IFM17360 - Fund structures involving multiple entities

Some fund structures may involve a series of entities which, in substance, form part of the same arrangement.

For example, fund structures may involve:

  • One or more parallel funds which are managed by the same fund manager as the manager of the main fund vehicle and make the same investments on substantially the same terms.
  • One or more feeder funds which are established by a fund manager to enable a particular class of investors to invest indirectly into the main fund vehicle, typically to accommodate a commercial, tax or regulatory requirement that is particular to that class of investors. Investors in a feeder fund will have substantially the same economic exposure to the investments made by the fund as direct investors in the main fund (or investors in other feeder funds).
  • One or more alternative investment vehicles (AIVs) which are established for the purpose of making a specific investment in order to mitigate a regulatory, tax or legal issue which would arise if the investment was made through the main fund vehicle.
  • An aggregator which acts as a pooling vehicle for several feeder funds under common management, so that its only direct investors are those feeder funds.

These kinds of vehicles are most likely to be present in fund structures which seek to rely on the GDO condition in the context of the Qualifying Asset Holding Companies (QAHC) regime (see IFM40240), Real Estate Investment Trust (REIT) rules (see IFM21000) or the provisions relating to collective investment vehicles within the Non-Resident Capital Gains (NRCG) rules (see CG73999P).

Specific provisions relating to certain types of feeder fund are contained in regulation 9A(8) of SI 2006/964 and regulation 75(5) of SI 2009/3001 (see IFM17350).

In addition to these specific provisions, in an offshore funds context, regulation 75(1) of SI 2009/3001 provides that where an offshore fund is constituted by a “class of interests” which form part of “main arrangements”, it is the main arrangements (rather than the specific class of interests) in respect of which the GDO condition is tested. This provision deals with the fact that a class of interest is looked at separately for the purpose of determining whether that class of interest constitutes an offshore fund (see IFM12270).

Multi-vehicle arrangements

In relation to the QAHC regime, NRCG rules and REIT rules, the relevant provisions which signpost to the GDO condition in Regulation 75 of the Offshore Funds (Tax) Regulations 2009 SI 2009/3002 specify that where an entity forms part of “multi-vehicle arrangements”, the entity itself can satisfy the GDO condition where the multi-vehicle arrangements as a whole do so. (If an entity satisfies the GDO condition in isolation, it will also continue to do so regardless of whether it is part of multi-vehicle arrangements.)

The definition of multi-vehicle arrangements encompasses a group of entities which form part of a wider fund structure, where from a commercial perspective an investor would reasonably regard their investment to be in the structure as a whole. As a result, an individual entity can satisfy the GDO condition where it forms part of a wider fund structure which, taken as a whole, satisfies Conditions A, B and C. This will be the case even if the individual entity would not satisfy the GDO condition when considered in isolation.

It is recognised that a feature of a particular entity within a fund structure may be important to an investor. For example, an investor may choose to invest in a feeder fund specifically because it has made an election to be treated as a corporation for US tax purposes. This would not by itself prevent that entity being part of a wider “multi-vehicle arrangements”. The relevant test is whether, analysed objectively, an investor would reasonably regard their investment to be in the arrangements as a whole. This is likely to be the case in respect of entities which are marketed together under a single umbrella and where investors can expect to have substantially the same economic exposure to the underlying investments regardless of the specific entity through which they make their investment.

Parallel funds and feeder funds are capable of forming part of a single “multi-vehicle arrangement” for the purposes of applying the GDO condition. This extends to parallel funds or feeder funds which have not been established or incorporated at the time the main fund is marketed, provided that a reasonable investor would regard the parallel or feeder fund as part of the same arrangement.

However, where an investor establishes their own feeder vehicle for the purposes of making an investment (for example, to act as a “blocker” for US tax purposes), this would not normally form part of the same multi-vehicle arrangement as the fund into which that feeder vehicle invests. This is on the basis that the feeder vehicle is controlled by a single investor and no other investor could reasonably expect to invest through that vehicle.

AIVs are also capable of forming part of a single “multi-vehicle arrangement” where the possibility of an AIV was contemplated at the time the arrangements were marketed and all of the investors in the wider arrangement retain substantially the same economic exposure to the underlying investments as they would have done had the AIV not been used.

