New LP structure drives surge for Luxembourg’s AIFM passports

Speakers at the Alfi and LPEA Roadshow, held in April, discussed the advantages of new structures, which carry some pleasant side effects. Indeed, according to BlackRock's Geoff Radcliffe and Schroders' Andrew Dreaneen, the introduction of an AIFM passport by the European Union has helped ease the fundraising process, as firms now benefit from a framework allowing them access previously harder-to-reach markets such as Spain.

According to Jérôme Wittamer, a partner at Genii Capital and president of the LPEA, Luxembourg stands to benefit the most from the changes. While the country has long been a major fund destination, the Grand Duchy has seen an uptick in the number of alternative fund managers dropping their anchor within its borders under the new directive.

Valérie Tixier, a partner at PwC, says it is the société en commandite simple (SCS) and, in particular, the more recent société en commandite spéciale (SCSp) vehicles that have driven this upsurge. According to the latest figures, 579 of these special limited partnerships (SLPs) have been created in Luxembourg since July 2013, the same month the country's authorities transposed AIFMD into domestic law. With an average of 40 SLPs created each month since last November, this trend is expected to continue throughout 2015.

Globally-backed
Those adopting SCSp vehicles are not only increasing in size but also becoming more diverse as global private equity players come on board. "As a multi-purpose vehicle, it is used for a variety of reasons. Around two-thirds of the current numbers are intermediary, co-investment structures widely used by venture capital firms," said Tixier at the conference. "What we begin to see now is the use of the vehicle as a real fund structure for marketing and fundraising under the AIFM passport, with big European or US private equity names."

This increasing appetite for SCSp is explained by its flexibility and the cheaper costs associated with its setup. Furthermore, SCSp has lower requirements for LP identity disclosures. Tax efficiency is also a big draw for the new vehicle, particularly after the clarification by the country's tax authority in March that AIFs under AIFMD are not considered to be carrying out a commercial activity and, as such, are exempt from municipal business tax.

Considered together, these factors may help further strengthen the case for Luxembourg as an onshore fund location against its offshore counterparts. Says Nigel Williams, managing partner at Royalton Partners: "At a time when the authorities are showing a clear will to shut down offshore fund locations, Luxembourg might soon emerge as an interesting, alternative domiciling site."

Tixier, however, argues SCSp's main weakness, for now, is that it is new: "Culturally, people aren't yet so used to setting up these structures. But it's all changing, as we see big players that traditionally have never used Luxembourg start to do so, thanks to SCSp."

All eyes on Luxembourg
The existing triangle between Luxembourg, the AIFM industry and EU regulation was further illustrated at the Alfi and LPEA Roadshow by the presence of Luxembourg's finance minister Pierre Gramegna. In a Q&A steered by BBC business editor Kamal Ahmed, Gramegna addressed concerns that the formation of a coalition government with the socialist and green parties after the 2013 election may jeopardise Luxembourg's commitment to the asset management industry. There is a broad consensus in the Grand Duchy that remaining a competitive financial centre is "essential", the minister indicated.

This reassurance comes as Luxembourg prepares for its presidency of the Council of the EU, which will commence in July. Conveniently, the country's six-month term will feature a formal discussion by Brussels authorities of a simplified securitisation proposal, a tax transparency initiative and the much-speculated capital markets union, a "priority" for the newly elected European Commission, according to Gramegna.

These proposed changes will ensure the industry's eyes are continually fixed on Luxembourg over the coming months.

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