Luxembourg issued a clear signal of intent this year. Not only was the Grand Duchy one of the first EU Member States to implement the AIFM Directive on 15 July 2013, it also made significant amendments to the 1915 Company Law, within which the limited partnership regime is defined.
There are two key developments – the first is a revamp to the existing SCS (Société en Commandite simple), the well-known corporate limited partnership without shares. The second is the creation of a new Société en Commandite Spéciale (SCSp); a special limited partnership that is very similar to the well-known common law partnership (comparable to the Anglo-Saxon partnership).
Both the revised SCS and new SCSp bring Luxembourg’s limited partnership legal framework in line with the well-established international models, and as such is expected to appeal as the jurisdiction of choice for European private equity, venture capital and real estate houses.
“The new provision does allow full tax transparency and tax neutrality including full contractual freedom and structuring flexibility. The main difference is that the SCSp does not have a legal personality and the SCS does. With all these choices Luxembourg rolls out the red carpet for fund managers,” explains Nina Kleinbongartz (pictured), Director at Sanne Group (Luxembourg) an independent fund and corporate services provider specialising in alternative asset classes, with in excess of EUR40billion in assets under administration.
It’s fair to say that GPs largely overlooked Luxembourg in the past as a primary domicile for private equity funds. The old SCS framework did not guarantee tax transparency outside Luxembourg’s product laws. It also required LPs to be published in the Luxembourg official gazette. “Also, under the pre-existing SCS, if an LP wanted to be actively involved in the management of the company they would lose their limited liability.
Now, after the revamp, an LP does not lose the benefit of limited liability and all uncertainty has been removed,” explains Kleinbongartz, who sees this as an important catalyst for bringing more private equity funds to Luxembourg.
“Sanne are looking to see how GPs can apply the SCSp. This new legal vehicle can be used for both regulated fund structures such as the SICAR and the SIF, and for unregulated structures – also often falling outside the scope of AIFMD (such as SPVs). Indeed we believe that regulated and unregulated partnerships are likely to be established in parallel,” explains Kleinbongartz.
Private equity managers have the flexibility, therefore, to structure funds in accordance with the demands of their LPs. If investors require a regulated fund structure, the GP can use either a SIF or a SICAR, both of which are AIFMD-compliant if they fall within the thresholds.
If investors are not too fussy about regulated vehicles, the GP has the freedom to use an SPV structure.
It’s too early to say to what extent private equity managers will take advantage of the enhanced regime but the improvements that have been made are undeniable and with them the costs of doing business in Luxembourg have been reduced. Moreover, the arguments for combining the administration of partnerships, holding companies and their fund vehicles in one jurisdiction are compelling.
“Now managers can do international business in the heart of Europe. Luxembourg’s favourable political, regulatory and tax environment and its long standing experience in the funds’ sector combined with multiple product passports and a variety of holding company structures should make it an excellent choice for those who want to operate within the EU,” concludes Kleinbongartz.
