Reserved Alternative Investment Funds established since its launch in 2016, according to the Association of the Luxembourg Fund Industry
As a financial services hub, Luxembourg has a lot at stake in the race to become the domicile of choice for European private funds. To date, it is the clear winner.
Acting swiftly to meet the requirements of the EU’s Alternative Investment Fund Managers Directive by establishing the Reserved Alternative Investment Fund – a flexible and speedy option – and expanding its product offering to include the Luxembourg Special Limited Partnership, the Grand Duchy outstripped its closest competitor, Ireland, to scoop up business swerving London in the wake of the UK’s 2016 Brexit referendum.
Grabbing first mover advantage shoves Luxembourg front-of-mind for managers selecting a domicile. According to the Association of the Luxembourg Fund Industry, as of May, more than 600 private equity and venture capital funds had set up in the Grand Duchy, holding €105 billion of assets.
“Both Luxembourg and Dublin offer tax-neutral fund vehicles and full access to EU tax directives,” notes David Ellis, professional support lawyer at CMS. “That’s why they are popular with infra funds. A manager also can benefit from a flexible and clear legal framework for structuring and operating infra funds.”
Luxembourg is also the preferred choice for large European LPs such as the European Investment Bank and the European Infrastructure Fund, which are looking to allocate increasing amounts of private capital funds, says Luxembourg-based IQ-EQ group head of funds, Justin Partington.
With 52 double tax treaties, a reputation for cross-border facilitation, including multi-currency operations and access to FX hedging, and a wealth of third-party service providers in close proximity, Luxembourg is an efficient choice as a regional base.
However, the Grand Duchy has a reputation for being expensive. While it makes sense as a home for large non-EU funds marketing across the continent, for funds collecting capital from a small number of specific European markets, obtaining an AIFMD passport is costly.
And while the product range grants flexibility, local particularities, for example the requirement for a Luxembourg notary to authenticate certain documents, adds time and cost, notes PwC private equity funds partner Robert Mellor. Competition for talent, wage inflation and staff turnover are also considerations, he notes, as is the uncertainty created by continuing competition challenges to Luxembourg’s tax regime.
Looking to the future, in response to an evolving tax and regulatory environment globally, some managers are shifting all their fund vehicles to one jurisdiction to simplify fund administration. What that might mean for Grand Duchy remains to be seen. But like all jurisdictions, Luxembourg will be keeping a close eye on market trends. It cannot rest on its laurels.