Onshoring debate: the Latvian card

Registering funds in onshore jurisdictions has become increasingly popular in recent years, with some LPs favouring Luxembourg, the Netherlands or their home countries over long-time offshore favourites Guernsey and Jersey.

Partly as a result of the AIFMD legislation, GPs have been looking to EU jurisdictions when launching new vehicles, and private equity firms such as upper-mid-market outfit Altor have brought their funds back closer to home.

In an interview with unquote", Altor's Tor Krusell said of the decision to bring the GP's funds back onshore: "It is a leap, but the initial reactions we have received from politicians and other external stakeholders are that it was long awaited to see a fund manager taking this decision."

The AIFM Directive has had a substantial effect on the onshoring debate, resulting in intensified competition among EU countries, many of which have since adapted existing fund structures to the new common framework.

Low-cost Latvia
Baltic-focused GP Livonia Partners opted for domiciling in a local jurisdiction for their inaugural €85m-target fund, after their research revealed the firm's native Latvia offers similar advantages as the more popular domiciles, but at a fraction of the cost.

"It is the same and it is cheaper," says Livonia co-founder and partner Kaido Veske, comparing Latvia to Luxembourg, the Netherlands, Guernsey and Jersey. "There's a big cost difference: Latvia is more than five times cheaper."

Veske says the choice came about after a review prompted by the vehicle's LPs. Among them were the European Bank for Reconstruction and Development (EBRD) and the European Investment Fund (EIF), both of which requested Livonia Partners Fund I be domiciled onshore.

"When we were looking at fund jurisdiction, we started in the same place as most and spent a lot of time looking at Luxembourg and the offshore options," Veske says. "But our investors quickly made it clear they did not want an offshore structure – and going onshore is a fairly big trend in Europe at the moment – so it was either Luxembourg, the Netherlands, or somewhere else."

In the end "somewhere else" turned out to be Latvia. Costs associated with registering and administrating a fund can be substantial, particularly in popular jurisdictions with thriving fund administration industries such as Jersey, Guernsey, and Luxembourg. However, Livonia's research found that those costs were more than five times cheaper in Latvia, and the advantages of the other jurisdictions were ultimately negligible.

"We quickly discovered that your fund's structure is actually a very low value-add item," says Veske. "At the end of the day, all structures will work the same way, though there will be some cost differences and differences in how tax efficient they are. That's how we got to our decision."

New to the game
As was seen with the reporting that followed the implementation of the AIFMD, there can be an aspect of inexperience when dealing with regulators in smaller countries without a history of dealing with financial administration and complex financial structures.

"The Latvian regulators are new to it," says Veske. "Latvia was the only Baltic country to apply for the AIFMD passport within the window when it was introduced, so when we did the country analysis we quickly arrived at Latvia being the better place [compared to Estonia or Lithuania]."

And, thankfully, Livonia's decision was ultimately very well received by its LPs: "Our investors are extremely happy with how much they had to commit towards establishment costs," Veske says.

While it is unlikely Latvia will ever compete with the likes of Luxembourg or Guernsey, the country's low-cost offering forms part of the ongoing fund jurisdiction competition in the EU and the tandem onshoring debate. But with the implicit rubber-stamping of two of the CEE region's preeminent LPs in the EBRD and EIF, GPs in the market may be taking a longer look at Latvia when deciding where to domicile their next fund.

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• Topics
• Performance
• Fundraising
• Latvia
• Fund structuring
• Livonia Partners
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