Rikard Lundgren (Steendier): How to avoid offshore haven reputational risk,increase safety and reduce costs

Rikard Lundgren (Steendier): How to avoid offshore haven reputational risk, increase safety and reduce costs
Rikard Lundgren, CEO of Steendier, argues that there is little disadvantage in repatriating an offshore fund to Luxembourg. By simply calling on the services of a well-established, independent advisor, it is possible to control the creation costs and even to establish savings in the recurring costs throughout the operation of the fund.

With an increasing focus on fairer tax payments and stigmatization of tax-avoidance through non-transparent tax havens as places to store wealth, a number of asset owners are considering, or have already started, on-shoring projects for their asset holding structures. Legitimate asset holders do not want to be associated with less legitimate assets which are typically held in offshore havens. When looking into the project of onshoring, asset owners have realized that the onshore fund industry has developed into a highly regulated activity with an increasing array of rules and mechanisms and actors, all present to ensure the protection of investors’ rights and interests (in addition to ensuring the respect of tax rules). Where the off-shore havens prime advantage was great flexibility, low regulatory demands and secrecy, the on-shore fund industry’s rigor has become its’ strength. In addition to these real differences between offshore and onshore the unpredictable, not necessarily well-informed, media commentary, can at any time make asset owners look bad in the eyes of the public, even when their off-shore structures are without any tax-avoidance issues. An example is the Panama papers that vilified asset holding structures based in the Caribbean for many asset holders, many of which were not involved in any form of tax evasion.

The question is then where to land when onshoring assets? For European asset holders, there are really only two options, Luxembourg and Dublin. These two financial centers have grown rapidly and are now the by far totally dominant fund structure hubs in Europe. Based on fund industry statistics, it would seem that Luxembourg is winning that battle. Why?

 

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  1. Luxembourg is now by far the largest of the two centers measured in AUM

  2. The asset management industry represents a very significant share of Luxembourg’s GDP, hence making it vital to any local government, regardless of color.

  3. Luxembourg is a politically and economically stable country with a steady AAA rating and a long tradition of prudent management of its public finances.

  4. Luxembourg has developed a diversified and increasingly competitive industry of fund service providers, which are under the scrutiny of the local regulator, the CSSF.  Since Luxembourg is the largest European investment domiciliation location, both Luxembourg itself and the CSSF are under constant and close scrutiny by ESMA, which provides further comfort to any foreign investor.

Next question an asset owner needs to ask himself is “How” to move his portfolio? The process of moving a perhaps complex portfolio of assets from a maybe totally unregulated corporate environment to a highly regulated and formatted fund environment requires thorough preparation and planning before the actual move. If preparations are done well, the move will be as undramatic as the new year of 2000.

The obstacles to a successful onshoring can at first be seen as almost insurmountable: complexity, costs and difficulty to predict time schedule. This image is of course supported by proponents for staying offshore, but also by some service providers who see a long and complicated project as a lucrative proposition to oversell services. Real-life projects that are well organized and run, show a very different picture and this is what this text will now describe.

Complexity is managed by having a thorough pre-project planning process. Costs are kept under control by including detailed budgets already during the RFP stage of choosing the service providers. Time plans form the very back-bone of the project and are committed to by all parties before the start of the project. A good project management organization keeps all of the above under tight control at all times.

"The use of an independent expert advisor can be compared to that of a site foreman in construction. It saves time and money and reduces risk, stress and hassle. "

Here is a high-level description of the steps involved:

The legal structure in Luxembourg

There are a number of possibilities which cater to different requirements of the type of assets and strategies in the portfolio  (liquid/illiquid investments, PE/RE/PC/VC, open ended/closed ended…etc.) not to mention the requirements by existing and new investors. In the regulated world (which applies for any fund structure with assets exceeding 100 million euros), there are many different types of fund vehicles, which can be placed under different regulatory regimes, such as AIF or UCITS. The analysis and choice of which structure is best for a particular asset portfolio necessarily involves advise by legal expertise. Such discussions are an excellent way to explore and get to know different potential candidates for the role of legal advisor.

