Summary and implications

Luxembourg may be a small country in size but it punches well above its geographical weight as a centre for funds. The recent changes introduced in Luxembourg to its limited partnerships make it a desirable jurisdiction in which to establish alternative investment funds.

The main aim of the reform was to give Luxembourg limited partnerships a similar degree of flexibility to that which their Anglo Saxon counterparts already enjoy. So how does the Luxembourg offering stack up against the English limited partnership (ELP)?

The changes in Luxembourg

The Luxembourg Government seized on the opportunity whilst implementing the alternative investment fund managers directive (AIFMD), to look at ways to increase the desirability of Luxembourg as the domicile of choice for funds. The result is the reform of limited partnerships under Luxembourg law.

Previously Luxembourg law recognised only two forms of limited partnership:

  • the corporate partnership limited by shares (SCA) (société en commandite par actions); and
  • the common limited partnership (SCS) (société en commandite simple).

The changes amended the regime governing SCSs and introduced a third form of limited partnership: the special limited partnership (SCSp) (société en commandite speciale).

The comparison: ELP v SCSp

The ELP is the vehicle of choice for most real estate private equity funds. How does the new SCSp compare to the ELP and will it become the vehicle of choice? Let's look at the main features offered by the SCSp.

  • Legal personality: The main difference between SCSps and SCSs mirrors the difference between ELPs and Scottish limited partnerships (SLP): both SCSs and SLPs have separate legal personalities. SCSps and ELPs on the other hand do not. Previously only SCSs with a legal personality existed in Luxembourg. Entities which have separate legal personality are often used as blockers in fund structures or for the carried interest or co-invest vehicles. Having entities available that have each of these characteristics within the same jurisdiction means that a corporate structure can be entirely domiciled in Luxembourg. This has practical implications too: only Luxembourg advisers are needed; there are no cross-border or jurisdictional issues that need to be dealt with, and the establishment process can be streamlined. This puts Luxembourg on a level playing field with the offering in the UK.
  • Certainty on limited partners' role: Under the new Luxembourg regime there is clarity over the extent to which limited partners can participate in internal roles in the limited partnership. In England it is common for limited partners to participate in an advisory committee but it has always been uncertain to what extent decisions can be made by limited partners without compromising investors' limited liability. The new regime in Luxembourg sets out clearly what a limited partner can do in the SCS or SCSp. Provided that a limited partner sticks to these activities, it will not lose its limited liability status. A limited partner in a SCS or SCSp can, for example, give authorisation to managers for acts outside their power, grant loans, guarantees or securities or provide advice or opinions to the partnership. This certainty is an advantage for Luxembourg limited partnerships and it is hoped the UK Government will bring forward the ELP reforms, as planned, to give this certainty in England.
  • Contributions in industry: A new concept has been introduced to the SCSp regime which allows capital contributions to be made by way of service. Known as "contributions in industry", this allows limited partners who do not have cash or other capital to provide services to the limited partnership in satisfaction of their capital contribution. In England, the concept of making a capital contribution in cash or in kind (which is often made by way of contribution of real property, for example) is well established. This is unlikely to be a major advantage to the traditional fund structures but it may be useful for start-up ventures trying to attract talented people to join them as a form of incentive scheme.
  • Confidentiality: A final attractive feature of SCSps over ELPs is that the names of the limited partners and their proportions of capital contributions do not need to be published. This offers investors and fund managers confidentiality. In England, the names and the amount of capital contribution of each limited partner must be registered at Companies House. However, investors with confidentiality issues will often use nominees in England and it is only the capital that needs to be published not the quantum of the total investment which will often be on a different scale and quantum.

Conclusion

Luxembourg limited partnerships certainly offer the same flexibility as the equivalent English structure. However, fund managers who do not have a presence in Luxembourg and/or who do not have existing relationships with Luxembourg service providers may be unwilling to make the move away from what is familiar. Whilst the Luxembourg reforms provide a strong competitor to the traditional ELP model, there are no major advantages to the new Luxembourg limited partnerships that would swing it their way. It does, however, give the UK Government impetus to keep England's competitive advantage under review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.