a strong regulatory environment, provide sophisticated service providers, and a strong support structure will be critical for managers seeking geographical expansion, according to Cerulli’s latest white paper, Fund Domicile Selection: Enabling Global Alternative Asset Growth, sponsored by Guernsey Finance.
Globally, alternative investments are in a “goldilocks” moment. Since year-end 2018, global private investment assets have almost doubled, increasing 92% and posting double digit increases each calendar year through 2021. Global alternative investment markets reached $8.7 trillion as of 3Q 2022 and hedge funds held another $3.6 trillion as of 2021.1 “There is no question that alternative product development and distribution plans are critical to asset managers that are seeking to raise capital from a variety of client types, across different segments and geographies,” states Daniil Shapiro, director.
As U.S. firms develop and deploy alternative capabilities internationally, they will need to decide where to domicile their offerings (e.g., Cayman Islands, Guernsey, Luxembourg), which investor segments to target, and how to structure their funds to gather international capital. “The strengths and weaknesses of each jurisdiction mean that firms may well be best suited by a nimbler jurisdiction other than the larger (in terms of AUM and number of funds) ones,” states Shapiro.
While firms take different approaches to domicile selection, common to all is a tremendous focus on tax implications for investors and seeking out stable yet flexible limited liability legal regimes. “Tax law is key for pass-through structures as alternative investment managers want to make sure that taxes are paid but not for every jurisdiction the firm is in. In other words, the focus is on avoiding double taxation of dividends and optimizing returns,” says Shapiro. 60% of research participants exclusively reference the tax function as a key influence point.
The success of firms looking to gather capital from international investors is reliant on myriad service providers. External counsel, fund administrators, and accountants are critical and provide valuable guidance and input. Human capital within domiciles as well as the orientation of that workforce toward financial services should be taken into close consideration. “As labor markets remain exceptionally tight, firms would do well to ensure their service providers have access to a stable labor pool able to support their offerings,” comments Shapiro.
For U.S. managers considering raising capital beyond their home turf, the white paper highlights best practices including investor consideration, regulation support, outlines what to look for from service providers, and consideration for specialized needs (e.g., listing options, sustainability). According to Shapiro, “Managers are already contending with the uncertainty of raising capital in new markets. They want to be mindful to avoid other external pain points such as overly stringent regulators and understaffed service providers.”
“This comprehensive research report is essential reading for U.S. alternative asset managers. The international investor audience for private capital and alternative strategies continues to grow exponentially so the right decision on where to domicile funds is more important than ever,” states Rupert Pleasant, Guernsey Finance Chief Executive.
For more about the research and to download the findings, click here.
1 Data according to Pitchbook and eVestment, respectively
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Note to editors
These findings and more are from Cerulli’s white paper, Fund Domicile Selection: Enabling Global Alternative Asset Growth, sponsored by Guernsey Finance.