The service providers

The services that need to be attached include custody/depositary/cash, administration, AIFM, legal, tax and audit. The service providers service the fund and control the adherence to rules as defined by the corresponding regulations and the mandatory prospectus. Some service providers are offering many of the required services. Others are more niche-type and only provide one or a few services. The composition of the team of service providers is a strategically important decision and should not be underestimated or taken too quickly. It is important that the buyer of the services has his own opinion and a good definition of the scope of services he wants from a particular provider. This is not easy as the asset owner, coming from an offshore environment, is mostly not an experienced buyer of these services. The lure of going with one big service provider could lead to the asset owner getting something quite different to what he had expected. This team composition task is best addressed by including an independent advisor with experience of Luxembourg service providers who applies that to advise and support the asset owner’s choices. A thorough selection and negotiation process often includes a first selection of 3 to 4 candidates going into an RFP followed by interviews.  The results are analyzed and form the basis for the final decision. This team-picking process can typically take two to four weeks to complete.

The Project Management

After the service providers are appointed, a project management structure is set up to organize the steps that will lead to the fund incorporation and subsequent launch, as the assets are transferred. The project must be planned with milestones, activities, workshops etc. defined with a high level of details to avoid missing any action that could delay or make the project more expensive. This plan takes the form of a project spread sheet which is shared by all persons involved in the project.

A good project management organization includes 3 levels.

A weekly project meeting; where all participants go through the status of all actions and raise any concerns or bottle necks and issues that cannot be solved directly get delegated to workshops.

Several workshops; where specific issues are discussed in depth and solved in smaller groups between the weekly meetings.

A steering committee; which monitors overall progress and the adherence to timetables and budgets. It includes one C-level representative from each service provider who has the authority to ensure that remedial action is taken by the organization that is the cause of any delay or budget deviance.

Costs, how they can be controlled and even lowered compared with offshore

The Luxembourg fund servicing industry is very dynamic with many different actors whose owners range from one individual to large PE-funds with deep pockets and big ambitions to build a world leading financial services company. This makes the service industry not just diverse but also highly competitive, especially for a client coming to Luxembourg with an established large asset portfolio. A well conducted service provider selection process is the asset owner’s best tool to negotiate and get both high quality and very competitive prices. Dublin used to have a cost advantage, but over the past few years this has changed. Asset owners who have compared Luxembourg with Dublin are no longer finding any significant differences in terms of price/quality.

What are the different costs for onshoring an unregulated offshore based asset portfolio to a regulated Luxembourg fund format? These costs come in two categories. One-off set-up costs and costs for the normal running of the new fund structure. In Luxembourg, set up costs can be amortized over five years, which limits their impact on fund performance.

One-off costs

Project management​

The cost savings from using an independent expert advisor to organize and lead the project through the above  steps, is covered several times over by the savings made during the structuring stage and on the service providers’ costs for setting up and running the fund. The project management/advisory costs are one-off cost while the cost savings remain for the duration of the fund.

Legal costs

This includes a prospectus, articles of incorporation, review of all contracts and agreements as well as any additional legal and possibly tax advice on all administrative steps linked to the set up. These costs are one-offs and can in today’s market be negotiated.

Service providers set-up costs

It is quite common that service providers charge one-off set-up costs for new funds setting up for the first time in Luxembourg. This makes sense because some of the new fund initiatives will not raise enough capital to start, so the service providers risk having done the start-up work for nothing. This doesn’t apply to an existing asset base that is being onshored. For large asset portfolios, the service providers may waive some or all of their normal set-up costs, especially if the new client is seen as strategically important or prestigious for the service provider.

Running costs

The TER for a typical Luxembourg fund, depending on a number of idiosyncratic features such as number of sub-funds, number of share classes, complexity of the strategy, AIFM acting as the regulatory PM or not etc. etc. typically range from 25 to 65 bp’s per annum, excluding management and performance fees.

Time to execute an onshoring project:

The RFP stage during which the service providers are negotiated and chosen, includes a commitment to a timetable. This timetable is then put into the weekly project management plan where it is followed-up every week and supervised by the steering committee as previously described.  Even if every onshoring project has its’ own challenges and complexities, the actual time from appointing an advisor and agreeing a fund fact sheet and basic legal framework to the transfer of assets and first NAV setting can, based on recent actual cases, be expected to range from 5 months for a complex structure to  2-3 months for a more simple set up.

Summary

To bring assets and investment structures from an offshore location to a regulated Luxembourg setting may at first look like a daunting task. Complexity management, cost control and adherence to timetables look nigh impossible. Too many examples show that “learning by doing” is indeed an expensive way to conduct an onshoring project. By instead hiring experienced supplier independent project management competence, rather than relying on input from the service providers, much time and money can be saved. The outcome may, depending on the actual case, prove to be not just a safer haven for one’s assets but also a way to achieve long term lower costs.