The wider alternative investment industry has approximately 3.5 trillion dollars of raised capital waiting to be invested across private equity, private debt, real estate and infrastructure, providing much needed investment and stimulus in the global economy, and the investment firms that manage that capital are becoming bigger, more global, more diversified and more sector-focused than ever before.
Many of those firms have chosen Luxembourg as their hub within Europe, but why is that?
“Fundamentally, private equity and alternative investment firms are looking for stability, predictability, and a business-friendly environment within which to raise funds and deploy capital into investments around Europe, and Luxembourg offers that,” says Peter Myners, Partner and Co-Head of Global Alternative Investment Initiative at Allen & Overy in Luxembourg. “Good cooperation and communication between the industry and government is the magic ingredient that Luxembourg has right now: joining forces to look ahead and identify and take advantage of opportunities, and solve for challenges – and there are plenty of those!” Numerous advocates for the industry such as the LPEA, ALFI and Luxembourg for Finance keep the government aware of developments and help drive the sector’s evolution.
Luxembourg is not Mayfair, and may never be, but it is a wonderful country and can be a fabulous platform for a career in the private equity and alternative investment industry.
Luxembourg’s investment vehicle “toolbox” has also strengthened the country’s appeal. There is a wide choice of legal entity and general structuring ease in Luxembourg, reinforced by a robust but flexible regulatory and legal framework. “The high level of certainty and enforceability in certain key technical areas, the general trend from offshore to onshore, the increasing desire to choose a neutral governing law and court system, and Brexit are further factors that continue to drive the biggest players in the industry towards Luxembourg,” explains Myners.
From back to front
A dedicated ecosystem has developed in Luxembourg, supported by a multilingual and increasingly sophisticated workforce. And a significant shift has occurred in recent years. Once a primarily back office environment, today Luxembourg sees a steady evolution towards the front office, with many senior middle office roles and some deal professionals now based in Luxembourg. “Luxembourg is not Mayfair, and may never be, but it is a wonderful country and can be a fabulous platform for a career in the private equity and alternative investment industry, and senior individuals are increasingly willing to make the move,” says Myners. “Plus the teams on the ground are becoming more experienced and are supported by much better training on things like deal sourcing and negotiation, thanks in large part to the industry associations.”
Dramatic changes in the regulatory and tax worlds, notably regarding substance requirements, have also had an impact on the private equity and alternative investment industry and its physical presence in the Grand Duchy. The days of letter-box shell companies are long gone, and avenues like Boulevard Royal are now lined with sizeable, and growing, physical teams.
When Larry Fink, CEO of BlackRock, the world’s largest investment firm, says that he will start voting against executives who do not take climate change seriously, people start to pay attention.
An operational reality now favours Luxembourg. The largest investment firms are raising huge amounts of capital and executing complex deals quickly, and they need operational ease. Using one jurisdiction to raise and deploy your capital can be very efficient operationally. Luxembourg remains significantly cheaper as a place for doing business than the West end of London or Manhattan, and smart firms are using tech solutions to drive greater efficiency and control.
Luxembourg’s multilingual talent pool, the scaling up and increased sophistication of its adviser industry, and the development and accessibility of its main regulator have further boosted the local ecosystem on which the private equity and alternative investment industry relies.
ESG comes out on top
The private equity and wider alternative investment industry is increasingly shifting its focus towards ESG, embedding ESG priorities in their decision-making processes and increasingly looking to future proofed, sustainable industries for outperformance and better risk-adjusted returns in the long term. “When Larry Fink, CEO of BlackRock, the world’s largest investment firm, says that he will start voting against executives who do not take climate change seriously, people start to pay attention,” says Mr Myners. And sustainable investing is at the heart of many of the initiatives that have been launched by the industry in Luxembourg.