Luxembourg has long been an attractive jurisdiction for setting up private equity vehicles, and until 2004 the most suitable structure was the financial participation company or Soparfi, a normal comp
Luxembourg has long been an attractive jurisdiction for setting up private equity vehicles, and until 2004 the most suitable structure was the financial participation company or Soparfi, a normal company subject to the normal rules on taxation. It can be established as a société anonyme (company limited by shares), société à responsabilité limitée (limited liability company), or société en commandite par actions (corporate partnership limited by shares), which is very often used for private equity using a classic arrangement involving a general partner and limited partners.
However, on June 15, 2004, Luxembourg passed legislation introducing the Sicar, or risk capital investment company, a vehicle specifically designed to facilitate the creation of private equity structures. The Sicar has been enthusiastically adopted by the industry and up to the end of April this year 195 had been approved by the regulator, the Financial Sector Supervisory Authority (CSSF).
Since February 2007, an additional option for the private equity industry has been the Specialised Investment Fund, a vehicle created specifically to encourage the development of the alternative investment industry in Luxembourg. While so far SIFs have been used more for real estate funds than for private equity or hedge funds, up to now they offered an advantage over the Sicar in the ability – shared with retail Ucits funds – to create multiple legally segregated compartments or sub-funds.
This is important so that investors can be sure that their revenues are linked to particular assets, and that in the event of the bankruptcy of the vehicle, creditors of one compartment have no claim over the assets held by other compartments. The lack of this provision within a Sicar structure has in recent years prompted some clients to opt for other vehicles.
However, on February 21, 2008, the Luxembourg government introduced draft legislation designed to make the Sicar more attractive to private equity and venture capital investors, most notably by extending to it the ability to create multiple segregated compartments. In addition, the regulatory requirements on custodians of Sicars will be lightened, bringing the regime into line with that for SIFs and reducing the annual running costs of the Sicar.
The proposed law includes various other changes. Share premiums will be taken into account for the computation of the minimum capital, with the share capital plus share premium required to be a minimum of EUR1m. Sicars will not be under any obligation to publish their net asset value, although the assets will have to be valued at fair market value, and Sicars will in future be obliged to publish their annual report within six months of the end of the accounting year.
The Sicar also possesses an advantage in that it is not subject to the diversification rule, which limits investment by a SIF in securities of the same type issued by the same issuer to 30 per cent of its assets. However, some promoters continue to opt for the Soparfi structure, particularly if they and their investors do not need a regulated structure. In addition, the Soparfi can benefit from Luxembourg’s network of double taxation treaties and from the EU parent-subsidiary directive.
The impending changes to the Sicar regime are set to swell interest in Luxembourg private equity structures, which are already strongly in demand from promoters in the US and other jurisdictions seeking a reputable jurisdiction with high-quality and experienced service providers.
Rémi Chevalier and Olivier Sciales are partners with the law firm of Chevalier & Sciales in Luxembourg
