Luxembourg: PE Fund Raising: A Luxembourg Perspective

Last Updated: 15 May 2019
Article by TMF Group

No matter who you talk to, global private equity has enjoyed a period of enormous growth in the last few years and, in Luxembourg, this has proven to be a key factor as it has looked to drive interest, globally, in regulated private equity funds.

As the Association of the Luxembourg Fund Industry (ALFI) reported at the end of 2018, although the PE fund landscape is still dominated by funds of €100 million or less in AUM, the number of large PE funds (€500 million and above) has increased to represent over 4 per cent of the total, with the Reserved AIF fund structure and unregulated Limited Partnerships representing 30 per cent of all Luxembourg-domiciled PE funds in 2018. 

"Private equity funds are performing well and attracting new investors and the boom seems to show no sign of ending," comments Ramón van Heusden, Head of Client Services at TMF Luxembourg.

Even though total net assets raised (USD426 billion) in 2018 were down slightly on the record level of USD566 billion raised in 2017 according to Preqin, it is fair to say that with more than USD1 trillion in dry powder, PE groups have enjoyed substantial fundraising success over the last few years.

Rising markets have led to an attractive selling regime among PE groups as they seek to lock in solid returns in their portfolios, but one of the dangers in such a highly valued marketplace today is that PE managers, weighed down by so much dry powder, start to acquire portfolio companies at prices that may prove to be overly inflated, in the event of a market reversal. In short, PE managers might still be raising substantial capital from investors but they are under increasing pressure to put that capital to work, and transform companies they acquire, so that even if the market becomes challenging, they can still create sufficient operational value at the time of exit.

"Companies continue to do well in most industry sectors and that has an impact on valuations, which some PE funds are taking a lot of benefit from," says van Heusden. "Private equity is still a sector that institutional investors continue to allocate more and more money in to, and that money needs to be deployed using robust fund structures; and in that regard, Luxembourg is a good jurisdiction to use.

"PE and RE managers have learned the lessons from 2003 to 2007 when prices continued to increase and leading to the credit crunch and subsequent events of 2007/2008. Funds that were launched in these years and bought assets at the top of the market got hit hard, some didn't survive – especially open-ended structures – while others incurred significant losses, when the market went into free fall. 

"I should imagine those PE managers who went through the global financial crisis a decade ago are all too aware of over-paying for companies in the current market environment."

Marleen Dijkstra is a principal in the Funds Investment team at AlpInvest Partners, one of Europe's leading PE groups with approximately €38 billion in AUM. Speaking on a fundraising outlook panel at the 'IPEM' event in Cannes in January this year, she commented that a big market correction would be needed for it to materially impact private equity markets.

"What we've learned having invested in private equity for more than 15 years is that a solid and consistent deployment is fundamental to achieving positive returns in the long run," said Dijkstra. "In our experience, it is better to look at multi-year targets in PE rather than year by year to capture the market opportunities at each point in time. There is no need for any sort of radical response to short-term market volatility."

Van Heusden agrees that there is a risk that companies are over-priced and that a major market correction in 2019 could have an impact on net capital inflows to private equity; possibly leading to outflows from some PE funds.

"It depends on the growth of the global economy and whether we start to see clear signs of a slowdown, which could make the markets nervous; as was witnessed in December 2018," he says, observing that some US private equity groups continue to show clear interest in Europe, both in terms of making investments and setting up new fund structures in Luxembourg, as part of a centralised distribution strategy.

"The types of clients we typically work with are mid-sized managers who are new entrants to the Luxembourg market, which requires us and other service providers to provide support and education. They tend to invest in specialist areas

"For example, one client recently set up a fund to invest primarily in cybersecurity companies. Another client is investing in software solutions for the online tourism industry. Technology focused opportunities such as artificial intelligence and biotechnology are also key areas of investment and present a good value proposition but we don't tend to see those types of investments being pursued through fund structures in a traditional GP/LP arrangement with a large number of investors.

"As these companies grow however, they then become the focus of early stage growth PE funds," explains van Heusden.

For PE managers looking to fund raise in Europe, Luxembourg offers many advantages. It has a long and distinguished history, having been home to UCITS funds for the last three decades. Indeed, it is the second largest onshore jurisdiction in the world, after the US.

When the Alternative Investment Fund Managers Directive ('AIFMD'), the Grand Duchy moved swiftly to update its alternative fund products, introducing the Special Limited Partnership (SCSp or société en commandite spéciale), which took inspiration from the Anglo-Saxon GP/LP model to make it more appealing to global PE groups.

Since 2013, more than 1,400 special limited partnerships have been established, most of which are unregulated.

The Luxembourg limited partnership has a number of advantages over the English limited partnership. Although the SCSp does not have its own legal personality or capacity, all contributions, acquisitions and dispositions of assets are made in the name of the SCSp and not the in the general partner's name nor any of the limited partners.

Aside from the SCSp, another highly attractive product for PE groups to consider is the Reserved AIF, which must be managed by an authorised EU AIFM. It can be created in the form of a company or a contractual common fund (FCP). If it is established as an investment company with variable capital it is set up legally as a SICAV. There, it can choose to operate as a partnership (SCS or SCSp), a limited liability company, or a limited company form; whatever suits the manager best.

"The Special Limited Partnership and the RAIF have proven popular with PE groups. All the large law firms are here, the Big 4 accounting firms, technology firms, administrators, custodians and so on. And in addition, the jurisdiction is well located, being in close proximity to Frankfurt, Berlin, Paris, London.

"More managers are also choosing to set up operations here as authorised AIFMs and establish economic substance; some of the functions are then outsourced to third parties, so there is a big push for talent.," comments van Heusden.

Those two structures alone should, over the next five years, lead to a good level of new business for the Grand Duchy says van Heusden.

Looking ahead for the rest of 2019, van Heusden is broadly optimistic on the overall fund raising dynamics.

"There is some uncertainty, with Brexit and other political factors, which could have a negative impact on valuations and, ultimately, on the level of fund raising. There is some risk of a slowdown in the market but I don't think it will be anything significant," concludes van Heusden.

Need more information? Contact us today.

This article was originally published by Private Equity Wire and Property Funds World.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions