This practical guide seeks to give an overview of the financial service sector regulatory framework focusing specifically on wealth and asset management, banking and insurance institutions.
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The Luxembourg Financial Connection - Issue 22
Private equity: winning in a new era
Private Equity firms are operating today in an increasingly uncertain environment. After the global financial crisis, the most important lesson learned was: expect the unexpected. Alongside uncertainty and global economic volatility, Private Equity firms are facing a new era of regulation.
Luxembourg has been a major hub in the Private Equity industry for more than 20 years. Its main features attracting Private Equity houses from all over the globe are political and economic stability, a stable tax environment, a strong market infrastructure and a business-friendly environment. Luxembourg has always strived for the cutting edge and will do so going forward. The Grand Duchy will be amongst the first countries to implement the Alternative Investment Fund Managers Directive (the AIFMD) and continually works on further enhancing its footprint in the global Private Equity landscape.
The Luxembourg office of EY welcomes you to discover more about Private Equity in Luxembourg and how we can help you gain perspectives on issues and trends affecting the Private Equity industry, including:
- Private Equity structures in Luxembourg
Private Equity activities in Luxembourg started more than 20 years ago by structuring international acquisitions via Luxembourg unregulated vehicles such as the SOPARFI (investment holding company - société de participation financière). Hosting nowadays more than 25,000 SOPARFIs, the key advantages of this vehicle can be summarized as follows:
- Flexibility in the structuring through three possible legal forms with limited disclosure;
- Stability given by a mature, flexible and sustainable legal framework to accommodate tailor-made structures;
- Tax efficiency provided within an attractive and reliable tax regime.
In 2004 respectively 2007, Luxembourg further strengthened its commitment to Private Equity by implementing two regulated Private Equity vehicles: the SICAR (investment company in risk capital - société d’investissement en capital à risque) respectively the SIF (specialized investment fund – fonds d’investissement specialisé):
The SICAR is an investment vehicle designed specifically to suit the needs of Private Equity and Venture Capital and allows for direct or indirect investments that are in line with the Private Equity business model of developing and exiting the asset. SICARs are not subject to any risk-spreading requirements. As of today, Luxembourg counts more than 280 SICARs.
The SIF is an investment fund that provides a very flexible regulatory regime regarding a fund’s eligible assets but imposes a minimum investment diversification of 30%. As of today, more than 1,400 SIFs give proof to the huge success of this fund vehicle out of which approximately 140 focus on Private Equity investments.
The four key advantages of the SIF and the SICAR regimes are:
- Access for general partners to a regulated domicile and superior brand;
- Tax neutrality;
- Flexibility in structuring through various corporate and legal forms, variable capital and compartments;
- Operational efficiency achieved by, for example, a formal exemption from consolidation.
Amidst an international regulatory environment seeking to increase transparency and oversight the SICAR and the SIFs are Luxembourg’s two tried-and-tested regulated Private Equity vehicles.
- Creating value in private equity investments
Those able to demonstrate a consistent track record in creating value in their portfolio — which translates into best-in-class realized returns —should be well positioned to attract fresh capital.
Private equity (PE), similar to other industries, is not immune to continued macro-economic uncertainties, including the impacts of the US and European sovereign debt issues that cloud the horizon.
However, PE is resilient, nimble and has demonstrated an ability to withstand shocks. It’s no wonder private equity investors have come out of the recession with a renewed focus on organic revenue growth, applying a more entrepreneurial mindset to working with their portfolio companies.
PE will once again have an opportunity to prove that its active ownership — as we have found in both the North American and European studies on how PE investors create value — enables it to create stronger and more profitable businesses. In fact, institutional investors are seeking exposure to Latin America’s attractive growth story — Brazil in particular — like never before to initiate or expand their private equity investment programs in the region.
This begs the question: Is the rest of the world evolving to replicate the PE model in the emerging markets? Find out why we say yes.
- The Alternative Investment Fund Managers Directive (AIFMD)
On 11 November 2010 the European Parliament adopted the Alternative Investment Fund Managers Directive which came into force in July 2011. The AIFMD will, when implemented in the EU member states, amongst others introduce a marketing passport permitting the distribution of Alternative Investment Funds (“AIFs”) in any member state of the EU without additional authorization or registration requirements. The transposition period for AIFMD end mid 2013. From 2013 until at least 2015, only European domiciled products from European domiciled alternative investment fund managers (“AIFMs”) will benefit from this pan-European marketing passport.
Although AIFMD is in place to regulate primarily AIFMs and indirectly its AIFs, all major stakeholders will be affected: managers, investors and service providers. EY has conducted several studies analyzing the impact of AIFMD on the Private Equity industry and its service providers.
While many see AIFMD as a burden as it will increase costs to Private Equity houses, the harmonized distribution regime is an opportunity that will make Private Equity a more widely accessible and attractive asset class then before. It is expected that, over a period of time, the AIFMD will establish a quality “AIF brand” for AIFMD-compliant products, comparable to the UCITS brand established by the UCITS Directive for the traditional products. The Luxembourg regulated Private Equity products, SICAR and SIF, display already many of the features that will now become standard under AIFMD.
Luxembourg aims at being one of the first countries to implement the AIFMD with the draft law having been deposited at the Luxembourg Parliament on 24 August 2012 and to duplicating the Luxembourg UCITS success story in the area of alternative investment funds.
- PE-backed IPO activity
An IPO can be one of the best routes to funding growth for fast-growing companies seeking to raise capital. But it's not a decision that can be taken lightly, and the most successful companies approach an IPO as a transformational process rather than a pure financing event or an endgame.
Gain insight into the markets trends that are impacting global PE-backed IPO volume, deal activity, investor sentiment and more.
- Private equity opportunities in emerging markets
To help private equity executives and investors gain insights into notable emerging markets, we offer perspectives into the trends, challenges and opportunities that are shaping them.
For a clear picture of where the industry is and, more importantly, where it is heading, see our individual sections on:
- Managing risk — for opportunities
We know you’re concerned about the risks of regulation and compliance.
Meanwhile, as market volatility and pricing pressures unsettle the landscape, those forces are stimulating competition and creating opportunities.
To strike that balance between risk and opportunity, our research suggests that many leading firms are developing an overarching strategy that balances both.
Our work with clients reveals that there is a need to re-engineer the risk processes across the business, just as was done with finance, manufacturing, and supply chain processes.
The goal is to get better coverage on the risks that matter.
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Our Center includes the best content from across EY to help you grow your PE-backed business and achieve more value at exit.
- Les grandes tendances du marché du Private Equity en 2015 - April 2015
- Welchen Wert schafft Private Equity? Eine Analyse der gröβten Europäischen PE Exits - March 2015
- Les enjeux majeurs des liens contractuels entre investisseurs et gestionnaires de fonds de Private Equity ? - January 2015