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“In my pan-European view this is the most effective change I’ve seen Luxembourg make in the last 10 years to boost its funds offering to the Private Equity industry,” suggests Justin Partington (pictured), Commercial Director at Ipes – one of Europe’s leading private equity fund administrators with more than USD50billion in funds under administration – in response to the amendments made to Luxembourg’s limited partnership regime.
“Speaking candidly, the SICAR hasn’t really attracted the interest of European private equity fund managers. For French and UK private equity managers in particular, this is a big development.”
Dr Martin Brockhausen, private equity funds counsel for SJ Berwin, one of Europe’s leading law firms in the funds area, in Luxembourg, says that one of the issues with Luxembourg before was that the existing Luxembourg fund structures (like the most common SA/SCA SICAR or SA/SCA SIF) weren’t very familiar to many investors used to the (simple and contract based) Anglo-Saxon LP/GP model. The LP/GP model is by far the most common structure for PE and VC funds.
“Luxembourg has done its homework. The new SCSp is an important step because it minimises Luxembourg’s historic disadvantages being accused by many to overregulate its funds compared to the likes of Jersey, and at the same time offers an attractive onshore alternative.
“In a nutshell, the SCSp combines an already competitive tax environment in Luxembourg with a lot of additional flexibility with regards to regulation and corporate structuring,” explains Brockhausen.
Until now, Luxembourg hasn’t been able to fully compete with more established offshore jurisdictions like the Channel Islands where the Anglo-Saxon Limited Partnership is a ubiquitous feature. The old SCS common limited partnership dated back to 1915 and until Luxembourg lawmakers amended it this year, was rather antiquated.
“Previously with the “old” SCS you had many disadvantages and only some of them could be mitigated by structuring the fund as an SCS SICAR, a regulated structure requiring, inter alia a depositary for the assets.
“You had, for example, a claw back if you distributed over profits, LPs names were registered in a public register and it wasn’t clear if LPs would lose their limited liability if they exercised market standard LP rights such as the ones connected with an advisory board seat. That has now been clarified in the updated law. The claw back has been removed, the GPs can (subject to the LPA) distribute whatever they like, and the liability issue for LPs has been removed. There is complete contractual flexibility within the fund structure,” says Brockhausen.
Now you can structure limited partnerships just as you can in Jersey, Delaware or the Cayman Islands. Previously, if you wanted to have a tax neutral fund vehicle in Luxembourg you needed to use a SIF or SICAR, both of which require full CSSF authorisation. “The new SCS is especially attractive if you wish to avoid using these regulated fund structures because you still have the possibility, if you structure it right, to have tax transparency through an unregulated fund structure,” says Brockhausen.
Partington notes that over the last couple of years some of Ipes’ clients have gone to Luxembourg to test the waters and concluded that it was a good jurisdiction, but the SICAR and SIF structure was unattractive to some investors because of its high degree of regulation with features like a mandatory depositary.
“When clients next go to Luxembourg, they’re going to see a fund product that is a lot more attractive and should result in more Luxembourg private equity funds being launched.”
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