Legal adaptability provides an international edge
By Simon Henin – These remain difficult times for the private equity industry. Although there are signs that activity is regaining momentum, it remains significantly subdued by comparison with the period before the onset of the financial crisis, especially in terms of fundraising.
Only around 150 new firms raised a fund for the first time in 2011 compared to 450 in 2007. However at the start of 2012 there were a record 1,814 funds in market targeting aggregate capital commitments of USD744.2bn which represent a 14% increase in the number of funds on the road. Private equity houses are having to look to new markets and new investors to attract the same size of funds as in the past, and inevitably it is taking longer.
However, Luxembourg continues to strengthen its position as a centre for private equity activity, including the use of structures as feeder vehicles bringing fresh capital to existing funds, and transactions at holding company level.
The country has a symbiotic relationship with other major private equity centres in Europe, notably the Channel Islands, which remain the main jurisdiction for the domicile of fund vehicles and had fund assets of GBP466.bn under management or administration at the end of March. However, more private equity houses may offer EU-domiciled funds in the future, probably alongside existing offshore structures, to maximise their appeal to different types of investor.
The grand duchy is not positioned as a low-budget jurisdiction in which to provide fund services, although that is equally true of many of its main rivals in the sector. It does benefit from the ability of groups such as Ipes to bring in specialist staff from other locations to supplement local skills in particular areas.
Luxembourg’s position within the private equity sector has undoubtedly been strengthened by the creation of the Specialised Investment Fund regime in order to increase its appeal to the alternative investment industry.
Since the introduction of the legislation in February 2007, the number of SIFs has grown to more than 1,400, and the law was updated earlier this year to bring many of the provisions applying to SIFs into line with the future EU Alternative Investment Fund Managers Directive in areas including risk management, conflicts of interest and delegation of functions.
A further overhaul of the country’s fund legislation is planned for later this year to enable Luxembourg to become one of the first EU member states to incorporate the AIFM Directive into national law.
The package is expected to include other measures designed to increase Luxembourg’s attractiveness to asset managers. Most important is a proposal to create a vehicle that is genuinely equivalent to the traditional common law limited partnership, which would increase the jurisdiction’s appeal to promoters targeting investors familiar and comfortable with this kind of vehicle.
Luxembourg already has the Société en Commandite Simple (SeCS), which is similar to a limited corporate partnership, but the proposed new vehicle would make it significantly easier to structure limited partnership fund vehicles. Our clients tell us that this is something they would particularly appreciate, particularly as it could be used not only for regulated funds but also for unregulated investment structures.
The planned changes to Luxembourg’s legislation, including amendments to existing company law, are intended to be completed by the end of this year. For the jurisdiction to have the EU directive provisions in place early should be a significant advantage, and its position as a major centre for retail funds also helps, since a great deal of the AIFM Directive’s language has been borrowed from the Ucits regime, while some of the directive’s requirements are already close to provisions of existing law.
Simon Henin is managing director of Ipes Luxembourg
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