During the past two decades, onshore regulated fund structures have experienced significant popularity. This may lead some fund managers to believe these structures represent the best option for entering new jurisdictions. But a closer analysis reveals notable challenges associated with onshore regulated fund structures:
They can be quite complex and expensive to set up.
They require significant assets under management (AUM) to see a return on investment.
They can be excessively time-consuming due to the extensive application process and legal formation involved.
Here at SFS, we’ve observed many new funds struggle with these issues because they didn’t carefully assess the complexities of onshore regulated fund structures. As a global fund administration company headquartered in Switzerland, we speak with many fund managers about how to setup up fund structures in various jurisdictions. Here is what we often conclude: From a time- and cost-perspective, simple, standalone structures are a more efficient way to expand into new jurisdictions. With that solid foundation, you can later evolve into more complicated structures, depending on your investor base.
Before we explore the reasoning behind this, it helps to create some context by sharing a recent history of cross-border restructuring.
A Brief History of Cross-Border Fund Structures
After the European Union was formed in 1993, European cross-border fund structures were created and quickly grew in usage. This is reflected by the enormous amount of capital — 14.1 trillion euros — currently invested in the two most common structures: undertaking for collective investment in transferable securities (UCITS) and alternative investment fund (AIFs).
These two structures have notable differences:
UCITS: Generally retail focused, UCITS has a relatively simple structure, and its products can be distributed and passported cross-border efficiently. Coupled with effective regulatory oversight and strong brand appeal to investors, this contributes to UCITS popularity.
AIFs: Generally retail focused, AIFs represent a newer structure gaining visibility over the last five years. Typically focused on professional investors, AIFs have far fewer investment restrictions compared to UCITS and are generally far more suitable for alternative investment strategies. Unlike UCITS, there is no automatic right of passport EU-wide, but these vehicles are generally well accepted by most jurisdictions for marketing to sophisticated, professional investors.
Although the mechanics of each structure are straightforward and strong regulatory oversight exists, cross-border structures pose the challenges of high cost and lengthy launch time. Let’s consider some recent changes in the way investors view these structures.
Recent Developments: Rethinking the Limitations of Onshore Structures
Although UCITS and AIF structures still have a loyal following, many investors and asset managers are reconsidering traditional approaches to cross-border investment.
A main reason for this involves evolving tax environments, as governments consider how to address budgeting shortfalls resulting from the COVID-19 pandemic.
Traditionally, investors and asset managers established entities that offer legal attributes to facilitate cross-border investing of pooled capital while maintaining tax neutrality. However, ongoing developments are bringing certain tax attributes in these structures to light, which could have unintended consequences that undermine investments.
Simpler May Be Better
Due to the growing uncertainty that accompanies tax changes, fund managers and investors are rethinking the logic of applying complex fund structures like UCTIS and AIFs to new jurisdictions. To help manage costs and complexity, many are concluding that simplified structures offer a better option. With simple, standalone fund structures, fund managers can achieve benefits similar to UCITS and AIFs, but without the burden of an expensive, time-consuming set up. As we observe these fund managers, we’ve seen a new conventional wisdom emerge: Start with a manageable structure when expanding to new jurisdictions, and then shift to a more complex option when it’s better suited for investor needs.
Our global team consults with investment managers on new fund launches and firm expansion. Learn more about Swiss Financial Services Market Entry Services by reaching out to a member of our team.