Transatlantic trends: Growth opportunities for US PE managers
Luxembourg is seeing a growing number of US managers interested in setting up private equity structures to access European investments and clients. Richard van ‘t Hof, head of Trident Trust’s operations in Luxembourg talks about the opportunities and challenges managers face when crossing the Atlantic.
What is the goal for Trident Trust’s business in Luxembourg?
Our primary goal is to keep our clients satisfied! But we also have plans to significantly grow our fund services business in Luxembourg. We have steadily grown our two main services, corporate administration and fund administration, since we opened in Luxembourg in 2009, but we now believe the growth of our fund services business is going to accelerate quite rapidly, driven by the combination of greater numbers of private equity managers appointing fund administrators, and more US managers establishing funds in Europe.
The majority of our pipeline of new business in Luxembourg consists of illiquid assets such as private equity and private credit, real estate, venture capital and non-performing loans. These are the types of strategies where we see the potential for growth in Luxembourg, both from existing clients from within our global client base of over 500 funds and also from new managers or managers who simply want to move to an administrator who provides them with a more personalised service.
There is currently a trend which is seeing US managers setting up private equity funds in Luxembourg. What is driving this?
There are around 8,000 private equity asset managers globally and half of them are based in the US. Taking the size of the market into account, together with the historical success of US PE managers, there has been an increased appetite for these players to invest in Europe and also to market their products to European investors as well.
Luxembourg is very well positioned to receive this demand. The infrastructure here, the technical and commercial knowledge of the advisory community and the large capacity of the market are all factors that make Luxembourg attractive to US managers.
In your experience, is this shift led by demand from European investors for US private equity or is it expedited by the US managers wanting to invest in Europe or sell their strategies to European investors?
Both. US private equity managers have deep expertise and successful track records investing in the asset class. Institutional investors in Europe want to take advantage of that. Equally, US managers want to duplicate their domestic success in Europe.
In terms of the investor base, if you aim to target European institutional investors, as a result of the Alternative Investment Fund Managers Directive (AIFMD), you are obliged to set up your structure in Europe. Luxembourg is a compelling choice for US managers to do this.
What are the specific benefits for US managers to come to Luxembourg?
The real benefit of coming to Luxembourg is a combination of a number of elements.
Luxembourg has always been popular choice for private equity managers, as it offers a favourable and flexible legal and tax framework. But for US managers, it certainly took a decisive lead over other jurisdictions when it simplified and modernised its partnership law in 2013. By replicating the terms of the Anglo-Saxon limited partnership, the revised Luxembourg SCS partnership regime suddenly became very attractive to US managers and their advisors, who were able to deal with familiar terms. It also made it easier to include a European entry point to a larger private equity structure, for example by setting up parallel Cayman, Delaware and Luxembourg partnerships.
Secondly, Luxembourg offers a wide choice of structuring options for the pooling, financing and deployment of private capital. These range from its widely used non-regulated SPV entity, the Soparfi, to its regulated SICAR and SIF funds, and now also the RAIF which offers quicker and simplified access to the EU passport by removing the requirement for local regulatory approval and supervision, as long as it is managed by an authorised AIFM.
Thirdly, Luxembourg is the jurisdiction of choice for many large institutional European private equity investors, so US managers will maximise their fundraising efforts by opting for a EU passported Luxembourg fund.
Finally, there is the depth of the private equity ecosystem. More and more international GPs are choosing Luxembourg as a place to set up their business and grow substance, in large part because of the availability of expert staff and of service providers specialised in private equity, including administrators, third party AIFMs, lawyers, auditors and independent directors.
What impact has this influx of US managers had on your business?
We’ve focused very clearly on ensuring that growth does not compromise quality of service, in particular ensuring that we have the right people with the right skills and that we retain our staff. The Luxembourg labour market is very competitive and many administrators suffer from high staff turnover, which is not good news for clients.
We have also broadened our service as a result of client demand, obtaining a depositary licence a few years ago. When setting up a regulated private equity SIF or a RAIF structure, managers need to appoint a depository.
We’ve also continued to develop our technology platform for clients – we can offer clients a specialist global private equity platform, which is a real selling point, particularly when they are working with Trident Trust in more than one location.
You have a thriving business in the US. Does this give you a competitive advantage in Luxembourg, both in terms of internal referrals and also among US managers looking to set up fund structures in the Grand Duchy?
Yes, it’s a huge advantage. There are very few administrators who have a significant presence in both the US and Luxembourg and real knowledge of both markets. We receive numerous referrals from our offices in Atlanta and New York.
At the moment we are working with a large US client to establish a new fund structure in Luxembourg as they expand their investment strategy into Europe. They’re able to make the transition to a new environment safe in the knowledge that they will work with a familiar long-term partner.
What are the primary challenges US managers looking to operate in Luxembourg face?
The different regulatory environment is the main issue. Regulations are generally stricter in Europe than the US and how US managers structure products in relation to something like the AIFMD is a big issue.
Also, it is not cost-effective for smaller firms to set up their own AIF here in Europe. It makes more sense to rely on third party AIFM providers, which is a somewhat alien concept for US managers, who are often uncertain about delegating a portion of their tasks and responsibilities to a third party. It’s just not a business model they are used to.
However, considering the third party AIFM concept has now been operating for a number of years, the sentiment towards it is changing. US managers are becoming more familiar with European regulations and starting to understand the business models available to market their products.
In the last few years, good steps have been taken in the right direction. At the end of the day, what will make a difference is increased knowledge, understanding and the passage of time.
Richard van ’t Hof
Managing Director, Luxembourg, Trident Trust
Richard is head of Trident Trust’s operations in Luxembourg. He has over 30 years of experience in management and operational roles in the international financial services industry, with particular expertise in alternative investment funds. He is also a Certified Investment Fund Director. Richard studied business administration at bachelor level and is also educated in accountancy in the Netherlands.