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Transcript of Luxembourg Private Equity and Alternative Investment · PDF fileLuxembourg Private Equity and...
Luxembourg Private Equity and Alternative Investment Funds SeminarInvestment Funds SeminarCarine Feipel PartnerCarine Feipel, PartnerPierre Beissel, PartnerAnne-Julie Bellaize, Senior Advisor
New York, 5 June 2012
The European regulatory framework...
MiFID iI t l dAsset managers MiFID review replies flood
in – a record?
Investors alarmed over EU reform
process
Asset managers aim to navigate
funds through big rocks aheadrocks ahead
Europe prepares Th AIFMDI tillEurope prepares for governance
green paper
The AIFMD – a benefit or a
hazard?
Insurers still uneasy over Solvency II
EU urged to go UCITS IV g gahead with
tougher bank rules
European regulations on OTC derivatives spark
disquiet
paperwork will surprise
regulators
2 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach2
rules q regulators
INDUSTRY FIGURESINDUSTRY FIGURES
3 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
The European Fund Industry in numbers (31 December 2011)
Non-UCITS
12/30/2011
UCITS
12/30/2011Country
12/30/2011Assets
€ millions
Germany 907,418
Country12/30/2011
Assets € millions
Luxembourg 1,760,155
Luxembourg 336,357
France 312,812
Ireland 235,227
France 1,068,141
Ireland 820,041
UK 648,406,
UK 156,704
Switzerland 61,504
Italy 53 598
Germany 226,456
Switzerland 211,037
Italy 139 697Italy 53,598
Spain 5,535
Sweden 3,392
Italy 139,697
Spain 150,877
Sweden 147,042
Others 213,702
Total: 2,286,249
Others 3,290,269
Total: 5,633,825
Source: EFAMA International Statistical Release 2011:Q4
4 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Source: EFAMA International Statistical Release , 2011:Q4
European UCITS / Non-UCITS Total Net Assets
EUR bn 2,28928%
EUR bn 5,86872%
UCITSNon-UCITS
72%
Source: EFAMA monthly Fact Sheet March 2012
5 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Source: EFAMA monthly Fact Sheet March 2012
Net assets of Luxembourg domiciled UCIs
Luxembourg fund industry Net assets of Luxembourg domiciled UCIs
2 500 00
April 20122 225,600April 20122 225,600
2 000,00
2 500,00
1 500,00
on
1 000,00
€bill
io
500,00
0,00
6Figures as at 30 April 2012 Source: CSSF
Market shares in cross-border fund distributionNumber of Luxembourg registrations during 2011: 96
G th L b i t ti 2010 2011 11%
FranceOther10%
Growth Luxembourg registrations 2010-2011: 11%Total worldwide registrations as at March 2012: 65,931
UK
Germany1%
France1%
10%
Ireland13%
UK2%
Luxembourg73%73%
Source: LFF - PwC Global Fund Distribution March 2012
7 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Source: LFF - PwC Global Fund Distribution, March 2012
Luxembourg – the European hub for alternative funds ?Private equity Real Estate Hedge funds SOPARFIq y g
Over 300 privateequity funds
Over 212 realestate investment
Over 1,700 hedgefunds and funds of
Over 30,000SOPARFIsequity funds estate investment
fundsfunds and funds ofhedge funds
SOPARFIs
Over US$ 37billion of private
Over US$ 30billion of real
Over US$ 190billion of hedgebillion of private
equity fund assetsadministered inLuxembourg
billion of realestate investmentfund assetsadministered in
billion of hedgefund assets admi-nistered in Luxem-bourgg
Luxembourgg
Growth of 850%over last 5 years
Growth of 500%over last 5 years
Stabilization(despite
Constant increasein numberover last 5 years over last 5 years (despite
the crisis) betweenDecember 2008and 2010
in number
8 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Source: LFF – October 2011
AIFMD (A I F(ALTERNATIVE INVESTMENT FUND
MANAGERS DIRECTIVE)Directive 2011/61/EU of 8 June 2011
9 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
What does the AIFMD regulate?
