Private Equity means Luxembourg

Capital V #10; by Alban Aubrée, EY Luxembourg

For the last few decades a majority of Private Equity (“PE”) houses have set up back-office structures in Luxembourg and started to use Luxembourg as a hub for their European operations. Over the last five years, with the introduction of the AIFM Directive as well as the increasing pressure from the OECD BEPS project (“Base Erosion & Profit Shifting”), the substance of these PE houses has been constantly reinforced and the operating model significantly upgraded, moving from passive back-office structures to very active European Hub structures frequently headed by Luxembourg-based Alternative Fund Managers (“AIFMs”).

PE businesses started effectively with various portfolio companies offered by Luxembourg but are now very often packaged together with AIFMs and different funds that together provide a real logistical advantage which goes beyond the substance of the initial objective.

With more than 6,000 PE professionals, Luxembourg is now home to the top 13 PE players worldwide. The changes which are happening now are not only the result of significant changes in the international political and tax environment but are also a combination of locally driven initiatives and innovations, long-term political and economic strategies, and the collective efforts of all the market players towards a single goal: Let’s make Luxembourg THE prime location for PE in Europe.

Although there is still a long way to go to achieve the principal objective, which is to onshore to Luxembourg the offshore PE funds, Luxembourg should not be shy of saying that it has achieved a great deal so far and is probably in the best position to offer PE houses all they need in the current environment.

Let’s take a few concrete examples and look at the main reasons for this success, which has certainly not come about by chance!

#1 A COMMUNITY OF EXPERTS AND TALENTS WHO HAVE SHARED THEIR PASSION FOR PE FOR MORE THAN 25 YEARS

When Luxembourg started to look at PE as a real and different strategic opportunity, it mainly focused on the banking sector, but at the same time it led the Asset Management industry, along with the U.S. The expertise and reputation of Luxembourg built on the Asset Management industry was therefore probably one of the main cornerstones of the foundation of the PE community which serves PE businesses today.

According to the World Economic Forum’s 2015 Human Capital report, Luxembourg contains the highest proportion of the world’s most highly qualified people. In other words, the study ranked Luxembourg “First”, ahead of Singapore, for the level of skills, development and qualifications of its employees. It can be in no doubt that the skills of people who specialise in PE contribute strongly to the attractiveness of the country.

Beyond the technical skills that all the professionals in this industry have developed, genuine expertise has also been gained over the years in the PE business model. Far from the old model of passive LBO (“Leveraged Buy Out”), the PE business model has played a much more active role in developing targets and assisting the potential for growth, both locally and internationally. This change has helped to reinforce the attractiveness of PE to Luxembourg’s employees while the country’s strong multicultural bias has enabled it to attract levels of interest in PE which are unavailable to almost all other EU countries without such a lack of cultural or language barriers.

#2 AN ATTRACTIVE AND SUSTAINABLE GATEWAY FOR PE INVESTMENT AND CAPITAL-RAISING IN EUROPE

What Brexit revealed more than a year ago is that an attractive tax and regulatory framework without political stability is not sustainable in the long term. This is also a reason why Luxembourg is today the prime location for PE as it has always demonstrated a form of continuity and political stability which is second to none.

Although Brexit plays an effective role in accelerating the re-allocation of key functions to Luxembourg (such as risk management and oversight), the Luxembourg authorities have always actively pursued the development of this market by setting up a “PE proof” regulatory and tax framework. Since 2004, when the SICAR law was enacted, there have been many initiatives to come up with new laws or to develop specific vehicles dedicated to the PE industry.

The Luxembourg special limited partnership (“SCSp”) and the Reserved Alternative Investment Fund (“RAIF”) are
now completing a toolbox which is able to compete with those in any other jurisdiction but which, above all, offers to PE managers a comprehensive list of attractive, flexible and very competitive solutions from a “time to market” standpoint. This Luxembourg toolbox, which includes AIFMD-compliant vehicles, is “tried and tested” and therefore probably one of the best ways to gain access to EU Investors.

