Over the past two decades, Luxembourg has emerged as a leading global centre for the Private Equity (PE) industry. Luxembourg’s share of the European PE market increased from 7.4% in 2010 to 51.5% in 2022. This makes it the largest domicile for PE funds in Europe, followed by Ireland with 18% market share. Luxembourg remains the natural choice for PE firms, bolstered by a strong appetite from limited partners, such as asset managers, insurance companies, pension funds, family offices and high net worth (HNWI) individuals, to invest into a wide range of investment strategies, including leveraged buyout, venture capital, growth capital, and mezzanine capital. Below, review the three key pillars that shape the Grand Duchy’s PE industry to gain some insight into its future.
Over the past two decades, Luxembourg has emerged as a leading global centre for the Private Equity industry.
A rising tide lifts all boats
According to Preqin, European PE and VC managed a record €1 trillion in capital at the end of 2022, up from €873 billion in 2021 – the first time the European industry has broken the €1 trillion barrier. Following the record-breaking performance of 2021 and a second-best year in 2022, it was slightly dampened in the second half as interest rates spiked, leading to a reduction in deals, exits, and fundraising. European dry powder (investable capital) reached €348 billion in 2022, highlighting the lack of deal opportunities. Overall, the European PE market remained fundamentally sound during 2023, carried by growing interest from institutional investors for the portfolio-diversifying, non-market-linked performance opportunities that PE offers.
In addition to market forces, events and trends have benefitted Luxembourg. The Grand Duchy helped many UK PE managers maintain access to the EU market post-Brexit with Luxembourg-law structures’ “European Passport” facilitation cross-border distribution. ESG trends have also positively impacted PE’s development as it plays a role in driving progress on sustainability, social and governance factors in the companies it acquires, unlocking lasting benefits and generating value.
A business-friendly and proactive Government
Luxembourg’s AAA-rated economy has a heavy bias towards financial services and its stable government has always been quick to adapt domestic regulations and adopt European regulations to give its financial services players a first-starter advantage. The country combines historical know-how with an ever-growing pool of highly skilled, multilingual workers to earn a strong reputation within the global asset management community as a key distribution hub from which to promote Luxembourg-law funds throughout Europe.
It offers structures to suit all PE players. For regulated structures, there’s the specialised investment fund (SIF), a standard regulator-supervised structure with diversification rules; the investment company in risk capital (SICAR) for professional investor fund collection without diversification rules; and the reserved alternative investment fund (RAIF) only supervised by an authorised AIFM with rapid time-to-market. However most PE players prefer unregulated GP/LP partnerships such as the limited partnership (SCS) and the specialised limited partnership (SCSp), both of which are tax transparent so appeal to tax-exempted investors. The SCSp, which has no legal personality, is popular with US and UK investors due to its similarities with English-law limited partnerships.
Technology driving progress
Various technology factors are driving progress in the PE sphere and Luxembourg firms are seeking to take advantage. Software platforms are constantly advancing, providing solutions that can streamline and centralise the entire investment cycle, optimise processes, and enhance data and reporting, helping GPs make fact-based decisions to mitigate risk, maximise performance and respond to growing regulatory and investor reporting needs. AI, machine learning and robotic process automation will be pressed into action to further streamline processes and create more value.
Various technology factors are driving progress in the PE sphere and Luxembourg firms are seeking to take advantage.
Traditionally, retail investors and pension funds have been locked out of PE due to regulators’ risk concerns, however, advances in Distributed Ledger Technology such as Blockchain, offer the potential to convert PE investment into digital tokens that represent a stake in the normally indivisible asset. This fractional ownership could enable smaller investors access to PE’s portfolio-diversifying assets at lower risk and retailisation would see the Luxembourg’s PE market expand considerably.
A bright future
A buoyant European Private Equity market, combined with a proactive government, a skilled workforce, and innovative technology signals are the drivers of Luxembourg’s success and indicate a positive outlook for the future. Both Luxembourg and Dublin stand to gain from continuing PE development, and groups like CACEIS with offices in both locations can assist PE players in selecting the most suitable domicile and structure for their business development objectives.