Loyens & Loeff  - integrated services

In the first decade of this century Loyens & Loeff launched its Luxembourg investment management team. The team has grown to a full-fledged integrated sector focused team, offering all legal services required throughout the PE life cycle. The team encompasses fund formation, fund regulatory, fund finance and fund tax specialists and is closely connected to our corporate and finance lawyers focusing on the acquisition of assets.

How our team operates? The best way to answer this, is to experience it! To trigger your enthusiasm, we provide below a snapshot of how our team approaches the typical questions of a foreign fund sponsor that aims to raise capital from European investors and to invest it in European assets.

For our EU fundraise - why not simply go offshore with our fund vehicle?   

Let’s not immediately rush to pointing at the attractive legal, regulatory and tax features of Luxembourg. The reason for going to Luxembourg is simple: business.  European institutional investors, especially pension schemes, have little appetite to invest in a funds organized in classic offshore jurisdictions like Cayman or the Channel Islands. The fact that European investors shy away from offshore structures was accelerated by the fact that Cayman was blacklisted for a period of time. Cayman subsequently came off the blacklist, but investing in a vehicle that is vulnerable to being blacklisted may ultimately mean that an investor must agree on a forced exit which may not come at the right moment or that the fund manager should cease its marketing efforts.  

Ok, clear, but why Luxembourg?

Investors prefer to invest in a vehicle that can count on their recognition and meets the preferences they have in terms of governance. Investors are traditionally used to limited partnership type of vehicles, being the fund vehicle the US PE pioneers kicked-off with, back in the 1980’s. Since 2013, Luxembourg accommodates such style of limited partnerships with all the flexibility GPs and LPs expect, which is very rare in Europe.

Fund initiators may however prefer to use alternative types of fund vehicles to anticipate the specific needs of certain investors. For such cases, Luxembourg offers the partnership limited by shares, which is a company type of entity with governance similar to that of a partnership. A partnership limited by shares typically opts to apply a certain product law, such as the specialized investment fund (SIF) or reserved alternative investment fund (RAIF) regimes, as to secure its quasi-tax neutrality.   

How can we efficiently reach out to investors?

It is critical that the fund sponsor can reach out to EU/EEA based institutional investors as to pitch its strategy and secure commitments. If a Luxembourg fund appoints an EU/EEA authorized alternative investment fund manager (AIFM), (pre)-marketing can be performed under an EU/EEA passport, without applying specific jurisdictional rules.

The launch of an inhouse Luxembourg authorised AIFM requires ample investment by the sponsor when it comes to staff, office space and office infrastructure. Minimum costs levels do easily go up to EUR 1 min per annum. That costs level means that it is often not commercially viable to organize organise an own Luxembourg AIFM. Luxembourg is aware of that and therefore offers the so-called third party authorised AIFM model. These third party authorised AIFMs are typically very sizable and have all relevant fund management expertise in-house and rely for buy and sell decisions or advice thereon on the fund initiator pursuant to a delegation or advisory arrangement. Also this third party AIFM model comes at a cost. It is thus relevant to analyse whether an authorised AIFM is actually required.

In certain key European investors countries, a Luxembourg fund can efficiently be marketed under local private placement rules. If only such countries are targeted, there may be  no need to appoint an authorised AIFM. The Luxembourg fund could instead be managed from a non-EU country.  

The distribution angle is not the only angle to factor in when deciding to appoint or not an in-house or third party authorised AIFM; certain strategies such as EU lending strategies cannot be efficiently conducted without the appointment of an authorised AIFM, certain tax rules may favor funds with an authorised AIFM, specific investors may not have appetite for funds without an authorised AIFM and the use of an authorised AIFM may also be a matter of branding.

Time to invest the capital we have raised: how do we do that?

Although it depends on the fund’s strategy, a fund vehicle typically does not directly hold the investments but rather acquires its assets via a Luxembourg platform vehicle typically structured as a limited liability company sitting between the fund vehicle and the acquired assets. The platform serves a range of purposes: it conducts asset oversight and cash management functions, can accommodate joint ventures, co-investment arrangements or financing arrangements and may shelter investors from tax filings in the jurisdictions where the fund invests.  

The platform is generally entitled to certain tax benefits in the investee countries as per the tax treaties and directives all subject to a set of anti-abuse rules. These-anti abuse rules can typically be managed through Luxembourg physical footprint, such as staff, management boards, office space and office infrastructure. That substance can be directly allocated to the platform or pooled in a Luxembourg separate entity controlled by the fund sponsor. That entity provides services to the platform under a contractual arrangement and, in certain cases, combined with bifurcated employment relations. The preferred substance set-up depends on the investee country’s tax preferences.

The above snapshot shows two main things: First, Luxembourg has all it takes to serve the PE industry and, second, Loyens & Loeff can answer to the needs of the industry with practical, tailored, and integrated advice building on our in-depth understanding of the private equity industry. 

First published by luxtimes.lu