KPMG Luxembourg has released the fifth annual edition of its , which polled more than 50 players in the sector. Head of alternative investments , tax partner and manager Quentin Monier sat down with Delano to cover the highlights of the survey.
Consolidation, sophistication trends continue
The firm’s survey covered both big and small players across the alternative investments sector, such as those in private equity, real estate or infrastructure, explained Toussaint. “What we’re able to provide is a kind of mapping of the typical structure, typical platform or headcount,” he said. This information is useful to clients as it allows them to “check if they are on par with the industry.”
Last year’s survey found two main trends: consolidation and sophistication. “This means players getting bigger, more organised, using AIFMs [alternative investment fund managers], having more employees, more substance, more functions, more tasks. So, more added-value or added-value tasks being performed in Luxembourg,” said Toussaint. That’s what was observed last year.
“This year, this trend is still there,” he noted. However, “what is supporting it is a bit different from last year. What we see is fewer AIFM licenses being obtained from the CSSF [Financial Sector Supervisory Commission] compared to last year. But nevertheless, there are still more employees and more substance compared to the past.”
“What is interesting to note is that in the past, the growth of the Luxembourg platform was mainly driven and generated by the obtention of an AIFM license. But this is actually slowing down and now we are shifting to an organic growth,” added Monier. “The majority of our respondents have their own AIFM licenses, they have funds in Luxembourg, they have SPVs [special purpose vehicles]. Now the platforms are up and running and we have organic growth.”
This is illustrated by the growth in the number of SPVs (+24%), full-time equivalents (+14%) and office space (+6.5%) between 2022 and 2023.
Tax audits
Given the international nature of much of Luxembourg’s business, cross-border considerations come into play. Survey respondents faced more tax audits compared to the previous year, noted Toussaint, with requests coming from tax authorities in countries like Spain, Italy, France or Germany.
52% of respondents were faced with a foreign direct tax audit, with around one-third of requests coming from Germany.
22% of respondents were faced with a VAT foreign tax audit.
Advantages of having an AIFM “on the ground”
“What drives the substance, the resources, the FTEs that we see increasing over the years is the fact that a large majority of players have a manco, an AIFM on the ground,” said Diricks. “And when you have an AIFM on the ground in Luxembourg, you have to comply with a lot of requirements from the regulator--the CSSF. And to comply with the requirements, you need to have people, you need to have the right skillforce.”
Having an AIFM set up in Luxembourg also helps when tax audits come in. “You’re better placed to positively demonstrate your substance towards the foreign tax authorities,” he said. “So it’s not really the tax [audit] that drives the substance, it’s the regulation.”
The survey found that Luxembourg platforms with dedicated AIFMs have an average of 155 SPVs and 29 FTEs compared to 48SPVs and 9 FTEs for platforms without dedicated AIFMs.
Moreover, for players with an AIFM “on the ground” in Luxembourg, adapting to new regulation--like the Anti-tax avoidance directive (Atad 3), which is still in the draft stage--will be easier “because they already comply with regulatory substance, which is much more strict and demanding,” said Diricks. The system is “really keen” on on-site visits to check substance and check documentation.
“We see a lot of players having a Luxembourg manco, AIFM and establishing branches below the Luxembourg manco in Germany, in France,” noted Diricks. “But Luxembourg remains the hub for Europe.”
Market confidence on tax audits
Because of the level of substance, survey respondents still feel “quite comfortable” and “have a good rating of self-confidence” when it comes to tax audits. “Last year was extremely confident,” noted Diricks. “This year is still good, but a bit lower than last year.” This reduction could be due to uncertainty around Atad 3, for example.
“I think this is very important because it shows that there is a confidence of the market regarding tax audits,” he said. “Tax audits are there. So the market should be ready to face tax audits.”
Looking at the people in the business
The survey found that on average, there are 17.4 FTEs in a Luxembourg office, said Monier, with 10 FTEs concentrating on SPV management. The majority (40%) are accountants, followed by those who handle para-legal, operations, tax, oversight and other functions (such as HR or IT).
Operations is an interesting and growing domain that’s related to increased sophistication, Monier pointed out. These are people who are “supporting, on a day-by-day basis, the deals and making sure that the transactions are understood in Luxembourg.”
While hiring intentions have dropped compared to last year’s survey, “it’s still positive,” said Diricks. Nearly half (47%) of respondents said they are intending to hire in the next six months. It’s a sign that “they still want to grow, they still need resources. And you can imagine that it’s quite difficult today, especially in this environment, to find resources.”
Co-sec software more important than it seems
“I think what also is important is that the business is transforming to reduce the cost of operations,” said Diricks. Company secretarial tasks--which can include administration for board or shareholder meetings, for instance--are a lot of work. This is often done manually using an Excel spreadsheet, but “we see players starting to use some software to help them build and prepare the various documentation.”
“Co-sec: that’s the acronym for company secretarial services,” he explained. It’s still the beginning, but players are looking at “software to help them process this huge amount of documentation.”
It might not seem like a very important topic, but it is, said Toussaint. During tax audits, for example, authorities will look at board minutes, contractual documentation and the like. “That’s where this co-sec software or proper governance is very useful. If you have nothing to produce to the tax authorities, it’s already a good sign that you did something wrong in the eyes of these tax authorities.” Co-sec software will be a priority in the future.
The magic number: €2.6bn AUM
53% of respondents have an in-house Luxembourg AIFM license, but 75% of respondents are using Luxembourg funds. “It means you have players having Luxembourg funds but not having their own AIFM in Luxembourg,” said Diricks.
So what’s the critical size for setting up an AIFM? According to KPMG’s survey: €2.6bn of assets under management.
Find the full results of KPMG Luxembourg’s 2023 alternative investments substance survey .
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .