Brexit one year on: Flight to Luxembourg?

Prominent private equity players including Carlyle, Blackstone, EQT, KKR and 3i have recently been linked with plans to move operations and staff to the European continent in the aftermath of Brexit.

In April this year, EQT said it would henceforth concentrate its fund management activity in Luxembourg, creating a single fund hub in the country, and appointing Peter Veldman as head of fund management. In 2012, the firm had already decided to manage future funds onshore, with eight vehicles having since been closed in the UK, the Netherlands and Luxembourg. "Now EQT is taking the next step in harmonising and future-proofing its fund management," the GP said in a statement.

In January, Carlyle was also said to be moving forward with plans to establish passporting rights in Luxembourg to preserve the possibility of doing business in the EU post-Brexit. The move, however, seemed to be more of a purely administrative one, rather than a transfer of people and operations. "Carlyle has a long-established office in Luxembourg, and reports that this is newly opened are incorrect," a firm spokesperson tells unquote". For at least one of the larger international private equity players, it then seems that a move to Luxembourg may be less synonymous with a fundamental restructuring and relocation of people and operations, than with a simple realignment of existing structures.

"No decision has been taken yet as to what we may do in the event of a hard Brexit. We are still considering what may be required by various authorities and have a number of options with regard to location should we need a European base" – 3i spokesperson

Jerome Wittamer, chair of the Luxembourg Private Equity & Venture Capital Association (LPEA), says: "Many of these funds have been analysing the landscape for many years already, and some of them have had offices in Luxembourg for over a decade. Brexit just acted as a catalyst for them to position themselves in an environment of increasingly complex regulation where reducing the number of jurisdictions you are exposed to gives you a significant advantage either way. For those, what we're talking about is rather a 'consolidation' or expansion, rather than creating a whole new structure or opening a new location, per se."

But while some fund managers have already made their move, some instead are adopting a "wait and see" attitude, according to industry experts. This, for example, is the case for 3i, whose spokesperson tells unquote": "No decision has been taken yet as to what we may do in the event of a hard Brexit. We are still considering what may be required by various authorities and have a number of options with regard to location should we need a European base."

Michael Collins, head of Invest Europe, says: "There are some early movers, and there are those who will probably never move at all. In the middle, you get a big group that is still deciding and discussing with their back office provider whether it is the right time to move, and where to. At present, you certainly still get quite a lot of people in the industry saying they just don't know; the more clarity we get over the timing and terms of Brexit, the easier it will be for managers to make decisions."

Different sizes, different strokes
A few European cities have already emerged as hot spots for relocating funds and services out of the UK, and the destinations that most frequently crop up are Dublin, Amsterdam and Luxembourg. However, selecting the ideal location is very firm-specific, various GPs tell unquote".

Earlier this year, Blackstone set up an AIFM in Luxembourg, appointing three people in the location. "All three locations have all the expertise and resources needed," says Andrew Dowler, managing director in the firm's public affairs group. "But for us it made sense to set it up [in Luxembourg] rather than somewhere else, as we had pre-existing links and were familiar with the relevant regulatory and tax systems."

If for large players such as Blackstone, laying the groundwork for fundraising in a post-Brexit environment appears a relatively straightforward step to take, smaller structures could face more challenging situations. "For big players like us, it's not a problem," a London-based fund manager suggests. "We employ large numbers of people and have several billions of assets under management, so the cost of opening an additional office and hiring half a dozen people is relatively insignificant; but if your firm is of a smaller size, that might be an issue."

For the latter, there are two ways out, the manager suggests: either they opt to continue raising money in Europe, in which case they must find an alternative, or they decide to limit themselves to the UK, which significantly reduces their fundraising opportunities.

"It is a real issue for the smaller end of the industry," the manager says. "Creating a new structure inevitably incurs additional costs and will make them less profitable. Some VCs and smaller PE firms are not making any profit at management fee level as it is, so the only way they can sustain themselves is through carried interest; in that sense, they might just not be able to cover the extra costs that setting up a new AIFM incurs."

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