US fund sponsors targeting an EU capital raise experience that prospective European investors prefer to commit to a Luxembourg fund vehicle organized as a special limited partnership (SCSp). An SCSp requires a Luxembourg general partner (GP), commonly organized as a Luxembourg company that is usually owned by the sponsor. The GP should have footprint in Luxembourg to ensure the fund is governed by Luxembourg corporate law, to mitigate the risk that the fund will be taxed elsewhere and to adhere to Luxembourg anti-money laundering standards.

To secure such footprint, the focus should be on the composition and meetings of the GP’s board. Three board members, two based on Luxembourg (class A managers) and one based in the US (class B manager), is the default board structure for GPs. Quarterly board meetings to discuss the deal pipeline and the performance of the portfolio are the market standard. The preferred setting for the meetings is often determined by foreign tax substance considerations and leans towards a combination of in-person and (video) call meetings. Especially when the fund invests in European assets, the GP’s Luxembourg footprint may need to be stronger to support access to tax treaties or EU tax directives for the wider investment structure.

If the risk and portfolio management functions rests with the GP, Luxembourg regulation would be triggered at the level of the GP, which fund sponsors prefer to avoid. Such functions should rest with the EU or non-EU authorized and supervised fund manager, subject to specific exceptions. Therefore, the GP’s role is usually limited to the mere execution of risk and investment management decisions (rather than engineering those decisions), cash drawdowns and distributions, investor onboarding and sometimes also the marketing efforts. Hence, careful function allocation between the GP and the fund manager is key.

The decision-making procedure for the functions allocated to the GP follows from the GP’s articles of association. The representation clause in the articles of association typically provides that the GP (and by extension the fund) is represented vis-à-vis third parties by the joint signature of one class A and one class B manager or any proxyholder. This often prompts the question: why take a board decision if the company is already bound based on signature of the representative(s)? Board consent is required for management decisions, it helps to manage the representatives’ liabilities towards the GP and it contributes to the GP’s Luxembourg tax footprint. Whether a board decision is taken depends in practice often on the importance and the urgency of the relevant action and the representatives’ sense of wider support in the sponsor’s organization. Ratification on a post transactions basis should not become the default process. 

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