Setting Up A Private Equity Structure In Luxembourg
Luxembourg is a global centre for investment funds, the second largest fund jurisdiction in the world, after the United States. It is the largest centre for funds in Europe, with over Euro 4.5 trillion in cumulative assets under management in supervised funds alone.
Why setup an investment fund in Luxembourg?
The country is:
- A founding member of the EU.
- Politically stable.
- Financially stable.
- Access to over 500 million EU residents.
- Reliable investment regulations.
- Over 4,200 supervised investment vehicles with around 14,500 sub-funds.
- A competitive framework for passporting of funds within the EU.
- Luxembourg funds are sold in more than 70 countries and is the leading jurisdiction for fund distribution.
- A responsive and globally recognized financial regulator.
- A wide range of supervised and non-supervised investment funds.
- UCITS and AIFs.
- Umbrella funds.
- Non-supervised funds.
- Depending on the need of investors, Luxembourg offers tax exempt, tax neutral or taxable investment vehicles,
- Some exemptions for VAT payments;
- Funds may access Double Taxation Avoidance Treaty benefits or establish SPVs that would have access.
What is considered Private Equity?
A private equity fund makes investments in the equity and debt of privately-held companies (sometimes listed entities as well), focusing on the long-term potential of the acquisition, much like private-equity firms. Such investments are usually made in later stages, after pre-seed, seed, and Venture Capital Fund rounds.
Private Equity investment stages are usually considered pre-IPO.
Luxembourg funds and the GCC:
Luxembourg is a jurisdiction of choice for investors based in the GCC. While the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) also offer fund structures, Luxembourg funds have more diverse options, including SLPs – that can be unsupervised and allow for greater flexibility for lower AUMs.
Luxembourg is an excellent jurisdiction for startup funds due to lower setup and maintenance costs, in some cases, as low as 35% of the costs in similar onshore jurisdictions in the GCC. They can be established quickly, are more flexible and can easily be upgraded to supervised or passportable funds once higher AUMs are achieved.
Luxembourg funds can also be managed from the DIFC (and ADGM), by setting up a restricted fund manager. This allows for greater comfort to prospective investors, besides opening an option for directly marketing and passporting the fund within the UAE.
Most large banks and investment managers in the UAE and the GCC have Luxembourg fund options. In fact, Luxembourg domiciled investment funds dominate among foreign funds sold in the GCC.
United Arab Emirates – 64% of foreign funds are Luxembourg funds
Saudi Arabia – 50%
Kuwait – 75%
Bahrain – 75%
Oman – 99%
Qatar – 98%
Do I use a Fund, or a special purpose vehicle for a private equity transaction?
This decision is based on the structure and size of the potential transaction. In some cases, the investors leading the deal prefer to use a special purpose vehicle, which can be a SOPARFI or a holding company. This is done in order to facilitate a smooth exit and increase tax-efficiencies.
In our experience, we have seen fund managers set up a Private Equity Fund in order to complete the fundraise, and then use a SOPARFI to acquire the shares in the target company.
Luxembourg offers both structures. A variety of fund vehicles and holding companies that can be used in isolation, or combined into a structure, in order to complete a Private Equity acquisition.
How do I establish a PE fund in Luxembourg?
Luxembourg offers multiple fund structures for private equity transactions.
Specialised Investment Fund, or SIF, is the most flexible investment fund structure, that can be used for multiple asset classes and investment strategies, including Private Equity deals.
The Luxembourg SIF is a supervised corporate vehicle and usually reserved for professional or qualified investors. It has low diversification requirements and can also be established as an umbrella fund with multiple sub-funds, thus allowing for multiple deals in the same structure. A Luxembourg Specialised Investment Fund can also qualify to obtain an AIFMD passport, given that it satisfies some mandatory conditions.
The Luxembourg Investment Company in Risk Capital, or SICAR, is also a supervised investment vehicle. The main purpose of the SICAR is to invest in risk-bearing assets, and is meant to be used as a vehicle for professional and qualified investors. SICARs are not obliged to follow risk-spreading obligations or diversification requirements. A Luxembourg SICAR can also qualify to obtain an AIFMD passport, given that it satisfies some mandatory conditions.
