Executive summary - Udo Bullmann

account of a LBO fund with up to £8bn (12 billion euros) of funds under management. Afterfive years 30 full partners in the LBO fund are expected to make between £25 million and£50 million each.The first attraction of LBO funds is that financial engineering concentrates reward for thebenefit of the minority of capital providers who provide equity and funds and not to themajority of capital providers who supply cheap debt.2.10 Off-shore / on-shore and tax evasionTwo clear distinctions have to be made, first regarding the location of the fund, secondregarding the location of the management company. The choice of location is clearlyinfluenced by tax considerations.• Domicile of the fundThe choice of location (domicile) of the fund can be between different national regulatedschemes (e.g. UK-based funds or French-based funds) – named ‘onshore’ funds - or betweenan ‘on-shore’ fund and an ‘offshore’ fund (e.g. Channel Islands, such as Guernsey or Jersey).The choice of location between different national ‘onshore’ funds will be made on the basisof tax - usually onshore funds are mainly designed to reduce taxation for national investors.The official reason for this practice is that by this method “double taxation” can be avoided.However, at the same time there is no control as to whether investors are getting taxed on theprofit from the private equity funds. The lack of control relates both to the amount of theprofit and the time of the taxation. This is due to the fact that there is no possibility ofcontrolling how private equity funds distribute profit. It should be clearly recalled that inmany off-shore centres, tax authorities are not as effective as in the major capitals of Europe.When choosing between an onshore fund and an offshore fund, other reasons may appear.For instance, the advantage of the Channel Islands is that they have no significant domesticinvestors so there is no need for heavy domestic regulation and enforcement by the localsecurities regulator – unlike continental regulators. Therefore, a light regulatory regime forprivate equity funds in terms of product design and contract conditions allows their fasterregistration in those offshore centres than in onshore ones (so called ‘regulatory arbitrage’).We should recall that all LBOs without exception place their fund off-shore, precisely forthese well-known tax reasons.53