How has Luxembourg positioned itself as a premier hub for private equity in Europe and what factors contribute to its attractiveness in this sector?
Luxembourg has been very successful in attracting a diverse array of market players such as asset managers, insurance companies, pension funds, family offices and high-net-worth individuals. These participants are keen to engage in a wide spectrum of private equity strategies, ranging from fund of funds and buyouts to more venture capital-oriented approaches.
What makes Luxembourg a success is that these strategies are catered for by the alternative investment fund tool box – the choice of regulations and legal forms on offer, which meet a range of investor needs. This toolbox is particularly appealing to private equity investors, who can combine different corporate forms with specific fund product labels, such as the Reserved Alternative Investment Fund (RAIF), or the Luxembourg Investment Company in Risk Capital (SICAR), depending on their strategy.
Luxembourg has been very successful in attracting a diverse array of limited partners such as asset managers, insurance companies, pension funds, family offices and high-net-worth individuals.
The SCSp, sometimes qualifying as an RAIF, is often the structure of choice for PE fund initiators and their investors, largely due to its fiscal transparency and substantial contractual flexibility. This is complemented by the investor protection offered by the AIFMD and expertise by the service providers required to run an AIFMD compliant fund.
The straightforward setup process in compliance with Luxembourg corporate law is combined with direct or indirect oversight (depending on the regulatory status of the fund) by the Commission de Surveillance du Secteur Financier (CSSF), which is regarded as an efficient and forward-thinking regulator.
Luxembourg’s legal framework is pragmatic and adaptive, making it business-friendly and relatable, in particular for those accustomed to common law regimes. Combine this with the fact that a significant majority of private equity funds are unregulated and it’s easy to see Luxembourg’s appeal.
Another key differentiator is Luxembourg’s mature universe of expert service providers accustomed to facilitate cross-border investments across the EU, whether relying on the AIFMD passport or National Private Placement Regimes.
In the latter case, Luxembourg offers the possibility to setup alternative investment funds managed by their general partner as registered AIFM (in the case of an SCSp with an SARL as general partner) under the so-called sub-threshold regime in case the total assets under management do not exceed certain limits, in accordance with the rules under the AIFMD as transposed in Luxembourg law.
It’s also worth noting Luxembourg’s extensive network of double tax treaties, which is also appealing for investors seeking tax efficiency.
On a general note, Luxembourg had a reputation as a fund back office, an execution hub, but that’s no longer the case. More and more stakeholders, in particular in the private equity space, have installed their middle/front office in Luxembourg, a witness that the market in Luxembourg has matured.
What are some of the key challenges that private equity firms face when operating in Luxembourg, and how can they be mitigated?
Like other asset classes, private equity has had a challenging time over the past few years. We’ve seen a general market slow down and fewer downstream M&A deals – and this isn’t exclusive to Luxembourg.
But despite global economic headwinds, private equity has demonstrated remarkable resilience as an asset class. This is particularly the case in Luxembourg, which has a reputation for political, economic and fiscal stability and this instils confidence among financial players.
One important challenge linked to the current economic situation is valuation. Private equity funds are mostly closed-ended, they hold assets for a certain period of time, and investors are keen to keep track of valuations.
The spread in valuations of underlying assets, global economic situation and the need for liquidity of certain investors have fostered the success of continuation and secondaries funds. These extend investment horizons, providing liquidity solutions, ensuring effective asset management despite market fluctuations.
One important challenge linked to the current economic situation is valuation. Private equity funds are mostly closed-ended, they hold assets for a certain period of time, and investors are keen to keep track of valuations.
Additionally, there is a growing interest in single asset vehicles, which offer targeted investment opportunities and enable asset managers and investors to focus on high-potential assets. Single asset vehicles only hold one single specific asset witnessing the growing sophistication of certain groups of investors seeking exposure to single assets, rather than investing in a blind pool of assets.
Looking ahead, what opportunities do you foresee for Luxembourg to enhance its status as a leading destination for private equity investment?
Making private equity investments accessible to retail investors, rather than limiting them to institutional or accredited investors, has been a big shift. What Luxembourg has done is position itself to address this increasing trend – and the success of that is evidenced by the increasing number of European Long-Term Investment Funds (ELTIFs) domiciled in the country.
By opening up private equity investments to a broader audience, Luxembourg continues to strengthen its position and reputation as a leading hub for private equity.
Also, continuing to embrace advances in technology and digital solutions that enhance operational efficiency will certainly help Luxembourg stay ahead of the curve. It will also help to reduce costs.