A tradition of innovation at a time of crisis - Ernst & Young - Luxembourg

A tradition of innovation at a time of crisis

By Alain Kinsch and Axelle Ferey 
Private Equity News
12 October 2009  

Luxembourg has been active in structuring and servicing private equity funds and deals for more than 20 years. Over the past twelve months, its traditional capacity to react quickly with innovative solutions has been essential in meeting the new qualitative and quantitative needs of the private equity industry in the wake of the economic downturn.
Non-regulated vehicles, such as Soparfis (sociétés de participations financières), have been widely used to structure tax-efficient international transactions due to their access to the large network of double-tax treaties concluded by Luxembourg (more than 50). The market crisis triggered significant developments to the way private equity acquisitions have been structured or restructured and the Luxembourg Soparfi proved particularly fit to structure buy back operations, debt acquisitions or debt to equity swaps aiming at enhancing liquidity among private equity players.
Over the past four years, an increasing number of private equity funds have been set up in Luxembourg thanks to the successful implementation of two new, lightly regulated onshore fund vehicles: the Sicar (investment company in risk capital), launched in June 2004 and the SIF (specialised investment funds), launched in February 2007. The Sicar regime was updated in October 2008 in light of the experience gained by buyout practitioners.
Today, financial sector regulatory body the CSSF (Commission de Surveillance du Secteur Financier) says it has registered 229 Sicars and 906 SIFs. The two vehicles have been among the continental Europe vehicles of choice and have been used by many of the top 20 private equity houses, as well as by small and midsized players to invest in buyouts, venture capital, mezzanine, funds of private equity funds or, more recently, in renewable energies, infrastructure and private equity microfinance.
The four key advantages of these two complementary vehicles are: (i) access to a regulated domicile and superior brand, which especially deserves to be underlined in the context of unprecedented calls for transparency and stricter regulation in the current draft EUDirective on Alternative Investment Fund Manager, a text likely to bring significant changes to the current services offered by private equity fund administrators and broaden the scope of their potential service offering; (ii) tax neutrality for investors and high tax efficiency for GPs; (iii) flexibility in structuring through various corporate forms, variable capital and compartments; (iv) operational efficiency achieved by an explicit consolidation exemption, for instance.
In addition, Luxembourg has built a real private equity cluster and Luxembourg-based service providers offer a comprehensive range of customised services, with teams specializing in structuring private equity acquisitions as well as transaction advisory, fund administration, custody, audit, legal and tax services. In that respect, Luxembourg reached a major milestone last year in establishing itself as the third major centre for private equity in Europe, alongside London and the Channel Islands: several large traditional fund administrators have begun to launch private equity desks, while specialist boutiques from London, Jersey and Guernsey are showing strong signals that they are well advanced in their plans to establish operations in Luxembourg.
Thus, the factors which have contributed to Luxembourg’s success expand far beyond tax considerations and would be of little value if there were no infrastructure on the ground. The human capital present in Luxembourg has a wealth of experience with dealing private equity, not least of which includes a deep understanding of the private equity business, the structures involved, and a keen appreciation of the varying needs of the different stakeholders. Furthermore, Luxembourg is a small andstable democracy, which allows its businessminded government and public bodies a unique degree of nimbleness and flexibility.
This has enabled the Grand Duchy to win international recognition as a pre-eminent jurisdiction for private equity funds and deals alike and to adapt rapidly to the changing business landscape of recent months.
The main challenge facing the Luxembourg financial centre is the EU AIFM Directive issued by the European Commission last spring and under discussion in the Parliament and Council. If Luxembourg welcomes the proposal to harmonise European standards of regulation and support greater transparency in private equity investor reporting and valuation, it is, however, very concerned about the means the Directive presently foresees to achieve these goals.
Over the next few months, Luxembourg will therefore continue to engage in a constructive dialogue with all stakeholders to take into account both the legitimate objectives of the Commission and the concerns of the industry.

* Alain Kinsch is partner and head of private equity at Ernst & Young, and Axelle Ferey is senior manager at Ernst & Young.

Posted on 15 October 2009