EQT to onshore all funds in Luxembourg, ditch UK post-Brexit

EQT began registering its new funds in onshore jurisdictions in 2012, having domiciled most of its prior vehicles in Guernsey. Since then, EQT funds have been registered in the UK, the Netherlands and Luxembourg. As the older EQT funds move through their lifecycles, the firm will be entirely onshore once these are fully realised.

"We've been moving onshore over the past five years, but across multiple locations," Caspar Callerström, COO of EQT, tells unquote". "The decision EQT has made now is to consolidate any new funds in Luxembourg."

Callerström says the decision five years ago to onshore was a result of a number of factors, including the AIFM Directive, as well as general considerations around acting as a corporate citizen. "At the time, we did not have a clear strategy as to where we wanted to onshore, but now that we're spread over three hubs, we see advantages in concentrating EQT's efforts into one place."

"Our decision has also been triggered in part by Brexit coming up, because the UK's future is now in unknown territory" – Caspar Callerström, EQT

All of EQT's current funds domiciled outside of Luxembourg will continue in their current jurisdictions, until the end of their lifespans.

The UK's impending departure from the European Union also played into the private equity firm's decision, due to the uncertainty about what Brexit will mean for passporting rights under AIFMD as well as tax and regulatory questions which remain unanswered. "Our decision has also been triggered in part by Brexit coming up, because the UK's future is now in unknown territory," Callerström says.

Currently, EQT's flagship fund – the €6.75bn EQT VII vehicle – is domiciled in Britain. While the firm does not have plans to move the fund to a different jurisdiction yet, it is exploring its options for how to manage the vehicle after the results of the UK's referendum on EU membership.

"We haven't made a firm decision yet, but one thing that we are investigating is the possibility to manage EQT VII from Luxembourg," EQT's COO says. "What worries us is the unknown, and we don't know what will happen to the UK as a jurisdiction. It is a fairly new fund that will live for many years to come, and of course we don't know what the rules will be post-Brexit."

"We know that upcoming funds will be based in Luxembourg, but we have not made a final decision on fund VII yet," he says. "EQT's UK-based funds will run out their lifespans, but we might end up in a situation where we need to move the domicile as well. It is a burdensome and costly process, so not something you do lightly."

EQT's rejection of the UK as a future fund domicile is not the only manifestation of Brexit's effect on jurisdiction choice. A European fund structuring law firm, speaking on condition of anonymity, told unquote" that the UK and Channel Islands are off the table as fund jurisdictions for first-time funds, and are increasingly being passed over in favour of Luxembourg and the Netherlands by GPs that have previously run funds in Britain, Guernsey and Jersey. However, the firm said it had not yet seen funds redomiciled due to Brexit.

Perception and progression
For EQT, the move onshore ties into its efforts to future-proof the firm and stay ahead of the direction it thinks the industry is headed. Callerström says LPs are not yet demanding onshore tax jurisdictions for the funds they invest in, but he believes it will become an increasingly important aspect for investors in the future.

EQT sees transparency and consistency in fund jurisdiction, as well as public perception, as part of what it calls its "licence to operate". In the Nordic region, EQT's home turf, the private equity industry has been under public and political scrutiny for years, particularly in Sweden. "Public perception and the suspicion with which regulators and the general public view offshoring [is driving the Nordic onshoring trend]," a senior partner at a Nordic private equity firm told unquote" in January, speaking about the trend of Nordic GPs bringing funds on shore. Offshore jurisdictions are broadly associated with tax avoidance in the eyes of the general public, as well as some regulators, he said at the time.

However, the Nordic countries themselves remain an nonviable option for most larger managers, for the same reason now affecting Britain: uncertainty. "We've looked at Sweden as an option, but we never got comfortable on the predictability," says EQT's Callerström, citing proposed tax changes floated and since scrapped, as well as a lack of legal precedence for many domiciling aspects. "Even if things worked on paper today, they might change tomorrow," he says.

That EQT's jurisdiction of choice ended up being Luxembourg was ultimately driven by predictability. EQT has had parts of its business operating in Luxembourg for several years and has had fund management in the country over the past four to five years.

Callerström says the choice was about eliminating uncertainty for the firm and its LPs. "LPs are comfortable with Luxembourg structures in general, because there is good predictability, which is not always the case in other jurisdictions. What you see is what you get in Luxembourg."

Though Luxembourg came under scrutiny following the 2015 Luxleaks disclosure, when accusations of acting as a tax haven were levelled against the country, Callerström says negatives such as the post-Luxleaks perception were outweighed by the positive factors offered in the country.

"Taxation does not differ that much from Luxembourg to the Netherlands and the UK, for funds," he says. "The applicable regulation is the same EU directive and within the EU there is less and less difference in taxation, fewer possibilities to do deals with governments and such – and over time, we believe any substantial differences will fade away."

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