Luxembourg becoming a hub for German funds

Figures recently released by BVK detailing fundraising in Germany in 2016 reveal the country's fund managers increased the aggregate value of their commitments by 52%, up to €2.33bn. Nonetheless, the figure is not the highest total recorded in the country's history, falling short of the €2.78bn committed in 2014 and €3.3bn raised in 2011.

However, GPs are capitalising on high levels of LP dry powder across the German market. Eight fund managers were reported to have christened their latest vintage in 2016, while nine GPs intend to launch new vehicles in 2017 and six other firms expect to come to the market in 2018, according to BVK. These 23 funds include 14 venture capital vehicles, four growth capital funds and four buyout-focused vehicles. Within those funds, 13 are reported to have a target below €100m, while three are aiming within the €100-200m bracket and six have a target of above €200m.

Next-door neighbours
Against this backdrop, several players in the market witnessed some developing trends. "Recently the German market has seen an increased number of funds located outside the country, particularly in Luxembourg," says Christian Schatz, a BVK board member and partner at the law firm Flick Gocke Schaumburg.

The reasons behind the move towards Luxembourg's jurisdiction seem to be twofold. First, Luxembourg is a more appealing hub. "In Germany, VAT is charged on management services, while in Luxembourg there are several exemptions for fund managers," says Schatz. "The costs needed for a German GP to locate a manager in Luxembourg do not normally exceed the VAT saving."

Luxembourg's authorities are much more used to private equity funds than the German authorities. So the approval process from larger vehicles is simply quicker in Luxembourg" – Christian Schatz, BVK

Secondly, its regulator is more clued up, says Schatz: "Luxembourg's authorities are much more used to private equity funds than the German authorities. So the approval process from larger vehicles is simply quicker in Luxembourg."

German GPs "are used to locating smaller AIFM vehicles in their home country under the GmbH & Co.KG regime, which currently represent at least 99% of the German market", says Schatz. On the contrary, larger funds with fully licensed fund managers will "undergo a longer approval process prior to landing in the market", he says.

Stephane Pesch, a senior manager at fund administrator Ipes, based in the firm's Luxembourg office, says large and upper-mid-cap fund managers "needed a flexible hub to structure their vehicles. Luxembourg currently represents an onshore prime location for their structuring and allows them to find bespoke solutions."

International appeal
Commonly, "the advantage of structuring a vehicle in Luxembourg is the easier access to an international LP base," says Pesch. "The Luxembourg government has always tried to keep up with recent legal developments and is keen on attracting foreign GPs and providing the right toolbox for them. This has seen the revamp of the existing Common Limited Partnership (SCS), the introduction of the new Special Limited Partnerships (SCSp) and the Reserve Alternative Investment Fund (RAIF), which are the most relevant legal innovations brought in during the past decade, after the introduction of the Specialised Investment Funds (SIF) in 2007."

Luxembourg is also often preferred to other offshore locations, Schatz says, particularly Germany. This is because of increased scrutiny from authorities that followed the recent leak of 11.5 million files from the database of the world's fourth biggest offshore law firm, Mossack Fonseca in Panama.

But most of all, GPs tend to consider offshoring as a non-appealing option because "the advantages, such as low regulation and no taxation, do not exceed the challenges in marketing the vehicles on the continent via the AIFMD regulation", says Schatz.

In Germany, low-regulated offshore structures are unmarketable to at least 50-60% of the German investor market. The AIFMD marketing rules require full AIFMD compliance for marketing to so-called semi-professional German investors. "This means offshore is not always attractive for European GPs," says Schatz.

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