We’ve seen it before. A market-leading brand or institution that’s seemingly untouchable one minute, and gone (or at least banished into the realms of the ordinary) the next. Who would have predicted the demise of the likes of HMV, BHS, Woolworths and Blockbuster a decade ago, or that Nokia would be having another go at selling its 3310 model, 18 years after it was first released.
You’re probably thinking – ok, but where’s the connection to Luxembourg? The moral of the story is that failing to evolve or adapt to the needs of your clients never ends well, regardless of the strength of your brand, history or reputation. Fund structuring is no different. Luxembourg may be making waves in the alternative investment industry at the moment, but can we really say with any degree of confidence that they’ll still be a leading domicile in the years and decades to come?
As the head of our Luxembourg office, you won’t be surprised to hear me say I have complete confidence in the future of Luxembourg. Here’s why….
Building on the foundations (experience)
One misconception we, like many of our peers and counterparts in Luxembourg, sometimes find ourselves having to tackle is a supposed lack of funds experience.
True, the introduction of AIFMD back in 2013 was a game changer for Luxembourg’s alternatives market, and I’ll return to this point in a moment, but in terms of the overall funds industry in Luxembourg it’s been Europe’s largest for some time now, dating back to the 1950s. As far as corporate structuring work is concerned, which, of course, goes hand-in-hand with fund structuring, Luxembourg has always been at the forefront, boasting one of the widest treaty networks and a stable and understandable domestic legal and regulatory environment.
What AIFMD and the introduction of passporting did was provide Luxembourg with an incredible opportunity, and one which it showed no hesitation in capitalising on. Drawing on years of fund and corporate structuring know-how, Luxembourg reinvigorated its partnerships legislation, which had long been the structure of choice for alternative investment managers, opened up the market through the deregulation of depositary services and relaxed its regulatory requirements. And this was just for starters.
Making more than just a splash (innovation)
Luxembourg’s special limited partnership legislation introduced in 2013 may not have been revolutionary, but it didn’t need to be. The partnership model worked and it’s what the market wanted, so that’s what was delivered. This didn’t mean they were going to stand still – far from it.
As the late Steve Jobs once said, “innovation distinguishes between leader and follower”. The funds industry is no exception to this rule – fund managers will choose the jurisdiction that makes life easier for them. The introduction of the RAIF in 2016 is the perfect example of Luxembourg listening to its clients (fund managers) and doing just that.
What fund managers wanted was quicker time to market, less bureaucracy and red tape and more flexibility. The RAIF achieved this by, among other things, moving away from product regulation, minimising the level of supervision required by the CSSF, removing some of the shackling investment restrictions and enabling fund managers to switch to other regimes, such as SIF, relatively easily and efficiently.
Often referred to as a “game changer”, the RAIF is by no means the first and certainly won’t be the last piece of legislative innovation we see from Luxembourg.
In the thick of it (location)
Luxembourg has long been a popular domicile for fund managers from Continental Europe, given its proximity to key markets such as France and Germany. The AIFMD was unquestionably the turning point for the UK market, with the special partnership legislation appealing, in particular, to Anglo-Saxon fund managers.
But ultimately, it’s not the strength of the legal and regulatory framework and favourable fiscal position that makes a jurisdiction, it’s the people (excuse the cliché) and this is where Luxembourg is truly unique.
Every day when I walk into the office, it never ceases to amaze just how diverse our workforce is and to be able to witness firsthand the benefits this brings to our clients. We have professionals from all over Europe, with the UK, France, Belgium and Germany to name but a few of the countries represented. They not only have the language capabilities to communicate with clients of different nationalities, but can relate to them on a cultural level too. That’s even before you consider the fact that the majority of them are graduates.
And with the country bursting at the seams with the very best professional service firms, this is a jurisdiction that is as well-placed as anyone to keep up with the ever-growing demand for its services.
Knowing where you stand (stability)
Nobody knows what’s going to happen in the post-Brexit world – the tax, the tariffs, the market access. It’s all speculation right now, but, nevertheless, it’s unsettling.
Putting all of the debate about Europe to one side for a moment, what Luxembourg’s position in the EU does provide is certainty and, in turn, stability. Fund managers that choose Luxembourg can be confident that this is a jurisdiction that will retain many of its attributes, particularly on the legislative and fiscal front. In short, the likelihood of the EU diminishing the competitiveness of one of its major capital hubs is extremely slim.
And in ten years’ time?
Luxembourg will continue to be a major player in alternatives. It’s extensive industry experience, history of innovation, stability and its location at the heart of Europe will make sure of that.
It’s not the finished article by any means. There’s room for improvement in areas such as industry training and development and some fine tuning around VAT and the substance rules, but Luxembourg has demonstrated that it is a jurisdiction that’s moving in the right direction and is not about to rest on its laurels.
This feature article appears in the November 2017 edition of Real Deals.