However, where a co-investment vehicle which is established to facilitate one or more investors gaining additional economic exposure to a particular investment, the co-investment vehicle would not typically form part of the same “multi-vehicle arrangement” as the main fund. This is because the co-investment vehicle provides certain investors with a greater degree of exposure to an underlying investment than they would have had if they had only invested through the main fund structure. A reasonable investor would therefore consider the investment in the co-investment vehicle to be separate to their investment in the main fund. In such a case, the GDO condition would need to be considered separately in respect of the co-investment vehicle.

Some examples of the application of the multi-vehicle arrangements provisions to specific fact patterns are set out below. These examples are intended to illustrate the application of the legislation but are not exhaustive. Each fund structure should be considered on its own facts.

Example 1

Fund A comprises two parallel limited partnerships, Partnership Y and Partnership Z. Partnership Y is intended to accommodate tax exempt investors whilst Partnership Z is intended to accommodate taxable investors. Other than differences to accommodate the two different investor profiles, the commercial terms applicable to Partnership Y and Partnership Z are similar. Partnership Y and Partnership Z have the same fund manager and will make the same investments on substantially the same terms.

Partnership Y and Partnership Z are marketed to investors as a single product, Fund A. As part of the marketing, a private placement memorandum (PPM) is produced. The PPM focuses on marketing Fund A as a whole but explains to investors that the entity into which they will invest will be either Partnership Y or Partnership Z, depending on their tax status.

Partnership Y and Partnership Z together form part of the same multi-vehicle arrangements and therefore the applicable test when applying the GDO condition is whether Fund A, taken as a whole, satisfied the relevant GDO condition.

Example 2

Main Fund B is a limited partnership which is marketed to investors using a PPM. No parallel funds are specifically anticipated when the PPM is prepared, however the PPM and/or constitutional documents of Main Fund B contemplate the possible establishment of a parallel fund if required for legal, tax or regulatory reasons.

During the marketing of Main Fund B, it becomes clear that for regulatory reasons a prospective investor (Investor X) cannot invest directly into Main Fund B. The fund manager therefore decides to establish Parallel Fund B to accommodate Investor X. Investor X is the only investor in Parallel Fund B, which has identical terms to Main Fund B other than changes necessary to accommodate Investor X.

Although the PPM did not expressly contemplate Parallel Fund B, a reasonable investor in the Main Fund B would have been aware of the possibility of a parallel fund being established when Main Fund B was marketed. As a result, an investor in Main Fund B or in the Parallel Fund B would reasonably regard their investment in that fund as an investment in the arrangements rather than in any particular entity. Main Fund B and Parallel Fund B therefore together form part of the same multi-vehicle arrangements and it is those multi-vehicle arrangements as a whole which should be considered in determining whether those arrangements meet the relevant GDO condition.

Example 3

Fund C is an aggregator constituted as a partnership and into which three feeder funds, also constituted as partnerships, invest. There are no other investors into the aggregator partnership – instead it pools the commitments of the three feeder partnerships.

The three feeder partnerships and aggregator partnership are marketed to investors as a single product, Fund C. The documents used to market Fund C explain that investors can choose which feeder partnership to invest into and the role of the aggregator partnership. As a result, an investor in any of the feeder partnerships would reasonably regard their investment in that fund as an investment in the arrangements rather than in any particular fund.

The three feeder partnerships and aggregator partnership together form part of the same multi-vehicle arrangements and therefore it is those multi-vehicle arrangements as a whole which should be considered in determining whether those arrangements meet the relevant GDO condition.

Example 4

Main Fund D is a limited partnership which is marketed to investors using a PPM. The PPM and constitutional documents of Main Fund D contemplate the possible establishment of an AIV if required for legal, tax or regulatory reasons.

It becomes apparent that a proposed investment cannot be made through Main Fund D for regulatory reasons. Main Fund D therefore establishes an AIV and under the terms of the fund documents requires investors to advance capital to the AIV which makes the investment. The investors each have the same exposure to the underlying investment as they would have done had it been made through Main Fund D. As a result, an investor would regard their investment in the AIV as an investment in the arrangement as Main Fund D.

The AIV and Main Fund D together form part of the same multi-vehicle arrangements and therefore it is those multi-vehicle arrangements as a whole which should be considered in determining whether those arrangements meet the relevant GDO condition.