For a variety of reasons, European investors generally prefer to be onboarded by US fund managers in a fund vehicle organized as a Luxembourg special limited partnership (“SLP”).
The Luxembourg accounting laws do not require an SLP to prepare and publish annual accounts. However, an SLP that qualifies as Alternative Investment Fund (“AIF”) in the sense of the Alternative Investment Fund Managers Directive (“AIFMD”) and that is managed by an EU Alternative Investment Fund Manager (“AIFM”) must prepare annual accounts.
The AIF’s accounts must be made available to the regulator and, upon request, to the investors no later than 6 months after the end of the financial year.
While the AIFMD thus sets aside the Luxembourg accounting laws when it comes to the absence of the need to draw up annual accounts, it respects the accounting laws when it comes to the absence of an obligation to publish these accounts. This secures confidentiality of the SLP’s financials, which is one of the reasons the SLP (and not the common Luxembourg limited partnership, which must publish its accounts) is the preferred Luxembourg fund vehicle.
The AIFMD requires that the annual accounts of the SLP are drawn up in accordance with Luxembourg accounting standards and the rules laid down in the SLP’s limited partnership agreement (“LPA”) and that they are audited. US fund managers generally prefer to apply US GAAP. As US GAAP is nowadays explicitly accepted as an accounting standard for Luxembourg AIFs, no double set of accounts is required.
It is generally accepted that Luxembourg SLPs can have a first prolonged financial year of up to 18 months. Such a prolonged year is generally preferred as it avoids the burden and costs of an audit of a first financial period of maximum 6 months during which the fund is typically not yet active.
The EU AIFM must ensure that the net asset value per SLP interest is calculated and reported to investors at least annually (for closed end funds). US fund sponsors usually offer quarterly reporting. The valuation principles underlying the reporting are typically in line with, or are very close, to the US GAAP rules in order to secure alignment between the annual accounts and the reporting.
If the SLP is managed by the US sponsor (no EU AIFM is used) and is marketed in the EU under private placement regimes, the aforementioned requirements to draw up and audit the annual accounts also apply.
Overall, US managers should be able to match the accounting, valuation and functional currency standards of the Luxembourg SLP with those of the wider US fund. A draft law that re-groups Luxembourg accounting provisions is pending, but this law will unlikely have any material impact on the above matters.
