Onshore funds: a fund administrator's view

In the aftermath of Skatteverket's decision to retroactively tax Nordic Capital's carried interest, and the ensuing three-year battle that followed, Nordic buyout houses are reevaluating their tax obligations. EQT, Sweden's largest buyout house, has already blazed a trail with its decision to domicile all funds from the 2013 vintage onwards onshore.

Developments are also occurring in the fund services space; in February, UK-based Aztec Group set up a Stockholm office with a full service offering including LP, depositary and corporate services, and fund administration. Aztec has a long history of advising Nordic funds, maintaining a 10-year relationship with Altor Equity Partners.

Andrew Brizell, who moved to the Swedish capital last month to head Aztec's new office, highlights two movements in particular: "We have seen a number of Swedish managers actively considering domiciling their forthcoming funds in Sweden, ostensibly as a result of Skatteverket's decision to appeal the Nordic Advisory carried interest pilot case. In addition, we are seeing an increasing awareness among managers of the AIFMD and the potential marketing advantages that it confers, which is causing them to reconsider where they will domicile their funds in the future. The general sentiment seems to be that both managers and investors are more aware of where funds are based now and that onshore structures are being considered as an option."

As witnessed in other European jurisdictions, the tone of domestic economic affairs in the Nordic countries is moving towards an inclination to increase domestic tax revenues – hence the recent tax authority investigations and subsequent trend of moving funds from offshore to onshore. But Brizell does not view this as a problem: "In the wider scheme of things, this is beneficial to the local economy and to private equity more generally, as in this way the industry is viewed in a more favourable light by the public, as well as contributing more to society. It's not too difficult to structure onshore funds in such a way as to achieve a reasonable level of parity with those domiciled offshore."

Nevertheless, there are a number of difficulties with onshore structuring for certain funds. The application of the participation exemption to fund-of-funds structures is one such challenge, as is the potential withdrawal of the VAT group exemption. From a Swedish point of view, the potential taxation of LPs could pose a problem but these issues should not be considered fatal to onshore structures, particularly in a buyout context. This view is endorsed by pan-Nordic buyout firm FSN Capital, which launched its fourth and latest buyout fund onshore in March last year, closing it on SEK 5.25bn after only eight months.

Polarised fundraising market
A number of Swedish-structured funds are entering the market, like Adelis, which raised its first fund above target at €230m in less than six months, showing LPs' appetite for domestically based vehicles. Indeed, the Nordic fundraising market seems to polarise into two camps at the moment: those GPs that can raise fairly quickly due to a positive track record, such as EQT and FSN; and those that are struggling to get off the ground.

Still, Europe's gradual economic recovery is adding momentum to the positive fundraising climate and Aztec's move to follow client demand indicates an optimistic view of the Nordic fundraising market. The region also has certain advantages over the rest of Europe, according to Brizell: "Nordic managers in general seem to be comfortable with an administration outsourcing model that gives them time to focus on deal sourcing and origination, something which is obviously in investors' interests."

Whichever way nascent developments unfold, the region will no doubt see some interesting fund restructuring for increased transparency in the years to come, with input from legislators and politicians, as well as the public.

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