1. Transaction Activity
1.1 Private Equity Transactions and M&A Deals in General
As of 2024, Luxembourg continues to solidify its position as a hub for private equity and M&A activities. The jurisdiction's appeal is largely due to its political and economic stability, favourable tax environment and sophisticated legal framework, which collectively provide an attractive landscape for international investors and companies.
In the current year, a sustained interest in private equity investment funds has been observed, with unregulated funds being the most utilised format. There is a particular emphasis on special limited partnerships (SCSps), which offer significant legal flexibility as well as tax transparency, and are the go-to form of European fund for a global audience of managers and investors.
On the M&A side, share deals involving Luxembourg-resident asset-holding entities remain prevalent. Typically, however, although the holding entity may be located in Luxembourg, the assets are not.
Sectors that have garnered significant attention from investors include fintech, biotech, and sustainable energy, reflecting a global shift towards innovation and sustainability, while areas like healthcare and broader technology also remain popular. Moreover, funds that focus on structured debt and credit continue to attract investors, benefiting from the sophisticated financial infrastructure and the high quality (and often bespoke) fund service capabilities that Luxembourg offers.
Despite a broader interest in diverse investment opportunities, most private equity sponsors in Luxembourg maintain a disciplined approach, adhering to their core investment strategies. There is, however, a noticeable trend towards sector-agnostic investments, as some firms seek to capitalise on special situations and unique opportunities that promise high returns, irrespective of industry.
1.2 Market Activity and Impact of MacroEconomic Factors
There has been a notable slowdown in transactions in the past two years. In 2024, high interest rates and other macroeconomic factors, such as inflationary pressures and supply chain disruptions, had a significant impact on private equity deal activity. These elements have introduced a degree of caution among investors, leading to more rigorous due diligence processes and a heightened focus on the sustainability of target companies' cash flows.
Geopolitical uncertainties and events have also played a role in shaping investment decisions. Investors are increasingly considering political stability and regulatory environments when evaluating potential deals.
Despite these challenges, the resilience of the private equity sector in Luxembourg is evident. The jurisdiction's ability to adapt to changing economic conditions and its commitment to providing a supportive ecosystem for private equity transactions continue to underpin its status as a leading destination for investment in Europe.
2. Private Equity Developments
2.1 Impact of Legal Developments on Funds and Transactions
Over a number of years, Luxembourg has taken steps to position itself as Europe's leading location for both private equity fund vehicles and asset-holding vehicles. Luxembourg partnerships – in particular the SCSp and (albeit to a lesser extent) the simple limited partnership – have become the go-to form of entity for private equity-pooling vehicles, while private limited liability companies (SARLs) remain the preferred asset-holding vehicles for private equity funds globally.
The introduction of the Alternative Investment Fund Managers Directive (AIFMD)-compliant Reserved Alternative Investment Fund (RAIF) regime in 2016 added another available option, and this form is often used by private equity sponsors for pooling vehicles, especially in the context of pan-European marketing to professional investors.
While there has been some movement and developments at European level that impact private equity funds (AIFMD 2.0 and, to some extent, ELTIF 2.0), over the past 12 months, Luxembourg has not implemented any significant changes to its laws or regulations that would impact private equity investment vehicles or their managers.
In the area of taxation, we have noted a continued interest in RAIF funds in non-transparent forms, such as the corporate partnership limited by shares ("SCA") and the public limited company ("SA"). These structures allow for more flexible navigation in the structuring and financing of downstream investments, particularly in light of anti-hybrid rules.
The year was also marked by the entry into force of the new double tax treaty between Luxembourg and the UK, as well as the introduction in Europe of the Global Anti-Base Erosion (GloBE) rules via Council Directive (EU) 2022/2523 of 14 December 2022, known as the "Pillar 2 Directive". This directive provides for a minimum effective taxation applicable to multinational groups and large-scale domestic groups with a presence in the EU and having a minimum consolidated revenue of more than EUR750 million. Like most EU member states, Luxembourg has implemented the Pillar 2 Directive by means of the law of 22 December 2023 on effective minimum taxation, which is applicable to fiscal years starting on or after 31 December 2023.
Finally, the new Luxembourg government, appointed at the end of the year 2023 for a term of five years, has committed to reinforcing Luxembourg's attractiveness with a series of tax measures and reforms, such as a gradual reduction in the corporate income tax rate, beginning in 2025 with a reduction from 17% to 16%. This will lead to an overall maximum combined corporate income rate of 23.87% for 2025 (in Luxembourg City), compared with the current 24.94%.
3. Regulatory Framework
3.1 Primary Regulators and Regulatory Issues
The Commission de Surveillance du Secteur Financier (CSSF) is Luxembourg's regulator for financial services (in addition to other roles). The CSSF has regulatory oversight and, in that capacity, has responsibility for product-regulated investment funds such as specialised investment funds (SIFs) and investment companies in risk capital (SICARs), as well as for investment fund managers located in Luxembourg.
However, the CSSF's oversight authority does not extend to limited partnerships that are not subject to product regulation, nor does it extend to RAIFs (nevertheless, RAIFs' management companies are still subject to regulatory oversight by the relevant financial regulator of the home jurisdiction of the relevant management company – which would be the CSSF for all Luxembourg-based management companies). In a similar fashion, M&A activity would be subject to the relevant rules and regulations in the home jurisdiction of the target entity.
There are no specific rules or restrictions that apply specifically to private equity transactions in Luxembourg, but relevant sanctions and the usual anti-money laundering (AML) and "knowyour-client rules" do, of course, apply in the same way as for any transaction. Where multiple AML supervisory regimes come into play in the context of a given transaction, compliance with each regime will be required by the applicable parties.
Following the implementation of the Law of 19 December 2019 and given the situation in Ukraine, there has been an increase in awareness of the need to comply with the Luxembourg sanctions regime. The Law of 20 July 2022 established a Luxembourg financial sanctions committee, which is responsible for monitoring the implementation of financial sanctions issued by the United Nations Security Council, the EU and the Luxembourg Ministry of Finance. There has also been an increased focus on sanctions evasion risk following the Russian invasion of Ukraine. Antitrust regulations would, in the same way, be applied in accordance with the relevant rules in the appropriate jurisdictions.
4. Due Diligence
4.1 General Information
In Luxembourg, legal due diligence is usually of secondary importance to financial and tax due diligence, but it is still carried out and typically consists – in addition to the usual practice of verifying corporate existence, the compatibility of corporate objects, and solvency – of reviewing the corporate governance and past and current activities of the target for compliance with Luxembourg laws and regulations.
The due diligence is usually conducted first via a review of the publicly available documentation (ie, the documents that are required to be filed at, and are available for download from, the Luxembourg Trade and Companies Register), followed by a thorough review of the documentation made available in the data room. Key areas of focus for legal due diligence include:
- company corporate documents – this encompasses the review of the company's articles of incorporation, minutes of shareholders' and board meetings, and any other essential corporate documents to ensure they are up to date and in order;
- regulatory status – ensuring that the company is in compliance with all relevant regulations, including those specific to its industry, and that it has all necessary licences and permits to operate;
- financing arrangements – reviewing the company's financing structures, including existing loans, credit facilities and security interests, to understand the financial obligations and any potential liabilities that may affect the transaction; and
- litigation – conducting investigations into any past, present or potential future litigation that the target may be the subject of or that might affect the target.
In addition to legal due diligence, tax due diligence is an essential process for investors and companies considering mergers, acquisitions or partnerships. While red flag tax due diligence allows for a quick assessment of major potential concerns and is increasingly becoming the norm, conducting a comprehensive tax due diligence is key not only for gaining an in-depth insight into the tax implications of a transaction but also for facilitating effective post-acquisition restructuring.
4.2 Vendor Due Diligence
Vendor due diligence is an intricate part of practice in private equity transactions in Luxembourg. Advisers will usually rely on vendor due diligence reports if the adviser is of the opinion that the third party who conducted the due diligence is reliable, but at least some independent verification is now the rule rather than the exception.
Auction sales are very, very rare in Luxembourg, and vendors typically only provide a summary corporate due diligence report. There is generally more focus on financial data for auction sales.
5. Structure of Transactions
5.1 Structure of the Acquisition
In Luxembourg, the landscape of private equity acquisitions has remained relatively stable, with most acquisitions by private equity funds being carried out through private treaty sale and purchase agreements negotiated between the parties. Auction sales are less frequent in Luxembourg as very few targets – as opposed to the holding structures – are located in Luxembourg.
5.2 Structure of the Buyer
In Luxembourg, the landscape of private equity acquisitions has remained relatively stable, with most acquisitions by private equity funds being carried out through private treaty sale and purchase agreements negotiated between the parties. Auction sales are less frequent in Luxembourg as very few targets – as opposed to the holding structures – are located in Luxembourg.
5.3 Funding Structure of Private Equity Transactions
Private equity deals are mainly funded through a mix of equity and debt. An equity commitment letter providing contractual certainty of funds is required in the majority of deals. In most transactions in Luxembourg, the private equity fund (together with its co-investors, if applicable) will seek to acquire a majority interest – or, even better, a 100% interest – as opposed to a minority stake, as sponsors tend to value control over the destiny of their investment and the certainty that a majority or outright shareholding can bring.
In many deals, debt funds will commit at signing but, in instances where debt funds are not yet confirmed, bridge funding is often provided by the equity shareholders.
Over the past year, the financing markets for private equity deals have faced challenges due to the increased cost of debt and the reduced accessibility of liquidity in debt markets, given the current interest rates; however, the fundamental approach to financing has not undergone significant changes.
