Parallel investment funds have increasingly become a preferred structure for sophisticated private equity fund managers seeking to access capital with multi-jurisdictional solutions.
A parallel funds structure is composed of side-by-side vehicle(s) which invest and divest alongside the main fund, usually on a pro rata basis per their commitments and at the same time, in a common portfolio of assets. Operational terms of the parallel fund are similar to those of the main one, and include a common investment policy and common asset targets. The differences between them are mainly due to regulatory or operational reasons.
In practice, global private equity asset managers have to reconcile the concerns of various types of investors in various jurisdictions. Investors' ability to invest in a traditional single main investment vehicle may be restricted as they have specific tax and/or regulatory requirements which cannot be accommodated . In a parallel fund structure, a greater range of investors may be reached by offering customised solutions and, as an example, a choice between onshore and offshore jurisdictions. Besides that, investors are able to maintain their target investments, while choosing the fund adapted to their particular risk profile, regulatory requirements and tax appetite. Regulatory costs, which might occur in a specific jurisdiction can be restricted without any correlative financial impact on the main fund. The size of a main fund and some of its parallel funds may not be the same. Parallel funds allow a larger investment pool and an easier and faster reach of their target size and investment objectives. If appropriate, investors of the main and parallel funds may also be aggregated to determine voting rights on the structure level.
Parallel fund structures are of course raising a number of operational challenges in practice and should be designed for sizeable funds only. Structuring challenges which a private equity initiator might come across in planning and operating the fund might be linked to ensuring equal treatment of investors and a balance in voting rights, as well as navigating different reporting obligations and steering different vehicles while ensuring adequate cost allocation and the distribution waterfall which will enable remediation of the initiator through an appropriate delegation model.
Luxembourg has historically been a jurisdiction of choice for fund sponsors seeking to access European capital through the appointment of an authorised AIFM and obtaining a European passport for marketing purposes. Local regulatory environment offers a flexible and varied corporate toolbox, providing fund sponsors with a wide range of corporate and product options to choose from.
Luxembourg and Cayman or Delaware meet halfway as well established funds jurisdictions, maintaining highest global governance standards and the interest to the institutional investors. Regulatory regimes demonstrate sufficient similarities, namely concerning the Luxembourg special limited partnership and the Cayman or Delaware limited partnership, which enables managers to operate funds in parallel in the context of familiarity with the product characteristics and the time to market efficiency.
Due to its flexibility and access to an European passport (through the AIFM), Luxembourg offers the possibility to structure a fund vehicle in parallel to a main fund vehicle in Cayman Islands or Delaware, allowing for each to be co-managed and target the same portfolio while meeting the different requirements of investors in different jurisdictions.