Can you talk us through the current private equity landscape in your jurisdiction?
Business is booming!!! Luxembourg is the largest financial centre for investment funds in Europe and the second largest worldwide. Private equity continues to grow in Luxembourg due to the Alternative Investment Fund Managers Directive (AIFMD), the increasing likelihood of a hard Brexit and pension funds turning towards more illiquid investments.
According to a recent industry report, the AuM of Luxembourg’s private equity funds notched up a 20 per cent growth in 2018.
The most commonly used vehicles for PE structuring in Luxembourg are the special limited partnership (SLP) and the common limited partnership (SCS). Many are unregulated, do not require approval and ongoing supervision from the Commission de Surveillance du Secteur Financier (CSSF) and are not subject to diversification rules (unlike the RAIF and SIF options). This provides more flexibility for institutional investors and managers.
The popularity of the Reserved Alternative Investment Fund (RAIF) structure continues to grow and there are now over 750 listed on the Luxembourg trade register website. The RAIF is a flexible, multipurpose alternative investment fund structure that can be marketed quickly and requires no CSSF approval, nor is it subject to ongoing supervision by the CSSF. A RAIF is indirectly regulated through the obligation to appoint an authorised Alternative Investment Fund Manager (AIFM) and therefore benefits from the AIFMD passport.
Have there been any recent regulatory changes or interesting developments?
Marketing: A new EU regulation and directive on cross border distribution has been published in the Official Journal of the European Union on 12 July 2019 that has the stated objective of establishing uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings in relation to their cross border activities.
The Amending Directive is required to be transposed into national law within two years of the entry into force of the Directive. Full implementation can therefore be expected to occur sometime in the summer of 2021. Similar amendments to the EUVECA regulation have also been made with the effective date of 2021.
Tax: As from 1 January 2019, the Anti-Tax Avoidance Directive (ATAD 1) applies in Luxembourg including controlled foreign company (CFC) rules, rules placing limits on interest deductions, rules to prevent the use of hybrid instruments within the EU and provisions to harmonise exit tax rules and anti-abuse rules.
The 6th Directive of Administrative Cooperation (DAC 6), that came into force on 25 June 2018 and requires the mandatory reporting, principally by intermediaries, of cross border arrangements that have certain characteristics that indicate aggressive tax planning is expected to be transposed into Luxembourg legislation by the end of 2019
What are the biggest challenges currently facing PE firms?
Besides the obvious uncertainty around Brexit and the continuing trade war between the US and China, ESG and technological changes will impact investment decisions and operating models.
The July 2018 European Commission Action plan on Financing Sustainable Growth sets out the six principles and key milestones. On 30 April 2019, ESMA’s final reports set out proposed amendments including obligations for AIFMs to consider sustainability risks in their due diligence processes, the impact of investment decisions on sustainability factors and including sustainability risk as a material risk in their risk management policy. Hiring staff that can implement this will add to the bottom line.
What are the reporting requirements in your jurisdiction and how can they be efficiently managed?
There are a number of reporting and notification requirements applicable under the Luxembourg laws.
Luxembourg legal entities, including funds, co-investment vehicles and SPVs, registered with the Luxembourg Business Register must disclose their BOs (together with additional prescribed information) to the Luxembourg Commercial Registry.
What impact will Brexit have on PE markets (i) in the UK, (ii) in the EU and (iii) globally?
Although the full effects of Brexit continue to be unclear, the Luxembourg authorities have expressed their commitment to preserving close business ties between Luxembourg and the UK. In the event of a hard Brexit, the UK will be classified as a ‘third country’ with limited access to EU markets under the AIFMD and the Markets in Financial Instruments Directive (MiFID II) (to name two of the most important directives affecting PE markets and with a clear impact on fund raising and distribution models).
In response, regulators in both the EU and the UK are providing for a number of temporary permissions regimes to allow firms and funds to continue regulated business and prevent market disruptions. Luxembourg has provided for a maximum 12-month transitional period during which UK firms carrying out financial activities may continue to operate in Luxembourg following the exit date provided notifications were made by 15 September 2019, further information is available here.
The CSSF has made it clear that the delegation of investment management (including portfolio management and/or risk management) to UK undertakings during the transition period, post-Brexit will continue to be possible on condition that the UK undertaking continues to be authorised/registered for the purpose of asset management, are subject to prudential supervision and provided that cooperation between the UK supervisory authority of these undertakings and the CSSF is ensured. A recent memorandum of understanding has been agreed between the Luxembourg and the UK authorities confirming that delegation will be allowed to continue.
The industry has also come up with alternative ways to assist UK firms to continue accessing the European Market without setting up an EU MiFID firm or EU AIFMs; we expect this trend to continue. Whereas the bigger players have already made contingency plans and moved some of their operations and people to Luxembourg.
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
We expect further amendments to the fund laws to make the product more user friendly for PE managers.
Further refinement of the carry interest tax regime should be encouraged to make Luxembourg attractive for managers.