5.4 Multiple Investors
Although some transactions will involve a consortium of private equity sponsors, the majority of deals are still concluded by a single sponsor. In the recent past, there has been a steady increase in co-investments, either between more than one sponsor or with sponsors and their limited partners.
Deals involving co-investments by other investors alongside the private equity fund's investment constitute an increasing proportion of the total transactions. In Luxembourg, both are in evidence, with co-investments between more than one sponsor and co-investments between a sponsor and its own investors increasing yearon-year both in number and as a proportion of the whole. Consortia that include both private equity funds and corporate investors are also present in the market, although they are not the norm.
6. Terms of Acquisition Documentation
6.1 Types of Consideration Mechanisms
In Luxembourg, there is no predominant form of consideration structure used in private equity transactions, as the consideration mechanism will depend very much on the general strategy adopted by each sponsor and the specific requirements of the transaction. It follows that both locked-box and completion accounts mechanisms are seen on a regular basis in transactions involving Luxembourg holding and pooling vehicles. In addition, earn-outs are commonly included where one or more of the founders remain either as minority shareholders or as part of the management group of the target.
The involvement of a private equity fund (whether as seller or as buyer) can affect the type of consideration mechanism used, in that, depending upon the circumstances of the transaction and, in particular, the size of the sponsor and the deal itself, the type of consideration mechanism might be imposed upon the seller rather than driven by the seller.
A private equity seller will generally provide the same types of protection in relation to the various consideration mechanisms as would be offered by a corporate seller.
Similarly, a private equity buyer will generally provide the same types of protection in relation to the various consideration mechanisms as would be offered by a corporate buyer.
6.2 Locked-Box Consideration Structures
Locked-box consideration structures are less common in Luxembourg, with closing accounts still being the preferred option, as they are typically seen as being "fairer" to both parties. If a locked-box consideration mechanism is used, then it would not be common practice for interest to be charged on leakage.
6.3 Dispute Resolution for Consideration Structures
Alternative dispute resolution is in its infancy in Luxembourg and, probably for that reason, separate dispute resolution mechanisms in the transaction agreements are rare regardless of whether a locked-box consideration mechanism or a completion accounts consideration mechanism is used.
Typical wording in the transaction documents would envisage an immediate recourse to the Luxembourg court system (it is also not usual for Luxembourg transactions to include reference to a choice of foreign law or jurisdiction). However, as awareness of alternative dispute resolution grows in Luxembourg, the inclusion of specific dispute resolution mechanisms in private equity transaction documents in the country is increasing in prevalence.
6.4 Conditionality in Acquisition Documentation
It is common for private equity transactions in Luxembourg to include relevant regulatory conditions. In addition, if the target itself is located in Luxembourg, then shareholder approval requirements are also not uncommon to ensure compliance with the relevant provisions of Luxembourg company law. However, such shareholder approval requirements are often superfluous, particularly if the seller typically owns sufÏcient equity for separate and specific approvals not to be required (as is often the case).
Material adverse change/effect provisions are fairly common.
It would be unusual for a deal in Luxembourg to be conditional upon third-party consents, such as those of key contractual counterparties. In practice, the lack of such clauses is often due to the fact that key contracts do not usually provide that consent needs to be obtained in the event of a change of control.
6.5 "Hell or High Water" Undertakings
In those deals where there is a regulatory condition, it would be unusual for a private equitybacked buyer to accept a "hell or high water" undertaking in Luxembourg. It would be much more common for completion to be conditional upon the necessary approvals and contractual requirements being fulfilled; the use of clauses in the transaction documents to stipulate such approvals and requirements (including qualitative conditions) is standard practice.
6.6 Break Fees
In such conditional deals with a private equitybacked buyer, neither break fees nor reverse break fees are common. Instead, it is typical for both parties to incur the risks of their costs and expenses until the conclusion of the transaction (and the completion of all relevant conditions). Any break fees that are envisaged must comply with the usual contract law requirements.
In addition, both break fees and reverse break fees should not impose unrealistic penalties, as Luxembourg law provides for the possibility for an excessive contractual penalty – such as a financial sanction that is out of proportion to the loss or harm caused – to be reduced by the courts, even down to an amount of zero.
6.7 Termination Rights in Acquisition Documentation
A private equity seller or buyer may typically only terminate the acquisition agreement in Luxembourg in limited circumstances, including the triggering of a specifically planned escape clause in the transaction documents, not meeting a condition imposed in the agreement between the parties, or (in much rarer circumstances) due to the complete frustration of the object of the agreement. Typically, the longstop date would depend largely on the nature of the target (private business versus listed entity/ regulated activities), and it could range from 6 to 18 months.
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Originally Published by Chambers and Partners
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.
