
German PE tempted by allure of Luxembourg LPs

With a government promising to keep industry regulation fine-tuned to the benefit of its denizens, Luxembourg has become a hotspot for GPs in post-AIFMD Europe. Ellie Pullen reports
Traditional buyouts in Benelux have given way to more complex transactions, with a number of take-privates and corporate carve-outs happening in the region. The latter is a trend that looks set to continue throughout 2014 with the arrival of new regional player Argos Soditic.
In fact, the largest deal of the year in terms of enterprise value was a take-private. In November, Advent International offered €1.17bn to delist Dutch software company Unit4 from the NYSE Euronext Amsterdam, giving the company an enterprise value of €1.28bn.
And throughout the year, Benelux saw a raft of law firms setting up camp in Luxembourg in preparation for the AIFM Directive. Hogan Lovells, Van Campen Liem and SJ Berwin all opened offices in the country during 2013.
Luxembourg: the post-AIFMD landscape
The AIFM Directive and what it will mean for Luxembourg has been the subject of much discussion throughout 2013.
"The surge, however, has been in debt-related funds," explains James Bermingham, director of the Luxembourg team at Aztec Group. "That's where Luxembourg's been doing well."
Likewise, funds-of-funds and real estate funds have begun reaping the benefits of the post-AIFMD landscape in Luxembourg. But the country has also begun to attract a wave of German private equity firms, according to Bermingham, thanks to the new Luxembourg limited partnership written into the country's law through the AIFMD.
Any Luxembourg-domiciled fund up to €500m has the advantages of being unregulated and without need of a custodian, significantly speeding up the process of doing business in the country.
"With the new LP, I would expect a fair amount of growth in mid-market private equity funds focusing on the DACH region," says Bermingham. "We're already seeing signs of this, because many DACH-based investors are naturally more comfortable with a German-speaking domicile on their doorstep. The new LP offers a quick, simple, flexible and efficient product for private equity, provided, of course, that each fund is worth less than €500m.
"The new government in Luxembourg has reiterated its commitment to keep fine-tuning the regulatory, legal and fiscal framework until we are in a position to compete on level terms for the larger, international private equity funds," Bermingham adds. "The new LP gets us part of the way, but we all know that further work is required on the product side as well as in terms of service delivery. The one-size-fits-all banking products have to be replaced in this sector by more sophisticated investment platforms that can accommodate diverse needs internationally and be managed without risk of conflicts."
Belgium on the up
While it is still by far the largest market in the region, the Netherlands looks as though it may experience some competition from its Belgian neighbour this year. The opening of mid-market GP Argos Soditic's Brussels office could signal a shift in the way Benelux's players invest in 2014.
Argos Soditic will begin its new foray into the Benelux market by first exploring Belgium, due to the country's strengthening economy (versus the Netherlands' weak one). The firm specialises in complex transactions such as corporate carve-outs – a trend that, as mentioned above, gained traction towards the latter half of 2013 in Benelux.
Belgium may be a small market, but there is plenty of activity and ample opportunity for unconventional deals, Argos Soditic senior partner Gilles Mougenot told unquote" at the time of the firm's announcement in November.
Life science investors look to public market
The life sciences sector – the crux of Benelux's investment industry – is at risk of stagnating if investors cannot begin to see an exit window for their existing portfolios.
Firms need to offload their current assets for investment appetite to pick up in the region. Gimv partner Patrick Van Beneden believes the best option for this will be public listings. "We just had a terrific open window in the US, which is still going on, but so far we haven't seen this in Europe."
In July 2013, Gimv portfolio company Prosensa listed successfully on the Nasdaq. Van Beneden says that a number of Benelux's biotechs are considering IPOs and are currently exploring both options – Europe or the US.
"The big question is whether we'll see a similar window in Europe or not. That's certainly what's driving the whole sector," says Van Beneden. "If we see that window it could mean exits for investors and this will drive the appetite to make new investments. If we don't have that window then we'll have to further support existing companies, so it's really going to be a major driver."
In terms of key areas within Benelux's life sciences industry, Van Beneden notes that investors may begin to move away from the favoured biotechnology sector and towards medical devices, or med-tech. He puts this down to smaller and fewer venture funds: "Drug development is very expensive and there is an assumption that building med-tech companies might cost a little bit less than biotech companies."
Lastly, Van Beneden believes that internationalisation of funding will drive the sector in Benelux this year, as US investors look to Europe's life sciences industry for better deals. "Compared with similar companies in the US, European deals are cheaper," he says. "US investors certainly see that now."
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