For many players in Luxembourg, private equity activity began with its arrival in the regulated fund environment with the launch of the Sicar in 2004, but Fortis's experience goes back rather longer. Fortis Intertrust was active in the market in the days when the industry used unregulated structures such as Soparfis, or financial participation companies, but the creation of a regulated fund vehicle for direct private equity investment opened up a broader range of opportunities for the industry.

Moreover, Fortis also has longstanding experience in the industry as a specialist provider of services to funds of private equity funds, which from an administration standpoint resemble funds of hedge funds more than directly private equity vehicles and tend to be structured as Part II funds under Luxembourg's mainstream investment fund legislation rather than as Sicars. Drawing on this existing experience in both direct and indirect private equity investment, Fortis was quick to react to the opportunities offered by the Sicar to become the leader in private equity servicing in the grand duchy.

Luxembourg is particularly attractive as a domicile and servicing centre for private equity vehicles because of the strength of its reputation among investors of all kinds as a centre for traditional funds, thanks to a well-regulated environment and strong investor safeguards. This has made the country not only the main cross-border centre for European fund distribution but a brand name trusted by investors in Latin America and Asia.

One reason Luxembourg was initially slower than other centres to seek alternative investment business was a reluctance to jeopardise its image as a regulated marketplace - hence the effort to combine regulatory involvement with the flexibility needed to be competitive with unregulated vehicles in other domiciles and marketplaces.

Luxembourg certainly benefits from the close interaction between the regulator and the industry. The regulator has an open-door policy and is always happy to discuss specific proposals with industry members and if appropriate offer a derogation to the regulatory framework, but without compromising the standards of investor protection. This is very much the Luxembourg way, and represents a competitive advantage over other jurisdictions. In addition, the country's network of double taxation treaties makes it very attractive from the fiscal efficiency standpoint.

The importance of regulation to Luxembourg's business model does present a challenge for custodians to private equity funds. Investors may know the risk of what they are investing in, but they appreciate the comfort offered by a regulated vehicle. The fact that this regulation is applied in part by the presence of a custodian brings some responsibility in terms of oversight of the assets.

Asset managers are happy to provide the documents the custodian requires and to comply with the processes it puts in place. But in a new asset class, there is always debate on how best to fulfil the custodian's obligations as a trustee for the fund's investments. To retain the confidence of the market, there is no margin for error.

Bernard Tancré is general manager of Prime Fund Solutions at Fortis Banque Luxembourg.