Direct regulation of AIFM
Indirect regulation of AIF Indirect regulation of AIF
Creation of a European market for alternative investments viapassport for management and marketing activities
10 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Definition of AIF
any collective investment undertaking (including investmentcompartments thereof)
which raises capital
from a number of investors
with a view to investing it in accordance with a defined investmentpolicy for the benefit of those investors
that is not subject to the UCITS Directive 2009/65/EC
11 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
AIFMD ScopeAIFMD - Scope
In scopeOut of scope
H ldi i / j i t tp
All EU AIFM, whichmanage one or more AIF
Holding companies / joint ventures EU pension funds Supranational institutions
All non-EU AIFM, which National central banks Social security / pension systems Employee participation/saving
manage one or more EU AIF
Employee participation/savingschemes
Securitisation special purposeentities
All non-EU AIFM, whichmarket one or more AIF
entities AIFM managing only group
investmentsSi l i t i t tmarket one or more AIF
in the European Union Single investor investment
vehicles
12
AIFMD ExemptionsAIFMD - Exemptions
EUR 100 million EUR 500 million
Open and closed-endedAIFs
Closed-ended AIFswithout redemptions for a
i d f5 AIF may be leveraged AUM do not exceed 100
period of5 years AIF must be unleveraged
million AUM do not exceed 500 million
13
Will unregulated entities (SOPARFIs) qualify as AIFs?
Yes, if they meet the conditions set out in the definition of AIF
A SOPARFI qualifying as an AIF will not be subject to specific product regulationproduct regulation
Opt-In: Product regulation for unregulated AIFs?
14 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
What rules does the AIFMD aim at introducing?Registration of all AIFMs nless o t of scope/e emption Registration of all AIFMs unless out of scope/exemption
Harmonized conditions for autorization Conflict of interest rulesConflict of interest rules Risk management rules Liquidity management rules Rules for the valuation of assets Rules of delegation Custodian/depositary requirement Custodian/depositary requirement Transparency requirements Rules in relation to leverageg Rules applicable to the acquisition of control by AIFs Marketing and third country rules
15 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Marketing : New passport and private placement regimes
EU AIFM / EU AIF Distribute under EU Passport (from 2013)
EU AIFM / Non-EU AIF Distribute under National Private Placement
Regimes (until at least 2018) Distribute under EU Passport (from 2015)
Non-EU AIFM / EU AIF
Distribute under EU Passport (from 2015)
Distribute under EU Passport (from 2015) Distribute under National Private PlacementDistribute under National Private Placement Regimes (until at least 2018)
Distribute under National Private Placement Non-EU AIFM / Non-EU
AIF
Distribute under National Private Placement Regimes (until at least 2018)
Distribute under EU Passport (from 2015)
16 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach16
Consequences for U.S. based PE manager
US PE manager has no European investors for the non-EU AIF it
manages: NO IMPACT
US PE manager has European investors in the AIF it manages:
IMPACT
US PE manager wishes to use an EU AIF vehicle/regime without g g
EU investors: IMPACT
US PE manager wishes to use an EU AIF vehicle/regime with EU US PE manager wishes to use an EU AIF vehicle/regime with EU
investors: IMPACT
17 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
AIFMD: Timeline
8 June 16 November 22 JulyJuly21 July 2015 2018Nov
2011 2011y
2013y
2012
ESMATranspo-sition intoIssue of
y2011 2015 2018
Expected
Nov2010
Vote f Directive
2011/61/UE
ESMA advice to European
Commission
sition into national law/passport for EU AIFM/EU
AIF
Issue of Level 2
measures by EC expected
Entry into
force
Passport for third country AIFM + AIF
end of private
placement regimes
of the Direc-tive
18 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
AIFMD - Level 2 measures
19 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Current status
Various provisions of the AIFMD to be detailed by implementingf th E C i imeasures of the European Commission
ESMA advice on implementing measures received onESMA advice on implementing measures received on16 November 2011
EU Commission draft regulation released in March 2012
EU Commission final regulation expected in July 2012 EU Commission final regulation expected in July 2012
20 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Discussion points
Calculation of assets under management
Delegation
Third country cooperation agreementsThird country cooperation agreements
Calculation and use of leverage
