Luxembourg has the toolbox for global distribution
Luxembourg continues to see net inflows of capital and is now the world’s second largest fund centre with, as of August 2018, EUR4.3 trillion worth of net assets under management, and this only in regulated funds, according to the Association of the Luxembourg Fund Industry (ALFI).
Luxembourg was the first EU jurisdiction to introduce the AIFM Directive, drafting a law and filing it with the Luxembourg parliament on August 24th, 2012 well ahead of the July 2013 deadline. Since then, the Grand Duchy has increasingly embraced moving away from traditional retail cross-border fund distribution under UCITS to become a real centre of alternative investment funds.
“This has put Luxembourg firmly on the map alongside non-EU financial centres such as the Cayman Islands and Delaware,” comments Joelle Hauser, Partner, Clifford Chance (Luxembourg) and head of its Investment Funds Division. “We see promoters coming from Asia Pacific and the US for institutional distribution in Europe under the AIFMD as it has become too difficult to accomplish this with their non-EU funds.
“They are looking for a European hub and I would say Luxembourg is one of the obvious alternatives. We have a good track record with real estate funds, which we have built over the last 15 years.”
Luxembourg is currently home to 3,949 regulated funds, but thanks to changes to its limited partnership regime and the introduction of the RAIF (reserved alternative investment fund), taking into account the marketing restrictions on non-EU managers of non-EU funds under the AIFMD, the Grand Duchy is going from strength to strength as an alternative funds centre, especially for private equity, real estate and private debt funds.
“Another reason for continued growth is Brexit, as we see many of our UK clients running partnership structures considering an alternative option to the UK and there again, Luxembourg is the obvious choice. Global fund sponsors are picking Luxembourg for their alternative fund products,” explains Kristof Meynaerts, Counsel, Clifford Chance.
In 2013, Luxembourg lawmakers took the opportunity to revamp the company law, allowing for partnership structures to be established in a similar fashion to Anglo Saxon partnerships. The revised regime facilitates both partnerships with legal personality (SCS or société en commandite simple) and without legal personality (SCSp or société en commandite spéciale), which has helped put the Luxembourg limited partnership as an alternative on the map, as referenced by Meynaerts.
Moreover, both the SCS and SCSp can be used for regulated and unregulated partnerships.
“This modernisation of our limited partnership law has been a real catalyst of growth, giving sponsors the choice of setting up limited partnerships under various forms as open-end or closed-end funds.
“We have been able to leverage our knowhow from the UCITS distribution network and the technical feature of these funds and transpose it to alternative funds. I think we have learned a lot and moved on as a jurisdiction; we still excel at supporting UCITS funds, but alternative funds are becoming increasingly important,” says Hauser.
At the end of September 2017, 32 per cent of all new investments into European funds that year were invested into Luxembourg-domiciled funds. To underscore the global appeal of the jurisdiction, these funds are held by investors in more than 70 countries; a ringing endorsement of its cross-border capabilities. Luxembourg’s global reach is unequalled and augurs further alternative fund growth.
“Luxembourg is home to a large number of people who are acquainted with regulatory implications related to UCITS funds, in respect to NAV calculations, liquidity rules, etc, and when it comes to launching alternative funds in an AIFMD context, that historical experience yields benefits. Whether it concerns fund distribution or regulatory compliance, Luxembourg is well positioned to take on alternative funds.
“The revision of the limited partnership law and the introduction of the RAIF, enables structuring an alternative fund without too much regulatory imposition, while still offering a lot of investor protection under the AIFMD regime. The significant decrease of the time required to market and structure, together with the many service providers that have acquired expert knowledge, explains how and why Luxembourg is becoming a good choice as a fund jurisdiction,” states Meynaerts.
The best fund on earth has little value if one is not able to distribute it to anybody. Fund managers, therefore, should carefully consider the domicile of their next global fund product.
“Quite often we come to the conclusion that Luxembourg is the right place, not only for distribution but also for structuring the new vehicle, as we have a well-equipped toolbox for structuring funds in a variety of regulated or unregulated regimes. With such an extensive toolbox, you can get the right cultural fit with the client for each product. I think this is one of the main advantages of Luxembourg,” says Hauser.
She believes that the perception is starting to change among global fund managers thinking about Luxembourg to establish funds as opposed to say the Cayman Islands, partly because investors are getting familiar with it.
“I see more Asian and US investors investing into Luxembourg funds compared to a few years ago. Global players want to invest in pooled vehicles alongside institutional investors from countries other than their own. In that respect, European institutional investors have been investing in Luxembourg-domiciled funds for a long time and have become very comfortable with the jurisdiction, amongst other reasons because they know that Luxembourg has a professional and competent regulator.”
Meynaerts confirms that in Asia, specifically Hong Kong and Singapore, Clifford Chance does a lot of work with fund sponsors based there, “who have local investors for their products but wish to attract other international investors. Luxembourg does not only work well for European fund sponsors but also for Asian fund sponsors.”
“It is very easy to do business and raise capital out of Luxembourg. You can sell a Luxembourgish fund to everyone and that is not necessarily the case for those who structure funds out of other jurisdictions.”
The RAIF can be set up in any corporate or unit trust form making it a very good solution for those who require an umbrella fund with compartments.
“In Luxembourg, all potential options are available to find the right solution for investors and managers,” says Hauser.
“Our corporate and fund structures are not directly linked to asset classes, which allows us to start thinking about the product within the right legal and corporate framework rather than thinking about the assets and building the product around it.”
“As a jurisdiction, you have to cater to the needs of different players in a matrix-like way which works for the type of investment, the tax requirements, as well as the appropriate governance structure,” concludes Meynaerts.