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.