A Reserved Alternative Investment Fund, or RAIF, was introduced five years ago and has been very successful. Unlike a SIF or a SICAR, a RAIF is not directly supervised by the CSSF, but otherwise, it is quite similar in terms of structure.
A RAIF can also be setup as an umbrella fund, with multiple sub-funds under it. If required, a RAIF can appoint a supervised Alternative Investment Manager (AIFM) in Luxembourg, and then benefit from passporting rights under AIFMD.
A RAIF can be setup in 4-6 weeks, is unsupervised and does not require regulatory approvals, and can be passported – these factors have led to it’s popularity as a fund type for PE investments in the region.
Special Limited Partnership, or Luxembourg SLP, is an unregulated Alternative Investment Fund, that can be incorporated in Luxembourg by one General Partner (GP) who acts as the fund manager and one Limited Partner (LP) who is the investor.
The Luxembourg SLP structure has been modelled on partnerships that can be setup in other jurisdictions such as United States, United Kingdom and the Cayman Islands. Their strategies are usually illiquid, and typical investments are made in real estate, PE or the debt markets. However, there are no restrictions on the asset classes, or on the fund strategies.
A Limited Partnership Agreement governs the functioning of the SLP and gives the fund the contractual flexibility to organise the fund structure. An SLP is not restricted to any asset class, nor is it subject to risk diversification rules.
There are more than 2,600 SLPs that were set up in Luxembourg between 2016 and 2019.
Advantages of setting up a Luxembourg SLP:
The following are the advantages of setting up an SLP in Luxembourg:
- It can be established quickly, in 2-3 weeks.
- No prior regulatory approvals required.
- Can be an unsupervised fund, and hence not subject to cumbersome regulatory requirements.
- The GP has to be regulated only when the Assets Under Management (AUM) crosses Euro 100 million (in case of closed-ended funds, when the AUM crosses Euro 500 million).
- No restrictions on asset classes – the SLP can invest in stocks, bonds, loans, alternative investments, real estate, VC/PE, liquid or illiquid instruments.
- No restrictions on hedge fund strategies.
- No custodian, audit or prime broker required.
- Fully tax exempt in Luxembourg.
Can a Luxembourg SLP be passported?
Yes, it can. It would have to appoint an Alternative Investment Fund Manager (AIFM), allowing the SLP to be distributed to accredited investors all throughout the European Union. The process takes around a month.
How long does it take to set up a Private Equity fund in Luxembourg?
A non-supervised fund structure can be setup in two weeks, while a supervised fund takes anywhere between two and four months. A large part of this is also due to the process of bank account opening, which can take upto a month.
Luxembourg holding company, or SOPARFI (Financial holding company or sociéte de participations financières).
The SOPARFI has become the preferred vehicle for cross-border private equity transactions in Europe and other parts of the world. Corporations, Sovereign funds, family offices and fund managers use Luxembourg SOPARFIs due to it’s flexibility, structural benefits and access to treaties.
How much does it cost to set up a private equity structure in Luxembourg?
Costs vary, depending on the structure opted for, and the level of supervision. Generally, a supervised fund costs more than an unsupervised fund.
A SOPARFI, for instance, can be set up in 3 days, once a bank account is opened and the share capital of EURO 12,000 is deposited. Notary fees come in at around EURO 1,700, and the SOPARFI can, once incorporated, setup a domiciliation agreement with us as a service provider, in order to avail a registered address.
To form a Special Limited Partnership, we would usually setup a SOPARFI, that would act as the General Partner of the SLP. The SLP cost would then only depend on the form of constitution (private deed or notarial deed). Once the LPA is executed, it can be registered with the Luxembourg Trade and Companies’ Register.
Other costs vary, depending on the structure and whether you opt for supervision.
Generally, we offer all-inclusive fund setup packages starting from US$ 20,000. Get in touch!
We provide turnkey services for Luxembourg structures.
From initial consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the legal framework
in Luxembourg and submit an application that is comprehensive, complete and compliant.
Our services include assistance in:
1. Reviewing the business model and advice on the applicable regulatory framework;
2. Preparation of all the required documentation, including Private Placement Memorandums and agreements;
3. Provision of compliance and bookkeeping services; and
4. Finalisation of registered space and bank account opening.
5. In fact, we can do all this without you having to visit Luxembourg!