Luxembourg the post-Brexit "jurisdiction of choice"

Luxembourg "is the jurisdiction of choice after Brexit", said Alan Ross, managing director and head of private equity at Aztec Group, speaking at the inaugural unquote" European Fund Structuring Outlook event.

Asked what the UK was doing to keep its investors and offset the impacts of Brexit, a partner at a global private equity firm said: "Not much yet. The UK has opened Pandora's box with Brexit. At the moment they have more important issues to deal with [than fund structuring].

"They are obviously doing things to remain attractive. For instance, corporation tax, which has been low since George Osborne [was appointed Chancellor] and currently stands at 20%, should go down to 18% and subsequently 15%. But the question is whether these measures are enough at this point in time. And no, they aren't – and they certainly won't be until there is clarity on the movement of goods, capital and people."

"When there is uncertainty, you have to have flexible structures and to be flexible in general. One response is to set up a solution of funds that can fit into different jurisdictions" – Stephen Grimm, Luxembourg Investment Solutions

There are two critical points for managers looking to set up a fund, the panellists said: "Will I be able to market the fund, and will I be able to attract people?" In other words, passporting rights and human capital are two essential questions that inescapably need answering before a manager can do anything. Said the private equity partner: "Until this is answered [by the UK government], the 'wait and see' mode currently prevailing will linger on."

Knowing whether the UK will henceforth work as an on-shore or offshore jurisdiction also needs to be addressed. Commenting on that aspect, panellists said that while larger international funds have historically been successful in establishing funds through placement regimes, this usually proves to be more challenging for smaller fund managers, such as southern European funds, for instance.

Holger Emmel, director of legal and compliances at SwanCap Investment Management, said: "As part of our fund-of-funds activities, we see smaller managers usually tend to go with a local regulatory regime, as it is easier and more convenient for them; it is the bigger platforms that look for alternatives."

And in the context of high political ambivalence, fund jurisdictions have to prove themselves innovative and adaptable. Emmel said: "If there's one lesson to be learned from recent political events, it is that uncertainty is not ideal. Having a stable political environment is a clear advantage."

Stephan Grimm, business development manager of alternative investments at Luxembourg Investment Solutions, added: "When there is uncertainty, you have to have flexible structures and to be flexible in general. One response is to set up a solution of funds that can fit into different jurisdictions."

Assessing the success of RAIF
Given the current politico-economic context, it seems the launch of the Reserved Alternative Investment Fund (RAIF) vehicles in Luxembourg could not have been more timely. Last summer, the country's parliament passed a law paving the way for the new fund type, significantly widening structuring options for private equity, real estate and hedge fund managers.

Described as tax-neutral vehicles, RAIFs allow fund managers to accommodate various investments and/or investors' tax needs or constraints. They provide the existing benefits associated with current private equity fund structures in Luxembourg – Specialised Investment Fund (SIF) and Investment Company in Risk Capital (SICAR) – while exempting applicants from requiring product approval by regulatory body CSSF in addition to managerial approval. The main result is an accelerated and privileged time-to-market that can compete with offshore funds.

As PwC Luxembourg partner Nathalie Dogniez told unquote" in October last year, RAIFs were launched as a response to fund managers' will to gain accelerated access to the market and to have a structure that would grant them the same flexibility as SIF funds, while still remaining within the regulatory frame of the AIFMD. "RAIFs are very much in the spirit of […] making the Grand Duchy an ever-more modern and attractive place for investors to set up their funds."

An important regulatory aspect of RAIFs is that, as they are managed by an authorised alternative investment fund manager (AIFM), they give access to EU marketing passport rights and are subject to AIFMD regulation, although a separate approval for the vehicle is not needed. This is particularly appealing to non-EU investors, who might have hitherto been reluctant to use European structures because of the double layer of costs related to both the AIFM and the fund itself.

Six months on, results speak for themselves, as according to ALFI's director of legal and tax Marc-André Bechet, a total 59 RAIFs have already been launched in the Grand Duchy. At that speed, unregulated vehicles might very well become "the new norm", one of the panellists suggested. Dr. Marcel Bartnik, counsel for the newly developing investment funds business unit of DLA Piper in Luxembourg, added: "There is some reluctance in moving on to completely unregulated vehicles on investors' part, but they also know [that with RAIF] they can be very quick with time-to-market.

"The structure's performance has been quite satisfactory so far and I think we can expect to see quite a bit more in the future."

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