Luxembourg has long been a significant domicile for private equity vehicles but the jurisdiction has emerged as a major European centre for the industry since the introduction of the Sicar, or risk capital investment company, five years ago. Now a series of changes to the rules governing Sicars that were enacted last year promises to consolidate Luxembourg's role, even at a time when the private equity industry is battling to adapt to a much-changed economic and financial environment.

The legislation of October 29, 2008 allows the promoters of private equity funds to create segregated compartments in a Sicar, putting the vehicle on the same basis as Specialised Investment Funds, which are widely used for a broad range of Luxembourg-domiciled alternative investment products. The changes restore the Sicar's position as the vehicle best suited to private equity funds because unlike the SIF, it is not subject to risk diversification rules.

The private equity industry has also used financial participation companies, or Soparfis, but today Sicars have become the vehicle of choice for investments that meet the regulator's definition of risk capital because of the greater flexibility they offer compared with SIFs and Soparfis. Sicars are fully taxable companies - although all income from transferable securities is exempt - and thus are in principle in a position to benefit from Luxembourg's network of double taxation treaties.

Today a surge of interest from promoters of funds investing in distressed companies has helped to push to nearly 220 the number of Sicars established since the law was enacted on June 15, 2004. Luxembourg also stands to benefit in the future from the concerns expressed by the world's largest countries about regulation in offshore financial centres, and moves to require greater transparency and oversight of alternative investment managers and their products.

Over the past two years the Luxembourg authorities and particularly the Association of the Luxembourg Fund Industry, Alfi, have made vigorous efforts to promote the country as an international funds jurisdiction to a global audience. They have stressed the central role of the regulator, the Financial Sector Supervisory Authority (CSSF), and the requirement for funds to have a locally licensed administrator and custodian. In the current market environment, Luxembourg's ability to offer regulated alternative investment vehicles is an important asset.

The success of the private equity sector and of Luxembourg's fund industry in general owes much to the strength in depth of its workforce, which includes many talented professionals from the neighbouring countries of Belgium, France and Germany as well as further afield. The country has always provided a welcoming environment to skilled individuals and has become a major generator of high-quality jobs within the wider cross-border region. It also helps that Luxembourg also offers an attractive tax environment for financial and other companies, although it is certainly not the tax haven it is sometimes caricatured to be.

While the past year has seen unprecedented turbulence within the European and global fund industry, there is every reason to believe that with its proven ability to develop innovative products and - as with the Sicar - to fine-tune its offering to meet the needs of fast-moving and dynamic market, Luxembourg is well placed to build on its reputation for providing the skilled services and regulatory certainty that the private equity sector will require in the future.

Olivier Sciales and Rémi Chevalier are partners with Chevalier & Sciales in Luxembourg


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