Q&A – Luxembourg Parallel Structures: Advantages, Challenges And Considerations

Anne-Gaelle Delabye, a partner in Ogier's Luxembourg investment funds team, discusses the advantages, challenges and considerations to be made when setting up a Luxembourg parallel fund structure.

In terms of why Luxembourg, it's clearly becoming one of the preferred jurisdictions for those seeking to access European capital by way of a parallel fund structure. This is due in no small part to Luxembourg's extensive product toolkit.

Q: What is a parallel fund structure?

A: Parallel funds are those which co-invest and divest alongside the main fund. They co-invest and divest at the same time and on similar terms. This is on a pro-rata basis per their commitments, so a manager has two funds side by side which invest and divest at the same time in a common portfolio of assets. The terms on which the parallel fund operates are similar to the terms of the main fund. This means that the parallel fund has a common investment policy, and common asset targets because they are investing in the same portfolio. The differences between them are mainly due to regulatory or operational reasons.

The size of a main fund and some of its parallel funds may not be the same. For instance, the parallel fund may be larger than the main fund and, in most cases, the AUM of all funds will be aggregated to determine the size of the overall structure. Investors in the main and parallel funds will also be aggregated to determine the voting rights of investors in the structure. This being said, what is quite complicated in a parallel fund is that the main and parallel fund are separate legal entities, and there will need to be a fine balance between the fact that different legal entities are being operated in different jurisdictions and yet these entities are part of the same global asset pool.

Q: Why are the Cayman/Luxembourg parallel funds structures generating such strong interest from US and Asian fund sponsors at this time?

A: When you're an initiator, you have to reconcile the concerns of different types of investors in different jurisdictions. You may need to structure a fund programme with one or more parallel funds which are co-managed by the initiator and that are targeting the same portfolio. Cayman is the natural choice for many US and Asian fund sponsors because they are used to this product and it's efficient from a time to market perspective.

When Asian or US sponsors want to reach European investors, Luxembourg (and in particular its limited partnerships)...