Regulated fund structures come into their own
The offshore fund industry is poised at a crucial juncture in its development and Luxembourg has a vital role to play. Amid initiatives such as the European Union’s Alternative Investment Fund Managers Directive that seek to increase transparency and oversight of a hitherto low-profile industry, the sector is ideally positioned to benefit from the country’s experience with regulated alternative investment fund vehicles, which are increasingly attractive to managers and investors alike.
The grand duchy first emerged as a centre for private equity activity early in the past decade, with unregulated Soparfi (financial participation company) structures, but its success took off in 2004 with the establishment of the Sicar (risk capital investment company), a vehicle specifically designed for private equity and venture capital investment.
Over the past five years around 235 Sicars have been established with nearly EUR20bn in assets. In addition, the creation of the Specialised Investment Fund (SIF) in 2007 has provided an alternative structure that can be used by private equity houses as well as other alternative investment managers. A total of 1,024 SIFs had been established at the end of March.
A measure of Luxembourg’s success in attracting international business is that big global players such as KKR, Blackstone, Carlyle Group and CVC Capital Partners have established back- and middle-office operations in the country. The growing size and expertise of the local sector helped to prompt the recent establishment of the Luxembourg Private Equity and Venture Capital Association, which brings together private equity houses, law firms, auditors, administrators and other service providers.
In an environment where unregulated fund structures may fall from favour, Luxembourg’s expertise in the area of lightly regulated private equity fund vehicles gives it an important advantage. The industry regulator, the CSSF, has won widespread plaudits for providing the strong protection desired by investors as well as the flexibility that makes innovative ideas possible.
Luxembourg can also boast an influx of offshore service providers to the industry that are establishing a presence in the grand duchy, a strong signal that it is becoming a location of choice for private equity administration. The incoming firms say the impetus is coming from private equity houses that are seeing the benefits of Luxembourg-domiciled funds even before the implementation of any EU-wide rules.
The country appears well placed to become a prime beneficiary of the trend toward increasing regulation of the financial sector as a whole and alternative funds in particular, thanks to its leading role within the global fund industry, the experience of market players in dealing with complex structures and new asset classes and, in particular, widespread expertise in investment into countries worldwide including emerging markets such as Brazil, China and India.
Luxembourg’s main challenge will be to sustain its high professional standards as the volume of business continues to grow, in which training within the marketplace and the ability to attract key skills from abroad both have important roles to play. The recruitment of new talent and training is particularly important with the emergence of new asset classes, such as renewable energy, infrastructure and timber, that call for specialist valuation skills, while the increasing diversity of the country’s investor base means industry players may have to meet new reporting requirements. Finally, Luxembourg needs to make the Sicar and SIF better known internationally and alert private equity houses to how well suited they are to the industry’s needs.
Benjamin Lam is an audit partner and head of private equity at Deloitte Luxembourg
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