Depositaries
Professional indemnity insurance
21 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Implementation of AIFMD in Luxembourg
22 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Methodology and content
Draft bill divided into three parts: First part: implemention of AIFMD Second part: amendment of existing product regulation
(SIF, SICAR, UCITS, etc.) Third part: creation of a Luxembourg limited partnership Third part: creation of a Luxembourg limited partnership
Main option taken - depositary: a credit institution (in accordance with Directive 2006/48/EC) an investment firm (in accordance with Directive 2004/39/EC) Option for closed ended funds: other professional specific Option for closed-ended funds: other professional – specific
depositary status created
23 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Timing
Luxembourg intends to be a first mover
Deposit of bill with Parliament prior to end of first semester 2012
Vote by Parliament anticipated prior to end of 2012
24 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
KEYNOTE ADDRESS BY
ANDREW DOUGHERTY
MANAGING DIRECTOR, HEAD OF ALTERNATIVE
AND INSTITUTIONAL SOLUTIONS
AT BNP PARIBAS
25 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
TRENDING TOPICS FOR ALTERNATIVE INVESTMENTTRENDING TOPICS FOR ALTERNATIVE INVESTMENTAND PRIVATE EQUITY FUNDS IN LUXEMBOURG
26 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
1. AMENDMENTS TO
SPECIALIZED INVESTMENT FUND LAW
27 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
SIF – basic features
Lightly regulated Multi-purpose/policy investment fund vehicle No Promoter requirement (no deep pockets) Qualified investors only Risk diversification Risk diversification Structuring options: SICAV, SICAF, FCP Custody and Central administration in Luxembourg Subject to independent audit Tax exempt except for 0.01% tax on AUM
28 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
SIF Structuring example29
SIF – Structuring example
Investors
Custodian
Portfolio/asset
SIF
CompartmentsCentral
administration
Audit
Portfolio/asset management:• Client• External manager
A B C
SOPARFIAudit
Target(30% - risk spreading)
29
SIF – changes (law of 26 February 2012)
Requirement for: a risk management procedure a management of conflicts of interest a procedure allowing to check and monitor the status of
qualified investorsqualified investors deadline: 30 June 2012
The SIF may no longer start its activities before having been approved by the regulator
Delegation conditions are aligned on AIFMD (deadline: July 2013) Delegation conditions are aligned on AIFMD (deadline: July 2013) Option for one SIF compartment to invest in a separate
compartment of the same SIF
30 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
2. DEBT FUNDS AND SHADOW BANKING
31 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Shadow Banking
Discussion at G20 summits in November 2010 and 2011
European Commission Green Paper – Shadow Banking (03/2012) European Commission Green Paper – Shadow Banking (03/2012) • What is shadow banking?• What are the risks and benefits?• What are the challenges for supervisory and regulatory authorities?• What are the challenges for supervisory and regulatory authorities?• What regulatory measures apply in the EU?
L b b ki l li t f i l i Luxembourg banking law applies to « professionals carrying on lending operations engaging in the business of granting loans to the public for their own account. »
Exclusions:• services to parent and subs of parentse ces to pa e t a d subs o pa e t• group services• SIF• Securitization Vehicles (SV)
32 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Securitization Vehicles (SV)
Structuring Solutions
33 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
(1) SIF Structure
Investor(s) 3
1. Qualifying Borrowers
2. Specialized investment fund (SIF) in the form of (i) apublic limited liability company (SA) organized as anpublic limited liability company (SA) organized as aninvestment company with variable capital (SICAV), (ii) acommon fund (FCP-SIF), or (iii) Lux Special PurposeVehicle (SPV) controlled by SIF
4
SIF 2 3. Qualifying Investor(s) (corporate/funds/FO/UHNWI)
4. Investor(s) contribute capital to SIFSPV (L)
1
5. Alternative (1): SIF or SPV lends to Borrowers (viasenior or mezzanine loans, debt securities, wholly orpartly drawn-down loans, etc)
5/6/7
SPV (L)OR:
1
Borrowers
p y )
6. Alternative (2): SIF or SPV acquires fully drawn-downloans discounted or not, distressed or not
BorrowersBorrowersBorrowersBorrowers
7. Alternative (3): SIF or SPV acquires partly drawn-downloans discounted or not, distressed or not
34 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
(2) Basic Structure
1. Borrower
Investor 32. SPV (unregulated)
