Real Deals, November 2017

Transformation of the Luxembourg’s private equity market

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Country Managing Partner of EY in Luxembourg and head of the Private Equity fund practice for EY in EMEIA Alain Kinsch discusses the transformation of Luxembourg’s private equity market.

 

What makes Luxembourg so attractive to GPs currently?

There is a track record across 25-30 years of acquisition structuring through Luxembourg. There are around 40,000 SPV’s in Luxembourg – many, but of course not all used by private equity, so the larger houses have had people on the ground in Luxembourg for a long period of time. Since 2004 when SICAR was launched there was a second area added to Luxembourg which was the private equity funds. Today 10 per cent of the world’s private equity funds are based in Luxembourg and you can estimate that there are around 5,000 people that work in the alternative investment space. It’s quite a substantial ecosystem.

The most important thing is that a place like Luxembourg provides planning certainty which in private equity is absolutely key. Investors want to have an efficient structuring from a legal perspective, a tax perspective and an operational perspective where they can be reasonably sure that what they have been promised, at least in terms of structuring, will not be affected by changes in the country’s legislation and changing government views. They have enough risk sitting in the performance of the investment.

There is a very good toolbox which you can use to either structure your fund, or your investment. I’m talking about SICAR, SIF and RAIF. These vehicles don’t fall from the sky, they are the result of a healthy dialogue between the government, the regulators, industry associations and the market players. The industry has a feeling that there are people who know what the industry is about, are interested and committed to the industry and try to come up with legislation which is fit for purpose for the various industry sectors.

 

What impact has the Brexit vote had on Luxembourg?

Positive and negative, I would say. Obviously, a number of UK firms will have no license in Europe if, in future, they want to distribute their funds or access the market. It’s obvious that they need to set up their operations somewhere. It’s not always Luxembourg of course, it’s Ireland, it’s Luxembourg, it’s Germany, but Luxembourg is surely one of the preferred locations. In private equity, it’s very much Luxembourg.

If you look at it short term, yes it results in more presence, more substance, more business in Luxembourg. Medium and long term I would say it is clearly negative. It’s a lose-lose: a loss for the UK and a loss for Europe and Luxembourg for the simple reason that Luxembourg and the UK have always been truly partners when it comes to any matters relating to the promotion and development of the financial sector. That’s something which we will miss in Europe and which we already feel we’re missing.

 

How has reaction to the OECD’s BEPS action plan changed private equity’s approach to Luxembourg? How has Luxembourg prepared itself to address BEPS?

Luxembourg had to change the tax system, implement BEPs measures and be transparent. It’s less a Luxembourg/Ireland/UK question, it’s more a question of if I’m a private equity house today, how do I want to structure my funds on a worldwide basis? The use of for example so-called hybrid instruments which might in the future may no longer be possible. But whether you’re in Luxembourg, the Cayman Islands or the UK, you will not be able to use these instruments. It’s more a global restructuring which the private equity houses need to do.

From a Luxembourg perspective, the impact so far has been moderate. It has more of an impact in terms of doing things differently when it comes to structuring the investment. The OECD BEPs measures are something, theoretically, that all countries, including the US, should implement. It is yet to be seen to what degree this will be the case. What is important for the industry is that there is a level playing field so there is not an arbitrage between the countries that implement the measures more or less strictly.

 

What predictions do you have for private equity in Luxembourg over the next five years?

I don’t see any disruptive changes. It will continue to grow like it has done over the last years. We will see new houses arriving and some of those will substantially increase their presence. You’ve probably seen the news about those who have decided to put their operational centre in Luxembourg and I think that others will follow.

You’re probably going to see a move up in the value chain. The elements served out of Luxembourg is middle office - in terms of risk management, compliance audit - and back office. There is going to be more of a drive towards having front office i.e. people who have management functions that might be more inclined to operate out of Luxembourg. The centre will remain London, and that’s good, but you will see a little bit of change in the value chain there.