Insourcing functions of Luxembourg asset acquisition vehicles

Initially, the management and administrative functions of asset acquisition companies (HoldCos) are usually outsourced to Luxembourg third-party service providers known as domiciliation agents. As the number of HoldCos grows, insourcing all or some of those functions becomes financially and operationally attractive. The tipping point is usually some 20 HoldCos. A phased insourcing approach is typical, starting out with a lean team of 1 or 2 in-house professionals who handle the HoldCos’ accounting, legal coordination, compliance and corporate governance. Two common models to structure this insourcing are:

  • Staff and resources are pooled within a HoldCo controlled by the fund. Such HoldCo services the other HoldCos controlled by one or several funds of the USFM. This model is efficient but may require restructuring when a fund winds down.  
  • Staff and resources are pooled in a USFM-controlled service company that services all the HoldCos controlled by the fund(s). This model offers continuity and scalability but may trigger Luxembourg licensing requirements. 

Insourcing management functions of Luxembourg funds

Initially, a USFM typically relies on a Luxembourg third-party authorized alternative investment fund manager (Host AIFM) to manage its Luxembourg fund(s). The Host AIFM delegates the portfolio management (buy and sell decisions) back to the USFM. 

The Host AIFM usually also support certain fund-related back office functions. However, if the USFM already avails of Luxembourg staff in connection with the fund’s HoldCos, the fund-related back office functions are usually assumed by that staff.

If the value of the assets under management through Luxembourg funds reaches a level of USD 3 to USD 5 billion, the USFM usually considers insourcing the AIFM functions. To do so they launch their own Luxembourg AIFM. That step is not taken lightly as it requires a substantial investment in Luxembourg in terms of head count, timing and costs. The next Snippet in this series will discuss the launching of an in-house AIFM.

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