The benefits to the USFM of this additional European capital include a higher basis to charge management fees. The capital also benefits the non-European investors as it provides the fund with more firepower on the deal side.
The benefit of the additional European capital also comes with a price tag. Launching the SCSp comes with the need for lawyers providing legal, tax and regulatory advice and support with the launch of the SCSp (Organizational Expenses). As per the fund complex’ governing documents, the Organizational Expenses are for the account of investors, typically subject to a cap. Beyond that cap the costs are for the USFM.
The SCSp also generates ongoing expenses (Fund Expenses). USFM consider an SCSp high maintenance as it usually requires depo, domiciliation, accounting, and regulatory services in Luxembourg. To market the SCSp under a European passport, a European-authorized fund manager must be appointed. All these providers charge the core of their fees - by default – based on the SCSp’s NAV.
Other investor-facing vehicles in the fund complex may not face equivalent Organizational Expenses and Fund Expenses. Thus, in proportion to the capital raised, the SCSp is usually more expensive than other investor-facing vehicles in the same fund complex. This raises the question whether the SCSp’s Organizational and Fund Expenses should be borne solely by the investors who invest via the SCSp or should be shared across all investors.
Rules relating to expenses are mostly disclosure obligations. There are no strict Luxembourg rules dictating how costs must be allocated across fund vehicles. Various models are used in the limited partnership agreements (LPAs) of the fund vehicles.
In rare cases, each vehicle bears the Organizational Expenses that it directly triggers, as if it is a stand-alone fund. However, market practice is to allocate the Organizational Expenses in proportion of the capital raised through the different vehicles.
Fund Expenses that are vehicle-specific (e.g., specific service providers fees, entity-specific tax filings) are typically borne by the relevant vehicle. Fund expenses benefiting all vehicles (e.g., expenses relating to deals, fund raising and governance) are typically allocated on a pro-rata basis across all the vehicles.
In rare cases, LPAs grant the USFM discretion to allocate Organizational Expenses and/or Fund Expenses as it deems appropriate.
Though largely a commercial matter, the allocation of SCSp-related expenses should be given ample consideration when establishing a European sleeve within a broader fund structure.
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