Luxembourg has many attractive qualities as a domicile and servicing centre for private equity and other types of alternative investment, from its tax transparency and firm but flexible regulatory app
Luxembourg has many attractive qualities as a domicile and servicing centre for private equity and other types of alternative investment, from its tax transparency and firm but flexible regulatory approach to the wealth of expertise offered by providers of professional services to these types of fund and the industry’s overall depth of resources. But what has most recently demonstrated the attractiveness of these attributes is the remarkable success of the jurisdiction’s Specialised Investment Fund regime since its launch in February 2007.
BNP Paribas Securities Services was responsible for the launch of one of the very first SIFs, on behalf of a hedge fund for the group’s investment bank, just three days after the legislation came into force. This indicates how keenly the structure was anticipated by the alternative investment industry, and the global appetite for this model has been amply demonstrated since then as the number of new funds has grown to around 500.
Various onshore and offshore jurisdictions offer tax transparency (although few within the European Union), a range of lawyers, accountants and other service providers, and regulators with teeth of varying degrees of sharpness. However, the SIF structure appears to have captured the mood among private equity firms and other promoters of alternative funds because it provides investors with the assurance that the fund is being administered under a robust regulatory regime.
At the same time, SIFs offer broad flexibility to promoters because there are effectively no constraints in terms of the investment philosophy or the nature of the underlying assets. This combination of investment freedom and effective regulation provides traditionally risk-averse institutional investors such as insurance companies and pension funds with a high level of confidence. Matching growth in the private equity market with a vehicle that appeals to investors that hitherto have been underweight in the asset class has created a virtuous circle for Luxembourg.
SIFs also permit a multi-compartment structure, providing the same advantages as the protected and incorporated cell structures, and offers the ability to launch a fund before it has been sent to the regulator for authorisation, although few if any promoters have seen any need to use this option to date.
The private equity managers who approach BNP Paribas Securities Services to service their funds are seeking a stable political and regulatory environment, and the availability of a wide range of skills and services. They are looking not only for custody and administration but also for banking services, escrow structures, SPV structuring capabilities and letters of guarantee, deposit and credit.
As part of a global banking group with more some 850 staff in Luxembourg and 167,000 people in all, and with a dedicated team for the servicing of private equity and real estate structures, BNP Paribas Securities Services is able to meet the requirements of both the largest private equity funds and small to medium-sized firms for which a high touch service is important.
The business is in the process of introducing a global administration, accounting and regulatory reporting platform and an operating model designed specifically for the private equity industry across its offices worldwide. This platform will underpin the comprehensive range of services offered, backed by the financial solidity of one of the four highest-rated financial institutions in the world.
Chris Adams is global product head for alternative funds with BNP Paribas Securities Services