In Luxembourg as elsewhere in the world, the private equity industry has suffered from the impact of the credit crunch, which has slashed bank funding for buyouts and forced private equity firms to re-examine their business models. In addition, the industry now faces a potential extra burden from European Union legislation that proposes a range of new regulatory obligations on managers of alternative funds.
But there is reason to believe that as economic conditions improve and activity in the sector revives, the grand duchy is well placed to play an increasingly important role, not only as a domicile for funds and acquisition vehicles and as a repository of third-party administration expertise, but as a centre for management functions. And greater oversight may also benefit Luxembourg given the flexible but effective regulation of alternative funds by the Financial Sector Supervisory Authority (CSSF).
A decade ago Luxembourg was used mainly as an intermediate jurisdiction by the private equity industry, which used normal taxable entities as acquisition vehicles. Since then, however, the jurisdiction has benefited from the introduction in 2004 of the Sicar, a risk capital company specially designed for private equity and venture capital investment, and two years ago of the Specialised Investment Fund (SIF), a flexible regulatory structure aimed at alternative investment managers.
There is a clear trend toward the increasing use of Sicars and SIFs for private equity funds, despite the constraints of the credit crisis. The attractiveness of the Sicar has also been increased by changes last year that allowed them to contain multiple legally distinct compartments within an umbrella structure. Fund structures have also been implemented recently under the legal form of a partnership.
Already a well-established jurisdiction for the servicing of traditional mutual funds, Luxembourg is building up its capabilities in areas such as administration, audit, legal services and tax advice for private equity and other alternative investment sectors. The base of skills and expertise is also being boosted by a trend among leading European private equity houses to open offices in the grand duchy whose staff manage their structures on a day-to-day basis.
But perhaps the most important development in the industry is the global move toward greater regulation of alternative investments, which is prompting fund promoters to turn from offshore to onshore structures. Luxembourg has already developed the light-touch regulation appropriate for vehicles aimed at sophisticated investors, which in turn are looking more favourably at regulated structures for prudential reasons of their own.
The future development of the private equity industry presents a challenge to Luxembourg to keep pace with the latest trends and opportunities, such as the current interest in distressed debt. Developing top-class industry expertise is essential as the sector looks to react quickly to maximise opportunities such as legal changes in different countries, the emergence of new strategies or investment in new types of asset.
Multi-faceted service providers such as ourselves have established dedicated private equity departments bringing together advisors, accountants and auditors specialised in the field, and the onus is on Luxembourg's financial industry as a whole to ensure the right skills are available to meet the market's requirements. The country's impressive reputation as a financial centre of excellence is already helping to attract private equity business, and the opportunity is there to move its role as an industry hub to the next level.
Vincent Lebrun is a tax partner and private equity leader with PricewaterhouseCoopers in Luxembourg