3. SPV controlled by Investor
4. Investor contributes capital or lends via subordinated loan to SPV
4
SPV (L) 2subordinated loan to SPV
5. SPV (i) lends to Borrower (on-off transaction) or(ii) acquires fully drawn-down single portfolio of5
Borrower 1
loans discounted or not, distressed or not5
Borrower 1
35 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
(3) Basic Structure
1. Qualifying Borrowers
2. SPV (banking license?)
Investor(s) 3
2. SPV (banking license?)
3. One or several qualifying Investor(s) (i.e., off-shore fund, discuss if off-shore fund is regulated or not or if it d b l t d )its managed by regulated manager)
4. Investor(s) contribute(s) capital or lends via subordinated loan to SPV
4
SPV (L) 25. Alternative (1): SPV lends to Borrowers (via senior or
mezzanine loans and assimilated) - [risk]5/6/7
Borrowers 1
6. Alternative (2): SPV acquires fully drawn-down loans,discounted or not, distressed or not (severalborrowers) - [risk]
5/6/7
Borrowers 1 ) [ ]
7. Alternative (3): SPV acquires partly-drawn loans,discounted, distressed or not (several borrowers) -[risk]
36 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
[risk]
Tax considerations on various structuring solutions
37 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Debt fund structuring – SIF / double LuxCo structure
LuxCo 1 financed with debt instruments (e.g. CPECs) from SIF
LuxCo 2 financed with interest free loan (IFL) from LuxCo 1
Investors
LuxCo 2 acquires loan assets LuxCo 1 and LuxCo 2 enter into a tax
consolidation
LuxCo 1 and LuxCo 2 fully-taxable butYield
Debtinstruments
SIF
LuxCo 1 and LuxCo 2 fully-taxable but interest received under loan offset against yield under debt instruments
no withholding tax on payment made by LuxCo 1 under debt instruments
Tax consolidation
instruments
IFL
LuxCo 1
LuxCo 1 under debt instruments Access to double tax treaties
SIF tax exempt no withholding tax on payment made by
LuxCo 2
SIF (limited exceptions)
non-resident investors not subject to Luxembourg tax
Interest
Loan assets
38
Debt fund structuring – Securitisation vehicle (SV)
SV can adopt the form of a fund or aInvestors
SV can adopt the form of a fund or acompany SV funds are not subject to income taxes SV companies are subject to corporate
Interest or dividend
p j ptaxes (corporate income tax andmunicipal business tax) but interest anddividends are tax deductible = smalltaxable margin
SVg
SV not subject to net worth tax no withholding tax on dividends
distributed by SVInterest on debt claims
Debtor
39
Key considerations
Source country / beneficial ownership issues Regulatory supervision European regulators’ concerns overRegulatory supervision European regulators concerns over
shadow banking Operational flexibility VAT exemption on management fees
40 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
3. LIMITED PARTNERSHIP
41 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Luxembourg reverse hybrid structure (as currently used)
LuxCo 1 & LuxCo 2 No substantial taxable base
Lux SCOSA GP
US Inc. LP
SCS (société en commandite simple) withLux SCOSA (société coopérative sous forme de société anonyme) as generalpartner
Yield Debtinstruments
SCS
Tax transparency: SCS not subject to corporate income tax nor municipal business tax (no commercial taint)
id t i t t bj t t
Taxconsolidation IFL
LuxCo 1LuxCo 1
non-resident investors not subject to corporate income tax
no withholding tax on distributions by SCS no double tax treaty
D btYield
LuxCo 2
yDebtinstrumentsAcquiCo
Target
42 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Target
Luxembourg reverse hybrid structure (as currently used)
Reverse hybrid SCS = pure flow-through for Luxembourg tax
purposes
Lux SCOSA GP
US Inc. LP
SCS = corporation and LuxCo 1 = disregarded from a US tax perspective: interest paid by LuxCo 1 (deductible in Luxembourg) is not recognized on an
Yield Debtinstruments
SCS
accrual basis in the US (tax deferral)
Taxconsolidation IFL
LuxCo 1LuxCo 1
D btYield
LuxCo 2
DebtinstrumentsAcquiCo
Target
43 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Target
Limited partnership - main features (as proposed)
Modernization of the current Luxembourg limited partnership( iété dit i l )(société en commandite simple) More flexibility in terms of management Creation of capital accounts Creation of capital accounts Additional confidentiality
Creation of an unincorporated limited partnership
Various tax provisions ensuring complete tax neutrality: abolition Various tax provisions ensuring complete tax neutrality: abolition or limitation of commercial taint theory (Geprägetheorie)
44 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012© Copyright Arendt & Medernach
Contact us
Carine Feipel Partner New York
Anne-Julie Bellaize Senior Advisor (Tax) New York
Pierre Beissel Partner Luxembourg
Tel : 212-554-3541 [email protected]
Tel : 212-554-3541 [email protected]
Tel : +352-407878792 [email protected]