PRIVATE EQUITY IN LUXEMBOURG
… has a long tradition !
Luxembourg has set an ambitious agenda to attract Private Equity houses to provide more middle-office related work out of Luxembourg, in particular with regard to increasing substance requirements and AIFMD-related requirements.
The Government has put in place a high-level working group consisting of key players of the financial services industry to develop a strategic plan to this end.
Out of the 10 largest Private Equity houses worldwide, 9 are doing business out of Luxembourg. Most have started by leveraging the advantages that Luxembourg holding companies provide when structuring Private Equity acquisitions.
But business interests have since driven more substance to Luxembourg. This originally discrete business with little local presence in Luxembourg is fundamentally changing as Private Equity houses enhance their presence in Luxembourg by establishing or ramping up operational and other capabilities.
A clear trend toward enhanced transparency and regulation drove Luxembourg to respond by introducing the regulated private equity and venture capital vehicle SICAR in 2004 and the SIF in 2007 which, in retrospect, anticipated many of the legal requirements that are now found in the Alternative Investment Fund Managers Directive (“AIFMD”).
Combining flexibility in legal and tax structuring, a reputable and stable financial environment and efficient infrastructure has brought hundreds of Private Equity participants, both established and emerging, to set up some or all of their Private Equity vehicles in Luxembourg.
LUXEMBOURG – A CONDUCIVE ENVIRONMENT FOR PRIVATE EQUITY
Choosing the right location for the set-up of Private Equity operations means having to take into consideration many different factors. The following features are Luxembourg’s strengths – the combination of these strengths makes Luxembourg attractive to Private Equity.
Political & economic stability
The political stability of Luxembourg is marked by a political culture of consensus where the traditional parties coexist within the context of broad agreement on key issues.
The business-friendly political environment is conducive to welcoming decision-makers and entrepreneurs. Attracting international players is considered paramount in building an efficient business framework and economic growth, and has enabled Luxembourg to establish a permanent and innovative business community. An illustration is the recent special tax regime for highly skilled workers aimed at attracting a specialised workforce in areas such as Private Equity.
A stable and rewarding tax regime
The tax framework is considered among the most stable and rewarding in Europe for companies, their shareholders and their employees. This is a key component of Luxembourg’s development. The tax authorities lead a constructive dialogue with taxpayers, have a business friendly attitude and the quick and pragmatic approach to the requirements of international investors.
Luxembourg is not a tax haven but it offers one of the most flexible and attractive tax regimes within the EU.
The strength of the Luxembourg financial services industry
Luxembourg is the largest financial centre for investments funds in Europe and the second largest worldwide. Sponsors from 42 countries distribute their Luxembourg funds around the world through more than 42,000 distribution agreements: 72% of authorisations for distribution granted to worldwide funds are allocated to Luxembourg funds.
Luxembourg has been able to turn retail EU funds, the UCITS, into a brand that stands on its own, not only within Europe but worldwide. In view of the fact that more than 44,000 people are employed in the financial services industry which contributes around 26% of the gross domestic product it is easily understandable why the financial
industry and government are working closely and smoothly together to ensure continued efficiency.
Luxembourg today hosts more than 500 companies servicing funds, such as central administrators, domiciliary agents, law firms, auditors, consultants, depositaries, management companies and alternative investment fund managers (AIFM) and many more; an industry that continues to develop dynamically.
Luxembourg has a unique system of social dialogue that involves regular meetings between the government, employers’ representatives and unions, which is key to avoiding social conflicts and to reaching consensus on important decisions regarding economic and social affairs.
Luxembourg was further one of the pioneers to implement the AIFMD and has largely leveraged on its long-standing and recognised UCITS experience to adapt the private equity industry to the new regulatory standards and
marketing or placement regimes. Although the initial objective of the G20 and
Although the initial objective of the G20 and the EU Commission was principally aimed at regulating the alternative investment industry in order to control and avoid systemic risk, the AIFMD indeed also entails a European marketing passport for AIFM. Once authorised in a EU Member country, these AIFMs can market the AIFs they manage to professional investors in all other EU Member countries.
In the context of UCITS, Luxembourg has taken advantage of the opportunities given by the passport regime and has, on that basis, become the leading jurisdiction in the world for retail cross-border distribution.
Luxembourg is therefore currently building on this positive experience and offer the possibility for both AIFM and AIF to use Luxembourg as their hub for marketing AIFs to professional investors in the EU and, potentially, as is currently the case for UCITS, beyond the EU.
A considerable number of Luxembourg UCITS management companies have also obtained approval to act as AIFM, allowing them to manage both UCITS and AIF. These AIFMs, as well as stand-alone AIFMs without UCITS licenses, offer private equity sponsors a cost-efficient solution, benefitting from the marketing passport.
Players on the Luxembourg Private Equity scene
GPs/Private Equity houses or their subsidiaries
Whilst historically local presence was limited mostly to smaller and/or emerging General Partners (GPs), many large international houses have set up and conduct business out of Luxembourg since the middle of the last decade with a considerable and growing local substance.
Private Equity administrators
These service providers offer domiciliary, accounting, trust services and, since the introduction of AIFMD in 2013, depositary services for closed-ended funds investing in Private Equity and Venture Capital. They provide offices to conduct business from, as well as a range of additional services to Private Equity houses that are conducting business out of Luxembourg.
Luxembourg is home to both Private Equity centric or specialised administrators Equity as well as many more generalist administrators that are often part of larger financial services groups.
Governance standards of Private Equity structures set-up in Luxembourg have undergone a significant evolution with enhanced governance having been made a priority by the supervisory authority and industry stakeholders themselves. Today, there is a high number of skilled independent directors available to serve Private Equity structures.