An attractive jurisdiction for private equity
By Pascal Hernalsteen – Benefiting from a flexible tax and legal environment, but also from a well-educated, multilingual, multinational workforce, and an exceptional concentration of highly skilled service providers and niche experts, the Grand Duchy of Luxembourg has in a few decades become the world’s second largest centre for investment funds, surpassed only by the United States.
In addition to being the leading domicile and servicing centre for cross-border distribution of UCITS worldwide, the country has been taking active steps over the past few years to attract a significant share of the alternative investment industry and has quietly built up a solid reputation for structuring regulated private equity funds and private equity deals. The expertise gained in fund administration has been successfully transferred to the private equity arena, and Luxembourg has built up a robust private equity model and servicing platform.
Luxembourg offers a choice of both non-regulated and regulated structures that meet the different requirements of investors and sponsors. There are five vehicles available to structure private equity investments in Luxembourg: SOPARFI, UCI Part II, SICAR, SIF and Securitisation Vehicle. The majority of private equity sponsors select either a SICAR or a SIF.
The SICAR (Risk Capital Investment Company) was launched in June 2004 and has since become the grand duchy’s flagship private equity vehicle. The new SICAR Law of October 24, 2008 introduced a set of further enhancements to the legislation, including the ability to create sub-funds and the upgrading of the Luxembourg limited partnership SICAR structure.
The number of SICARs has increased dramatically every year since their introduction in 2004, reaching 277 as of July 2012, according to the CSSF. This vehicle has been used by some of the top 20 private equity houses, as well as by small- and mid-sized private equity players, to invest in venture capital, private equity, mezzanine and other risk capital investments such as opportunistic real estate, microfinance or, more recently, clean energy technologies. All types of fund structuring are available, including direct funds, funds of private equity funds and master-feeder structures.
The SIF (Specialised Investment Fund) was created in February 2007 specifically to encourage the development of the alternative investment industry in Luxembourg. By contrast with the SICAR, the SIF can also be used for core property investments and hedge funds.
Over the past five years, following the implementation of the SICAR and SIF, an increasing number of private equity vehicles have been set up in Luxembourg as new lightly-regulated onshore structures, and have proved to be major successes.
These complementary vehicles offer key advantages: tax neutrality for investors and high tax efficiency for GPs, flexibility in structuring through various corporate forms, variable capital and compartments/sub-funds, as well as operational efficiency, provided for example by an explicit consolidation exemption.
Both vehicles have put Luxembourg on the map as a leading jurisdiction for private equity structuring. Even during the recent financial crisis, private equity activity in the grand duchy has shown surprising levels of growth, including the launch of new funds and the establishment or expansion of offices in Luxembourg by private equity houses and managers.
That growth is mirrored by Luxembourg’s private equity service providers such as CACEIS, which have developed specialist expertise and bespoke servicing packages to deliver effective support to the private equity industry.
Pascal Hernalsteen is head of private equity & real estate at CACEIS
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