V Capital, Luxembourg, September 2017
Luxembourg, The Prime location for Private Equity business operating in Europe
For few decades already, a majority of Private Equity (“PE”) houses have setup a back-office structure in Luxembourg and started to use Luxembourg as a hub for their European operations. Over the last 5 years, with the introduction of the AIFM Directive as well as the increasing pressure from OECD BEPS project (“Base Erosion & Profit shifting”), the substance of these PE houses has been constantly reinforced and the operating model was significantly upgraded moving from a passive back-office structure to a very active European Hub structure very often headed by a Luxembourg based Alternative Fund Manager (“AIFM”). The PE Business started effectively with the various portfolio companies offered by Luxembourg but is now very often packaged together with an AIFM and different funds that all together provide a real logistic advantage that goes beyond the substance initial objective. With more than 6,000 PE professionals Luxembourg is now home to the top 13 PE players worldwide. The change which is happening now is not only the result of the significant changes in the international political or tax environment but really the combination of locally driven initiatives & innovations, long term political & economic strategy as well as collective efforts of all market players towards a single objective: Let’s make Luxembourg THE prime location for Private Equity in Europe. Although there is still a long way to go to achieve our biggest objective which is to onshore to Luxembourg the offshore PE funds, Luxembourg should not be shy to say that We (all together) made it happen and are probably the best positioned to offer to PE Houses all they currently need in the current environment.
Let me take a few concrete example and look back on the main reasons behind this success as this is definitely not by chance that this has come true!
- A community of experts and talents who share their passion for Private Equity for more than 25 years.
When the Luxembourg place started to look after the Private Equity business as a true and different strategic opportunity, Luxembourg was mainly focusing on the banking sector but also leading alongside with the US the Asset Management Industry. The expertise and reputation of Luxembourg built on the Asset Management Industry was therefore probably one of the main corner stones in the foundation of the PE community that serves the PE business today. According to the World Economic Forum’s 2015 Human Capital report, Luxembourg counts the highest proportion of highly qualified people. In other words, the study ranked Luxembourg “First” ahead of Singapore for the level of skills, development and qualifications of the employees. No doubt that the skills of people specialized in Private Equity strongly contribute towards the attractiveness of the country. Beyond the technical skills that all the professionals specialized in this industry have developed, there is also a true expertise gained over the years on the PE Business Model as such. Far from the old model of passive LBO (“Leveraged Buy Out”), the Private Equity business model itself has evolved to a much more active role in developing their target and assisting them achieving their growth potential locally and internationally. This change was really favorable to reinforce the attractiveness of Private Equity towards Luxembourg employees and again, Luxembourg strong of a multicultural community can offer to any PE player, the capacity to actively play that role from Luxembourg in almost all of the EU countries without cultural or barrier language.
- An attractive and sustainable gateway for PE investing and raising capital in Europe
What Brexit has revealed a year and a half ago is that an attractive tax and regulatory framework without political stability is not sustainable in the long term. This is also a reason why Luxembourg is today the Prime location as it has always demonstrated a true continuity and political stability which is second to none. Although Brexit plays today an effective role in accelerating the re-allocation of key functions to Luxembourg (such as risk management and oversight), the Luxembourg authorities have always actively pursued the development of this market by setting up a “PE proof” regulatory and tax framework. Since 2004 when the SICAR law was enacted, there has been many innovative actions taken to come up with new laws and new specific vehicles dedicated to the PE industry. The Luxembourg special limited partnership (“SCSp”) and the Reserved Alternative Investment Fund (“RAIF”) are now completing a toolbox that is now up to speed to compete with any other jurisdictions but moreover offering PE Managers a comprehensive list of solutions that are attractive, flexible and very competitive from a “Time to market” stand point. This Lux toolbox is AIFMD compliant, “tried and tested” and therefore probably one of the best to access EU Investors.
- Pro-active, reactive and business oriented environment
In the current times, no matter the anticipation a country and an entire economy can demonstrate it is extremely difficult to bet what will be the future changes that will affect the way we operate and the way we will be doing business in 5, 10 or 20 years. What matters more, now that a number of significant changes are undertaken such as the BEPs project, is the reactivity of a country and the capacity of its business community to adapt to the changes and to potentially implement them into the local law when required. On 7 June 2017, Luxembourg signed the Multilateral Convention at the OECD in Paris, underlining once again its commitment towards transparency in tax but also its rapid implementation of the BEPs measures agreed by the G20 and the OECD. The Luxembourg government has consistently pursued pro-active economic development policies and easy access to senior civil servants was always a key pillar of growth in the Luxembourg economy. Private Equity is and will continue to be the rising star for the Luxembourg economy and this is not by coincidence that Luxembourg with its business oriented mindset is a perfect match to the PE community.
- A prime location for listing
Did you know that Luxembourg is the 1st market in terms of listed international bonds in Europe and world’s number one exchange for international securities listing? Issuers can list in as little as 24 hours and have a choice of 2 markets amongst which the so-called Euro-MTF market for which the PE Industry has always had a strong appetite. This market generally seen as a more flexible market is often selected by PE houses to list bonds aimed to finance the growth of their portfolio companies (add-on) or refinance their pre-acquisition external debt. Relying on its vast 80-year-old experience, the Luxembourg Stock Exchange keeps on diversifying on new markets such as CoCo Bonds, Dim Sum Bonds (Renminbi), Islamic Bonds (Sukuk) and more recently Green Bonds to better adapt to the new expectations of their customers including Chinese, Islamic as well as Green Private Equity players.
- Last but not least – An outstanding and undisputed quality of life
All of us have heard, at least once, someone disputing the potential attraction of Luxembourg, a tiny country without mountains or sea borders. Although we should admit that the latest part of this statement is true, those should probably better just look at the facts and figures of our leading financial place with no compromise to quality of life. The Independent and Business Insider UK recently published in early 2017 a survey carried out by InterNations where Luxembourg has been ranked The safest country in the world for expats just after having been recognized as having the best healthcare system of the world. FT also recently commented on Mercer’s Quality of Living Survey, Luxembourg was 20th, London 40th. With the second highest Growth Domestic Product per capita (“GDP”) in the world (Qatar is first) and a growth projection of the national GDP of 4.7% for 2017, Luxembourg is more than well equipped to continue to invest in its hard and soft infrastructure and strive for excellence and high quality of life in order to offer the best environment for international businesses, skilled professionals and their families.