While the international financial centres (IFCs) historically described as ‘offshore’ have come under a lot of pressure and criticism since the crisis, the best of them have taken a proactive approach to adapting to the 'new normal'.
Adaptability and innovation are core strengths for those IFC's seeking to make sure that they meet new regulations designed to protect wider economic stability, but still provide an environment in which private equity firms and their investors can prosper.
A number of specialist IFCs are introducing specific measures to make sure they adapt to the new regulatory and fiscal landscape. From a regulatory perspective, the Alternative Investment Fund Managers Directive (AIFMD) lays down specific conditions that jurisdictions’ regulatory authorities will have to meet in order to continue to be recognised as bases from which alternative investment managers can market into the EU. Some jurisdictions will find it harder to meet these conditions than others, simply because they have let funds operate largely unregulated to date and the changes now needed might be too great.
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:
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.