#3 PROACTIVE, REACTIVE AND BUSINESS-ORIENTED ENVIRONMENT

At the current time no amount of confident economic predictions or indicators can tell us how an economy will perform in the future or what changes will be needed to keep up with developing economic circumstances in five, ten or 20 years’ time. What matters more, now that a number of significant changes have been made, such as the BEPS project, is the  response of countries and the ability of their business communities to adapt to changes and to incorporate these changes into local law when required.

On 7 June 2017, Luxembourg signed the Multilateral Convention at the OECD in Paris, underlining once again its commitment to transparency in tax but also its rapid implementation of the BEPS measures agreed by the G20 and the OECD.

The Luxembourg government has consistently pursued proactive economic development policies, while easy access to senior civil servants has always been a key pillar of growth in the Luxembourg economy. PE is and will continue to be the rising star of the Luxembourg economy and it is no coincidence that Luxembourg, with its business-oriented mindset, is now a perfect match for the PE community.

#4 A PRIME LOCATION FOR LISTING

Did you know that Luxembourg is the number one market in terms of listed international bonds in Europe and the world’s
number one exchange for international securities listings? Issuers can list in Luxembourg in as little as 24 hours and have a choice of two markets, amongst which is the so-called Euro-MTF market for which the PE Industry has always had a
strong appetite.

This market is generally seen as more flexible and is often selected by PE houses to list bonds aimed at financing the growth of their portfolio companies (add-ons) or at refinancing their pre-acquisition external debt. Relying on its vast 80-year experience, the Luxembourg Stock Exchange keeps on diversifying to new markets such as those for CoCo Bonds (Contingent Convertible Bonds), Dim Sum Bonds (Renminbi), Islamic Bonds (Sukuk) and, more recently, Green Bonds, so as to better adapt to the new expectations of their customers, including Chinese, Islamic as well as Green Private Equity players.

#5 LAST BUT NOT LEAST – AN OUTSTANDING AND UNDISPUTED QUALITY OF LIFE 

All of us have heard someone dispute the potential attraction of Luxembourg, a tiny country without mountains or sea borders at least once. Although we should admit that, on the face of it, this statement is true, those who express such a view should probably just look at the facts and figures produced by our leading financial commentators which indicate no compromise on the quality of life.

The Independent and Business Insider UK, in a survey carried out by InterNations and published in 2017, ranked Luxembourg as the safest country in the world for expats and as having the best healthcare system in the world. The FT
also recently commented on Mercer’s Quality of Living Survey, where Luxembourg was ranked 20th and London 40th, globally.

With the second highest Gross Domestic Product per capita (“GDP”) in the world (Qatar is first) and a growth projection
for national GDP of 4.7% for 2017, Luxembourg is more than equipped to continue to invest in its hard and soft  infrastructure and to strive for excellence and the highest quality of life as well as offer the best environment for international businesses, skilled professionals and their families.

Having been present in Luxembourg since 1930, the Wendel Group has chosen to develop its private equity business here owing to the country’s very high level of stability and the safety of its legal and tax systems and the favourable environment in terms of the competence of the various players (supervisors, bankers, lawyers, auditors), all key components in having a long-term vision, which is a pillar of the Group’s strategy.

Jean-Yves Hemery

International Delegate of Orange-Nassau, Wendel

The decision to create a hub for future EQT funds in Luxembourg formed a natural part of EQT’s growth strategy. We are looking at ways of futureproofing every single part of EQT, and consolidating the GP presence is one way of doing this. With Luxembourg, we can be sure that future funds are managed under the AIFM Directive within the EU, which is an important consideration for us. We also like the region’s macro-environment and its ability to offer one-stop solutions for deal structures. On balance, Luxembourg is the best long-term solution for EQT.

Peter Veldman

Managing Director, Head of Fund Management, EQT

For PE/RE/DD houses of any type and size, the main drivers in using Luxembourg as an investment hub are the flexibility of the marketplace, its smooth and quick adoption of EU/ OECD regulations, and the wide variety and availability of experts who are able to advise efficiently throughout the entire lifecycle of an investment. Luxembourg is also well known for its stability, which is one of the reasons why Oaktree decided to list funds out of Luxembourg before Brexit took place.

Sebastien Pauly

Head of Finance Luxembourg, Oaktree Capital Management