China magazine, April 2019

Luxembourg - an enabler for Chinese Private Equity transactions

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Interview with Alain Kinsch, EY Luxembourg Country Managing Partner & EMEIA Private Equity Fund Leader

How do you think about Chinese M&A market and the implication to Luxembourg?

99% of Chinese respondents are positive to both the global and local economy and their willingness to engage in M&A activities continue to increase according to the 18th Edition of EY’s Capital Confidence Barometer. Chinese M&A activities are no longer dominated only by corporate acquirers but private equity, which has rebounded since 2017 and deployed its dry powder. The increasing competition for assets by PE has made corporate dealmakers more disciplined, contributing to a healthy, robust but not overheated deal market. I expect cross-border deals and PE will be the key engines of M&A in coming months. Luxembourg, an established hub for China to invest in Europe, will certainly continue to play a role.

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Why Luxembourg is the natural leading onshore PE gateway to Europe, China and the rest of the world?

Due to its stability as well as its innovative and international orientation, the Luxembourg well-regulated financial center is an ideal hub for private and institutional investors from all over the world, including a well-recognized hub for PE houses with over 700 fund units and over US$ 400 billion of PE assets under management in Luxembourg. In today’s world, the use of off-shore funds and vehicle can have a negative connotation and we see large EU LP’s that now refuse to invest in off-shore vehicle. Besides, in the (near) future, off-shore fund might not have access to the EU capital market as there is a large uncertainty over the so-called "third country passporting". As a result, over the past years, there has been an acceleration of the "on-shoring trends" and Luxembourg has been attracting most of the largest PE houses with a set of regulatory and legal form that can be adapted to most situations. It is actually very interesting to Chinese investors since I observe more and more of them have been shifting their off-shore structure to onshore as driven by commercial and regulatory factors. Luxembourg being the second largest fund center in the world, its worldwide leading position in terms of cross-border fund distribution as well as the fact that we have 7 Chinese banks which facilitate M&A transactions have made Luxembourg the natural PE onshore gateway for Chinese PE players.
 

What advice would you give to Chinese investors considering Luxembourg or Europe via Luxembourg as an investment destination?

We advise Chinese investors to be ready to grasp the opportunity, but also do their homework. It is crucial to have a trusted advisor who is able to provide local insight, raise awareness on processes and options, prioritize advantages and provide assessment and mitigation of risks. After an acquisition, the key questions are how to continue to incentivize and empower people, and how to deliver sustainable growth. Securing top talent and tapping in to these countries’ educated workforces should be a top. Luxembourg offers a multinational environment with a high qualified, international and multilingual workforce. The social environment is remarkably stable: the Luxembourg Government’s business-supportive attitude, the stability of legal environment as well as the access to regulators all ensure efficiency and predictability to investors and asset managers. In addition, with its extended treaty network and access to the European Directives, Luxembourg is a privileged platform of international expansion for Chinese investors.