Luxembourg: what’s driving success?
The preferred European jurisdiction for private equity and private debt investment structures
Guest contributor: Luc De Vet, Carne Group, European Alternative Investment Funds Leader
Luxembourg holding and finance vehicles have been used for many years in structuring investments in private equity and private debt (hereafter together referred to as “PE”). Over the past 5 years, the number of investment funds investing in PE and establishing in Luxembourg has grown significantly. What has caused this growth?
There are various factors of influence that have had an impact:
- The PE industry is growing, worldwide and especially in Europe.
- BEPS in combination with the requirement for more substance.
- The implementation of AIFMD in national laws in mid-2013 making non-EU funds less attractive for investors and private placement more difficult for fund initiators.
- Luxembourg’s stable and business-friendly environment.
- Luxembourg’s extensive alternative investment fund (“AIF”) toolbox.
- Growing loan origination investment activity in Europe supported by a clear regulatory framework for loan origination in Luxembourg.
- The longstanding experience with PE investment structures in Luxembourg, both at the level of the regulator and the service providers.
- The competitiveness of the market due to the large number of AIFMs, auditors, banks, board members, depositaries, fund and spv administrators, lawyers and tax advisers with extensive PE experience supporting the PE industry.
Below I highlight two factors contributing to the success of Luxembourg in the PE sector.
Luxembourg’s alternative investment fund toolbox
Luxembourg offers a well-equipped toolbox for structuring AIFs in a variety of regulated and unregulated regimes. These options provide fund promoters with the ability to structure their AIFs in the best possible way considering investors’ needs and investment strategies.
The toolbox combines a variety of legal forms, from corporate to contractual structures, and specific fund laws, like the SIF, SICAR and RAIF laws.
The most flexible option was introduced shortly after the implementation of AIFMD in Luxembourg law. It is the SCSp, the special limited partnership. It has been developed with the flexibility of Cayman and Delaware partnerships in mind. It can be structured without any restrictions and time to market is as short as it gets in a Luxembourg environment. The SCSp is very popular amongst PE fund promoters. In a period of 5 years, more than 1,500 SCSps have been created, mostly for investments in private equity and private debt. Although the SCSp as an AIF is unregulated by the Luxembourg regulator, many SCSps are managed by an AIFM and as such are subject to the laws and regulations imposed under AIFMD.
The SCSp and many other different legal vehicles can also be structured under a specific fund law. In 2016, the RAIF (Reserved Alternative Investment Fund) law was introduced. The RAIF law is based on the SIF (Specialised Investment Fund) law. An AIF established under the SIF law is regulated and needs approval from the CSSF prior to its launch. The main difference between the RAIF and the SIF is that the RAIF does not require the approval from the CSSF. As a result, the time to market for a RAIF is considerably shorter than for a SIF. Also, for AIFMs established outside Luxembourg, using unregulated AIFs avoids such AIFMs having to deal with two regulators, their home regulator and the CSSF. Every RAIF has to appoint an AIFM and is fully subject to AIFMD. Several hundreds of RAIFs have been established since their implementation and it seems that investors are similarly comfortable with the RAIF regime as with the SIF regime. SIFs and SICARs are still set up but the additional time to market of between one and three months compared to a RAIF, has reduced their attractiveness and they are only used to satisfy specific investor requirements or for tax reasons.
Loan origination AIFs in Luxembourg
Luxembourg has become Europe’s main domicile for credit funds. Funds engaging in loan origination and/or in the acquisition of existing loans originated for instance by banks, are attracted by the structuring options offered in Luxembourg and by the regulatory clearance for Luxembourg credit funds, especially for funds engaged in loan origination. The certainty that these AIFs do not require additional licensing to be allowed to originate loans has made Luxembourg the domicile of choice for many loan AIFs. The only requirements applicable to AIFMs managing loan funds are of an organisational and governance nature and would apply just as well to a private equity AIF. Most importantly, the CSSF has clarified that the AIFM should ensure that the necessary expertise and experience in loan origination, in combination with adequate technical and human resources, are in place and that the risk and liquidity management process are tailored for loan funds. With a growing market for non-bank loans, the number of credit funds is expected to grow significantly over the years to come.