Mergers and acquisitions

Luxembourg positions to capture global M&A boom

Sylvain Cailleau of Allen & Overy believes that Luxembourg can be a centre of excellence for M&A Photo credit: Allen & Overy. Illustration: Maison Moderne

Sylvain Cailleau of Allen & Overy believes that Luxembourg can be a centre of excellence for M&A Photo credit: Allen & Overy. Illustration: Maison Moderne

It’s no secret that global mergers and acquisitions enjoyed a bumper 2021. Pent-up demand from 2020, supported by low interest rates and generous credit supply swelled volumes to a record-breaking $5.8 trillion last year, according to analysts Refinitiv, leaving the former 2007 record of $4.55 trillion for dust and rising 60% on 2020’s valiant effort of $3.6 trillion.

Luxembourg has played its role in this M&A uptick, thanks in part to an ongoing drive for consolidation in the private banking and insurance sector, but lawyers believe it can leverage on the number of holding companies registered in the jurisdiction to play an even bigger role on the global stage. “Luxembourg could develop an M&A offering for the entire process,” said Sylvain Cailleau, partner at international law firm Allen & Overy in Luxembourg.

M&A in Luxembourg

Luxembourg has had an active few years of local M&A. Deals include not only the bank and fund sector, such as the sale of Danske Bank’s private banking activities to Union Bancaire Privée in 2022 or fund services provider TMF Group’s 2021 acquisition of services provider Selectra Management, but the Luxembourg state’s sale of plant engineering business Paul Wurth to mechanical engineers SMS Group.

“Luxembourg is a very interesting jurisdiction for M&A,” says Cailleau, referring to the consolidation deals in the financial sector over the past few years.

But there is another M&A opportunity in Luxembourg that has not yet been fully exploited: The sheer number of holding companies registered in Luxembourg. There were just over 150,000 companies registered in Luxembourg at the end of 2021, data from the Luxembourg Business Register shows.  Only 30,000 or so are non-financial, according to national statistics service Statec. A portion of the remainder will be holding companies. 

“Most private equity transactions involve one or more Luxembourg transactions,” said Cailleau. However, because the Luxembourg portion involves the holding company, the legal activity can be confined to the transfer of shares and other local formalities, he explains.

What could be developed instead is an M&A offering for the entire process. This is particularly true of corporates that have no association to a specific country, for example, fintechs, corporates that own and manage properties across Europe, or other companies with regional and global, rather than local, ties need not be restricted to legal services in their country of origin, points out Cailleau.

The appetite for technology, digital and data-driven assets fueled much of 2021’s M&A boom, according to consultancy PwC’s Global M&A Industry Trends Outlook 2022 report. This is set to continue for 2022.

“We have the expertise, we have the teams to offer the full spectrum. Not just corporate M&A but employment law, tax law, regulatory environment, financing etc,” said Cailleau.

The volume of holding companies in Luxembourg provide an excellent entry point.

“If we can capture just a fraction of these hundreds of existing transactions involving Luxembourg holding companies then we’ll be significantly boosting M&A legal activity in Luxembourg across the life of the deal,” he said.

Private equity explosion

Growing private equity participation in M&A will further turbocharge Luxembourg’s role. According to the PwC report, almost 40% of deals in 2021 involved a PE fund, up from just over a quarter over the past five years, and this is on track to grow further in 2022. In Luxembourg, private equity was the fastest-growing asset class in 2021, its assets under management increasing 30% year on year within an overall 18% increase across all of Luxembourg’s assets under management according to the Association of the Luxembourg Fund Industry data.

According to the PwC report, private equity deals are becoming bigger. “PE firms aren’t just doing more deals, they are doing bigger ones; and this is accounting for 45% of total deal values in 2021, compared to 30% over the past five years.”

However, the way that holding companies in Luxembourg are structured means that Luxembourg-based advice is crucial. “Luxembourg M&A is founded on joint ventures, meaning that you need shareholder agreement to bring in a new partner. The governance for this follow Luxembourg law and requires Luxembourg legal input,” he said.

And M&A  headwinds require expert advice. “ESG has become a dealbreaker in M&A. It can topple a deal.”

He explains that if the audit reveals poor ESG compliance then investors won’t invest, they will struggle to put a market value on the business and banks are unwilling to lend.

“To advise on the legal aspects of M&A, the legal world now needs a holistic understanding of ESG.”

For PE firms, the ESG appetite goes beyond compliance. Keen to create even more value for investors in the rising market, they are asking themselves what they can do over the life of the investment to raise the bar in ESG. The PE growth approach, once confined to financials, now concerns investment in ESG-compliant projects that both create value but also that won’t become liabilities at the point of exit in 5-7 years’ time.  

“Assets [that don’t comply with ESG] are difficult to sell and for now there’s not even a trend of alternative players picking these up for cheap,” said Cailleau.

The growing capacity in Luxembourg to advise on M&A puts Luxembourg in a strong position to do the A to Z of a deal as lead counsel. “Clients like one single point of contact in a deal. Meanwhile, international law firms know that they need to be in Luxembourg to follow the client wherever they go.”

An M&A ecosystem?

Allen & Overy is holding an M&A forum in Luxembourg on 16 June to bring key players in the sector together. The idea is not only to discuss trends but also to establish a base for sharing best practices.

Cailleau does not want to hoard the M&A opportunities for Allen & Overy. “My hope is that competition grows in the M&A field in Luxembourg,” he said. “For example, it’s more efficient to work with people on the ground than to face a lawyer in Amsterdam.”  

Luxembourg has a good track record for establishing centres of excellence in a number of financial areas. The UCITS directive was one, and its expertise in financial services is another. Ambitions to do the same for servicing global M&A are lofty but not without precedent. Cailleau points out that it’s not only a good thing for Luxembourg but also for the legal terms. “[advising on] M&A is interesting,” he said. “It involves a lot of adrenaline, sometimes the transactions can be completed in a few months. In law firms, moral is a big thing. I think other firms will come to offer the full spectrum of M&A services too, as it’s a matter of moving up the value chain,” said Cailleau. “I’m optimistic. We have the right foundations and we’ve started to do it already with supportive client feedback.”