The private equity landscape in the Grand Duchy is predominately populated by funds of €100m or less but in recent times, a rise in the number of large funds (i.e. those over €500m) now sees them represent over 4% of the total. Indeed, in terms of fund houses themselves, of the 10 largest worldwide, 9 are doing business out of Luxembourg. And this really is worldwide, not just Europe, as North American private equity houses represent 8% of Luxembourg’s total private equity holdings.
The country also plays host to some 500 fund servicing companies such as central administrators, domiciliary agents, law firms, auditors, consultants, depositaries, management companies, and a host of fintech players, creating a very dynamic business environment. These financial sector players create an hub that offers a full range of services required by private equity funds, including fund structuring, VAT services, global fund distribution, human resource services, transfer pricing, investor reporting, capital market accounting advisory services (CMAAS), risk management, responsible & ethical Investment and banking services.
A flexible and varied “toolbox” for fund domiciliation
Luxembourg has shown itself to be an ideal jurisdiction for structuring private equity acquisitions and financing. It is by no means a tax haven but offers the EU’s most attractive and flexible tax regime, enabling most vehicles to offer tax neutrality at fund level. Its offer in terms of fund vehicles is particularly suited to private equity, with a selection of either regulated (authorised, recognised, or registered by a regulator - safe & controlled) or unregulated (not authorised or recognised by a regulator - easy & quick to set up) structures.
The S.C.Sp. is a limited partnership without legal personality, which provides comparable functionalities to the common law limited partnership.
Most private equity funds are structured as SIFs (Special Investment Funds), which accepts any type of asset including private equity and is reserved for institutional investors, professional investors and well-informed investors. Next, the SICAR (Société d‘Investissement en Capital à Risque) which accepts ‘risk capital’ assets, has the flexibility to suit a variety of promoters and retail investors’ needs.
The S.C.Sp. (Société en Commandite Spéciale or SLP) is a limited partnership without legal personality, which provides comparable functionalities to the common law limited partnership. And finally, the RAIF (Reserved Alternative Investment Fund), which under AIFMD only requires the manager to be regulated, makes rapid vehicle launches possible.
A genuine hub at the core of Europe
Well before the financial crisis, Luxembourg set itself an ambitious target to attract private equity firms and the clear trend towards enhanced transparency and regulation drove the Grand Duchy to launch the above structures. It was then very quick to take advantage of new opportunities like passporting to become the world’s leading jurisdiction for cross-border distribution.
Luxembourg is clearly benefitting from Brexit uncertainty.
Luxembourg’s business friendly, tax efficient environment was key to building its reputation as a hub, nevertheless, there is another recent factor that is providing at least a significant short-term boost to Luxembourg’s private equity industry – Brexit. Luxembourg is clearly benefitting from Brexit uncertainty , and UK-based managers are finding Luxembourg’s easy company incorporation (just a couple of days), immediate legal personality, any currency accounting/reporting and easy qualified personnel work permit procedures refreshingly efficient.
An eye to the future
Private equity worldwide is clearly in a golden era, and in Luxembourg specifically, all the stars have aligned to place in a central position as a major global hub. Its private equity market is forecast to reach some €290bn by 2025, growing 10% yearly, driven in part by further Brexit uncertainty, tightening monetary policy in North America and Europe, and the expected boom in the younger Asian private equity market. However, it is the quality of Luxembourg’s comprehensive support environment that will be by far the greatest driver of Luxembourg’s continued private equity success.
CACEIS as an asset servicing provider offers fully integrated front-to-back services to private equity, real estate, infrastructure and private debt fund managers. The group is a major player in Luxembourg, offering depositary banking, fund administration, middle office and financing services. With expertise across many European jurisdictions, and the backing Crédit Agricole’s extensive banking network, CACEIS, and our clients, benefit from the geographic scope and range of services of one of Europe’s largest banks.