Industry Comment

Private Equity Funds in Luxembourg

Wednesday, February 08, 2012

Luxembourg should not be discounted as a private equity funds’ domicile and 2012 promises significant change. By the autumn, the domicile debate could start to look very different.

Make no mistake; Luxembourg is an excellent European domicile for private equity funds and not just SPV’s. This small country at the heart of Europe (in every sense) is highly solvent, has low tax rates, is politically stable and, as we all know, has a very developed savings funds industry. This is perhaps the only truly safe environment within the EU for long-term investment funds.

A certain amount of EU interference is the price paid for EU membership and it is a multifaceted issue. On the one side, Luxembourg has immediate and unrestricted access to an increasingly harmonised, single financial services’ market and on the other side, is subject to its sometimes unhelpful rules (in particular with regard to regulation and taxation).

As a small country however, Luxembourg adopts a literal and no-nonsense approach to implementing EU rules which results in a refreshingly straightforward legal environment (notwithstanding a wide array of unhelpful acronyms mostly beginning with the letter ‘S’) in which it is perfectly possible already to replicate private equity industry funds (as opposed to other vehicles commonly confused with them).

The key to replication, however, is making an authentic copy of the existing model used by the industry. If the model recommended locally differs in legal form or it is managed in a different format or administered by different, more institutional providers, then the product will inevitably differ (and there are no local tax advantages with this asset class to offset the differences). The ‘product’ should always be understood as an amalgam of legal form, management and operational processes.

You need to get the right product, to get the right result. The Aztec Group, with its unrivalled track record for service delivery, is perfectly placed to replicate the private equity model in Luxembourg and its international team is totally familiar with the local legal environment and the advisers within it. With regard to custody, there are a handful of banks that have already moved away from the traditional ‘problematic’ business model and, AIFMD or no AIFMD, represent a compelling supervisory proposition. AIFMD should simply introduce greater choice and flexibility for those that want it.

VAT efficiency remains elusive; however, it can already be addressed on a fund-by-fund and investment-by-investment basis. This is obviously sub-optimal and the big challenge for 2012 is for the industry to move away from the simplistic exemption of all local management services (that may not remain effective in an increasingly harmonised environment).

Even the authorisation process may become more streamlined in the future with the adoption of more risk-transparent structures.

With a package of reforms planned, 2012 promises to be a threshold year for Luxembourg in achieving its stated aim of becoming a leading domicile for private equity industry funds. It is well worth watching it closely.  Read more...

No matter how complicated the consultation may seem, the outcome is looking clearer all the time ...

Friday, September 23, 2011

The answer is buried in EVCA’s response to the third country consultation, which states that AIF are commonly managed by AIFM domiciled in the Channel Islands, Switzerland or the United States, because these jurisdictions offer the product certainty necessary for particularly high value, long-term institutional investment without many of the political, legal and fiscal complexities in the EU identified by the Report of the Expert Group and the Commission itself. If it wasn’t obvious why AIFM were located outside the EU, current monetary uncertainties and fiscal risks should make everything clear. Picking up again on the EVCA’s response, it is not all clear that international private equity funds even need to market in a European context and, therefore, ESMA should consider a more conservative approach when formulating its advice if it is to keep an international industry onside.

For those successful onshore EU domiciles, the time has come to look very carefully at the definition of an AIF in the context of EU not domestic law and decide whether the term really has the universal meaning that some claim. The application of EU legal concepts to interpreting the Commission’s original work may well leave scope to protect the very stable legal environment necessary for long term investment. With terms such as AIF, AIFM, EU AIF, Non EU AIF etc. the term “EU Non-AIF” would be a worthy addition.

If onshore EU domiciles are unsuccessful in this endeavour, no doubt international, institutional, returns’-driven investors will be provided with a relatively neat choice in the future: the AIF pool or the non-AIF pool. It couldn’t be much clearer I guess. Read more...

A new European regime for Venture Capital (as it seems the AIF does not fit all sizes after all!)

Friday, June 17, 2011

Just over a month from the publication of the final text of AIFMD, the Commission has published a new consultation document recognising: Read more...

What direction should people be heading?

Tuesday, June 07, 2011

It seems as if confusion reigns in the market and we are seeing some advisers suggesting promoters look onshore while others are suggesting offshore. As everyone seems to have vested interest, one way or another, what is the right thing to do?

The answer is that no-one knows for certain and therefore, the prudent approach would be to wait and see.  Waiting is simple, free and avoids the risk of getting it wrong, which could be very costly indeed.  Unfortunately, however, this advice is of little use to those who cannot wait the two years necessary before going to market. Read more...

AIFMD: EUR 500m is unlikely to be enough

Wednesday, April 27, 2011

The small funds’ exemption in the Directive may be much more limited than private equity promoters expect. Read more...

The Golden Ratio projecting past the SICAR published in AGEFI Luxembourg

Friday, March 11, 2011

Structuring a private equity fund in a non-tax neutral jurisdiction is a complicated business and the political, regulatory and fiscal risks are high. Promoters should be very wary, therefore, of perfectly packaged products offering simple solutions for all. Excellent options do exist though, for those who adopt a classical approach to structuring private equity funds recognising the differences with this asset class. Sophisticated products require fine tools. Read more...

AIFMD - when one size does not fit all

Wednesday, March 09, 2011

One size does not fit all when it comes to investment fund regulation. By adopting terms of art used in relation to hedge and mutual funds, the Directive comes undone in a private equity context and good advisers should be quick to examine ways of giving shape to the law. Read more...

Alternative Investment Fund Managers Directive

Wednesday, December 01, 2010

The Commission would have been wise to have researched the “law of unintended consequences” before first publishing its draft on 29 April 2009. For those who are unaware of this “legal” principle, it is an adage or idiomatic warning that an intervention in a complex system always produces unexpected outcomes. Private equity managers then should spot the relevance paradox at the heart of the Directive and think carefully about its possible application in a returns-driven environment. Read more...