Striking a balance

IFCs will also need to have solid infrastructures of skilled professionals, as private equity managers are likely to build up the administrative tasks they carry out locally. Both new regulations and increasingly assertive tax authorities are pushing private equity managers to have local ‘substance’, which is likely to cause an increase in administrative functions.

Given this changing environment, we’re helping private equity firms to assess which jurisdictions will serve their needs best, either for their General Partner or for a particular fund. In doing so, we’re balancing the full range of factors that affect their interests – and crucially those of their investors:

• Tax neutrality
• Regulatory position
• Governance
• Infrastructure & geography

Each private equity firm will award different weightings to different factors, depending on its specific set of circumstances. But in the eyes of their investors, who ultimately wield the power in the private equity industry, strong governance and tax neutrality are generally the most significant factors. Taking a proactive approach to adapting to AIFMD and other regulation is also important.

We’ve found that the most attractive IFCs in the new world are those that have best judged how to balance their historic tax and regulatory ‘neutrality’ with the new regulations and tax issues. In particular, investors value the continuing tax neutrality of Limited Partner structures, which allows them to be taxed wherever appropriate depending on their own specific circumstances.

But the practicality of operating from IFCs is also critically important. Private equity firms want to be based in locations only a short distance from major regional financial centres such as London, with reputable governance regimes, strong service infrastructures and low costs.