Luxembourg and the Cayman Islands are the two most popular fund domiciles for private credit fund managers, according to research by the Alternative Credit Council and law firm Dechert LLP. The Luxembourg Reserved Alternative Investment Fund (Raif) emerged as the preferred vehicle to invest in EU-based private credit assets.
Some 58 percent of the 40 private credit managers polled stated that they have a fund based in these two jurisdictions, attracted by the presence of an ecosystem familiar with fund formation. The US, Ireland and UK were the next most popular fund domiciles amongst respondents.
Loan origination
Luxembourg is the traditional domicile for loan origination, while Ireland is the hub for aviation finance. The global popularity of the Cayman Islands for funds investing in all types of assets means most investors are familiar with it, the report said.
“When it comes to a choice between Luxembourg or Ireland, there is often little difference for asset owners who are familiar with both,” said the report. “This means that, for investors in EU-based private credit assets and their asset managers, other factors such as familiarity, costs and service provider capacity can be more relevant. This is likely to become an increasing driver of competition for funds investing in EU-based private credit assets when determining where to domicile.”
Risk management and alignment of the structure with the investment strategy remain critical to how investors and private credit managers structure their investments, said the report, published at the end of September. While efficiencies are important, the alignment of the investment structure with the liquidity profile of the underlying assets remains fundamental.
Rapid growth
“The rapid growth of the private credit sector over the past decade means that investors and asset managers have become more sophisticated and experienced, both in their approach to the asset class and its role within their portfolios,” said Jiri Krol, global head of the Alternative Credit Council, in the report’s foreword. “They are now exploring structures that provide ongoing exposure to private credit strategies and enhance the returns that they are able to achieve on their capital.”
When considering fund domiciles, researchers found that this is driven by a range of factors. The need to balance multiple considerations, including remains vital. Some markets have been able to create a reputation for particular strategies.
“Investors’ increasing sophistication and appetite for customisation has led to a proliferation of vehicle ‘entry points’ for our offerings,” said Nicole Adrien, chief product officer and global head of client relations at Oaktree Capital Management in the research report. “Beyond Luxembourg main funds – which used to be the primary entry point for most – we’ve seen a rise in requests for bespoke vehicles, whether they be ESG-focused, capital-efficient, currency-hedged or other.”
Luxembourg Raifs preferred
The largest single cohort of survey respondents (48 percent) reported using the Luxembourg Raif as their vehicle to invest in EU-based private credit assets. Other popular vehicles include the Irish Collective Asset management Vehicle (ICAV), a UK Limited Partnership or Irish S.110 companies. The report said a small number of respondents (8 percent) expect to start using the Eltif to invest in EU-based private credit assets once the reforms to the Eltif2.0 regulation take effect next year.
“When we were setting up, we chose Luxembourg as it is well recognised, established and was a preferred jurisdiction for some of the key investors that we were hoping to target at the time of fundraising,” said Samyuktha Rajagopal, general counsel at Arrow Global Group in the report.
Key considerations when selection a fund domicile:
Source: In Partnership: trends in private credit fund structuring, September 2023