Industry shifts focus amid global change

After enjoying impressive growth over the past four years, the Luxembourg private equity sector has had to confront a different market environment over the past 12 months. While the industry has continued to grow, significant changes can been seen in the style and strategy of new funds, in the kind of transactions that are taking place, and in the market for private equity administration and other services that has grown up over the past few years.

The past year has seen a slight decline in the number of private equity funds being established, admittedly from a high level in previous years, in part the result of general partners deciding to delay the raising of new funds. In many cases this is not because they would have problems attracting money from investors but because they believe prices in the market will continue to decline and that investment is better deferred.

Meanwhile, there has been a qualitative shift in the type of funds being launched, with an upsurge in the establishment of niche funds that specialise in a particular geographical area or industry sector. These funds are still traditional private equity funds but they are in general smaller than those launched in the recent past and tend to focus on equity-financed deals because leverage has largely dried up.

At the same time, however, there is also an extremely prominent trend among firms to move away from traditional private equity funds toward investments related to renewable energy. Funds have been launched by private equity houses that have been building up new expertise in areas such as wind and solar energy, Kyoto Protocol carbon credits, very heavy infrastructure projects, land and timber. In parallel, more private equity firms are becoming interested in financial services companies at their current very low valuations.

The second area in which Luxembourg's private equity sector has experienced the impact of the global financial crisis and economic downturn is at transaction level, where for example US or UK funds that invest in countries such as Germany or France use Luxembourg Soparfis as intermediary vehicles for tax optimisation purposes, using the network of double taxation treaties concluded by Luxembourg.

This type of business has also experienced less a drop in activity than a qualitative shift. There is now a focus on private equity portfolio companies that are struggling to repay debt incurred through highly leveraged acquisitions during the boom years. This entails restructuring across the entire private equity value chain from the fund to the investment.

Last year Luxembourg made major strides toward establishing itself as the third major centre for private equity services in Europe, alongside London and the Channel Islands. Many big traditional fund administration players have begun to launch private equity administration, while specialist boutiques from London, Jersey and Guernsey are well advanced in their plans to come to Luxembourg. Two or three years ago such firms preferred to wait and see, unsure whether Luxembourg would really take off as a private equity centre, but now they are opening offices or buying out a local provider.

Last year Ernst & Young expanded its private equity business by more than 25 per cent to well over 100 dedicated private equity professionals. The new arrivals include partners who have relocated to Luxembourg from the UK and Germany - the kind of people who would only come here if the development of the business matched their professional ambitions.

Alain Kinsch is a partner and head of private equity with Ernst & Young Luxembourg