Publications

Private fund structures and HNW investors: They offer investors flexibility and potential tax benefits
- May 1, 2021: Vol. 8, Number 5

Private fund structures and HNW investors: They offer investors flexibility and potential tax benefits

by Mark Cleary

Family offices, high-net-worth individuals and wealthy families are increasingly considering private fund structures to hold their investments. While “standard” investment structures such as hedge or private equity funds can be ideal for some investors, other HNW investors are looking for options with more flexibility.

There are several reasons why a private fund provides an attractive way to hold assets.

A private fund can be used for a variety of reasons. It can be a great way to pool funds so several investors can enter into an asset class that would otherwise be out of reach to them as individuals. Private funds can potentially offer added cost savings, as several investors share a fund’s costs jointly, rather than creating their own structure. There are also potential tax benefits and more investment flexibility than might be found with standard fund structures.

Private funds are also attractive for co-investment “club” type deals, with several investors coming together to seek opportunities jointly. Investors may know each other and have decided to set up a private fund together; alternatively, they may be known to the fund manager and brought onboard through this connection. Wealthy families who are well acquainted and have similar investment goals could also choose to enter into a private fund together, for example.

Private funds are often based in jurisdictions that offer a neutral fiscal regime for corporate entities or transparent limited partnerships so that the fund structure is streamlined from a tax perspective. This makes the Channel Islands, Cayman, Luxembourg and Ireland attractive locations. The United States may be a natural choice for funds where investors are U.S. residents.

SETTING UP A PRIVATE FUND

A fund manager usually operates a private fund and typically markets the fund and makes investment decisions. Private funds can be set up as different entities as allowed by a local regulator, but they are most commonly structured as a company or limited partnership.

The Channel Islands are popular jurisdictions for private funds, based on the regulatory framework and its reputation as highly compliant place to do business. The Channel Islands are perhaps a natural choice for fund managers based in Europe or the Middle East because it’s easy to travel there and there is no significant time difference. Singapore and Cayman also prove popular jurisdictions, and they may be more natural choices for Asian, U.S. or Latin American clients.

Fund managers usually appoint a fund administrator to provide expert back-office support, including handling fund and investor compliance, KYC and AML requirements, and keeping detailed records of each investor and corporate secretarial work related to the fund entity.

Although private funds might have fewer investors than a larger retail fund, running the fund correctly and in line with regulations is vital for its ongoing success and is critical for both the fund manager and investors. Fund managers may not be familiar with local rules and having a local, professional partner who can support and provide guidance to ensure the fund is operating appropriately is a must.

ADVANTAGES OF FUND ADMINISTRATOR

A fund manager will often appoint a fund administrator to handle the fund entity’s day-to-day administration, ensuring it is compliant, well run and operating in line with regulations. Investors like that an independent third party oversees the back-office function, as it adds professionalism and peace of mind. For fund managers, it allows them to focus on marketing the fund and investing without focusing their own time and resources on important but time-consuming back-office tasks.

I continue to see more high-net-worth individuals and family offices showing interest in private fund structures. The simplicity, flexibility and cost savings that private investment funds can offer make them an attractive choice.

 

Mark Cleary is director at ZEDRA Fund Services.

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