As part of this , we asked nine figures in Luxembourg’s financial industry about the strengths and weaknesses of the grand duchy’s private market funds sector. Pauline Roux, vice president, legal counsel at AllianceBernstein told Paperjam:
“Luxembourg, located at the heart of Europe and having been part of the creation of the European Union, is primarily known for its well-developed financial ecosystem and political stability.”
“In my view, one of the primary advantages of Luxembourg is its role as a pioneer in the European fund industry. It was the first country to implement the EU directive on undertakings for collective investments in transferable securities (Ucits) in 1988. This early adoption quickly attracted international fund promoters. Over time, Luxembourg has also become a prime location for private assets funds, particularly with the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2013. This directive was quickly implemented, the grand duchy positioning itself at the forefront of developing products with less liquid investment strategies, such as private equity, real estate, and debt funds. As of May 2024, the assets under management of Luxembourg-domiciled funds .”
Roux continued: “Private asset managers willing to set-up funds in Luxembourg also benefit from a large corporate and regulatory toolkit. From most to less regulated, the following labels are available: specialised investment fund (Sif), investment company in risk capital (Sicar), undertaking for collective investment (Part II UCI), reserved alternative investment fund (Raif), not to mention ‘simple’ alternative investment funds (AIFs). This allows managers to combine investors’ needs, contemplated investment strategy and time-to-market considerations.”
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“Indeed, some of the aforementioned products are not subject to the direct supervision of the Financial Sector Supervisory Commission (CSSF), and therefore even more flexible and faster to set-up, while still benefiting from the CSSF supervision at the level of their Luxembourg alternative investment fund manager (AIFM). On the contrary, more regulated vehicles such as Part II UCIs, allow for a broader investor base and can accept retail investors. In terms of corporate structures, Luxembourg funds can be set-up under a wide range of forms, including limited partnerships. This allows better adjustment to the needs of Anglo-Saxon investment managers meaning Luxembourg funds can have a very similar structure to US partnerships.”
Flexibility a key strength
“One of the main strengths of Luxembourg is also to be a leader in global fund distribution,” Roux added. “Last but not least, the grand duchy’s legal environment is flexible and adjusts to market needs. For example, in the private assets sector, the CSSF has long established that lending activities are permissible for AIFs, provided they exclude lending to the ‘public.’ This was not the case in all EU countries and as a result, Luxembourg has become a leading country for the establishment of private debt funds.”
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“With the recent publication of a revised version of the AIFMD, known as AIFMD II, the European regulator confirmed that loan origination strategies can be implemented by AIFs. This new lending passport comes with a series of new requirements for AIFMs that manage AIFs with loan originating activities. Since the CSSF has long paid attention to asset class and corresponding requirements for AIFMs, the impact should be minimal for Luxembourg AIFMs.”
How to improve
“While I cannot think of a weakness specific to Luxembourg, I would prefer to highlight areas of improvement for the EU market generally,” Roux concluded. “For example, tax requirements vary considerably from one EU country to another. It could be beneficial to harmonise investor’s taxation in case of transfers, distributions, and when selling interests of funds. Distribution of private debt funds to retail investors has also become a key point and the EU market could benefit from better harmonisation as well. In any case and as the market evolves, Luxembourg’s proactive approach to regulation and innovation will likely ensure its continued success and attractiveness to investors worldwide.”
An alternate version of this article first appeared in the October 2024 on the private markets & fund ecosystem.