The LPFS is often managed by an EU authorised (host) alternative investment fund manager (𝗘𝗨 𝗔𝗜𝗙𝗠). The LPFS’s management then falls under the Alternative Investment Fund Managers Directive (𝗔𝗜𝗙𝗠𝗗) and the LPFS has access to an EU marketing passport.

Under the fund documents, the manager of the LPFS often has the right to establish alternative investment vehicles (𝗔𝗜𝗩𝘀) to address tax, regulatory or other needs for specific transactions. The fund documents specify that the USFM can reallocate part of the investors’ commitments to AIVs as necessary, which is sometimes subject to investor consent. As a result, AIVs do not need to be separately marketed to investors.

EU investors in an LPFS commonly prefer that any associated AIVs are established as Luxembourg SCSps rather than, for example, Cayman vehicles. This preference is caused by investor compliance requirements and/or allocation needs.

AIVs are usually considered alternative investment funds (𝗔𝗜𝗙𝘀) under AIFMD and must therefore appoint an AIFM. AIFMD permits management of AIFs by both EU and non-EU AIFMs, but only EU AIFMs secure full compliance with AIFMD. USFM may however prefer to manage the AIV-AIFs themselves, thus reducing costs and regulatory requirements compared to appointing an EU AIFM.

For consistency, EU investors often require that a Luxembourg AIV is managed by EU AIFM (i.e., same as the LPFS). If the AIV is instead managed by the USFM, EU investors may feel exposed when part of their commitment and investments move from an AIFMD-protected LPFS to an AIV that lacks AIFMD protection. An AIV managed by a USFM may also complicate compliance with EU investor allocation rules, which generally favour EU AIFM-managed structures. Finally, the EU AIFM managing the LPFS might be hesitant to re-allocate investors to vehicles managed by non-EU AIFMs.

Tax considerations may also favour an AIV managed by an EU AIFM. For investments in some European countries, local tax leakage may be lower if the AIV is managed by an EU AIFM rather than a USFM. Additionally, using an EU AIFM provides stronger protection against the applicability of Luxembourg municipal business taxation (a corporate income tax potentially levied on a Luxembourg AIV), though such taxation is generally unlikely to apply.

When USFM bring in European capital, it's important to ensure EU investors are comfortable with the AIV structure. Most often, this means using a Luxembourg AIV, set up as an SCSp and managed by an EU AIFM.

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