Private Equity in Luxembourg

By Nicolas Palate

Posted: 14th February 2012 09:59

Despite the current economic slowdown, Private Equity remains a key feature of the economic landscape, playing a major role in the business economy as it represents a fundamental source of support to unlisted companies, throughout their lifecycle.  It also permits direct and indirect investment in and promotion of innovation and new technologies, and as a result stimulates growth in the economy, as well as creating employment.

However, as an asset class, Private Equity is probably one of the less well understood segments of the current financial markets, probably due to the broad and diverse range of investment strategies which it encompasses.  Compared to traditional investment funds such as UCITS, Private Equity differs in strategy, operating model, structure and objective.

This article aims to demystify the generic label of Private Equity, through some practical examples of investment strategies we come across in Luxembourg and CACEIS is one of the major service providers in this domain.

Defining Private Equity…

Private Equity is usually considered as an asset class consisting of an equity participation in operating companies not publicly traded on a recognised stock exchange.  This definition yet encompasses a wide range of investment strategies that fundamentally differ in a number ways.

Let’s start with a strategy that has been well known since the 80s and the RJR Nabisco/KKR deal, a Leverage Buyout, which consists in the acquisition of a mature company generating important cash flows, allowing the interest payment on the debt which is used to finance the deal.

By way of comparison, Mezzanine Investment is the common designation used for subordinated debt (also denominated junior debt due to its position in the firm’s debt hierarchy, less secured compared to senior debt which must theoretically be repaid before junior debt) granted to less mature companies unable to access high yield capital market.

Venture Capital refers to equity investments in recently launched companies allowing them to expand while Distressed Investment relates to an equity or debt investment in financially distressed companies, often accompanied by corporate restructuring.  Last but not least, Growth Capital describes equity investments in relatively mature companies that are looking for capital to further expand their reach, either to enter new markets or to finance a major acquisition.

… In Luxembourg

One of the famous Private Equity success stories in Luxembourg is the emergence of Skype.  Financed in 2003 by a Luxembourg Private Equity fund for EUR 20 million, Skype is now owned by Microsoft which spent USD 8.5 billion on the acquisition in 2011.  Since this showcase, the Luxembourg Private Equity market has grown, new investment vehicles have been implemented, allowing a large range of investment strategies.

Real Estate Investment funds based in Luxembourg are an increasingly demanded vehicle for acquiring properties all over the world.

Some of the main European Infrastructure funds have also set-up their domicile in Luxembourg, financing brownfield (already in operation and generating cash flow) or greenfield (under development)  infrastructure projects, such as general public services (water or heating production and distribution, etc.) or public/private partnerships (PPP) in transportation (highways, railway networks, transportation companies, etc.), telecommunications (fiber-optic networks), health services etc..

Socially Responsible Investment (SRI) is currently a very popular topic in Luxembourg.  The Eurosif 2010 study defines SRIs as “a generic term covering any type of investment process that combines investors’ financial objectives with their concerns about Environmental, Social and Governance issues”.

Renewable Energy assets acquisition for instance, consisting in investment in a wide variety of companies engaged in the production and sale of “green” energy (hydroelectric, photovoltaic or wind energy, but also gas recovery from rubbish dumps). These assets often benefit from the political generosity of governments willing to promote green energy.

Out of the 300 existing specialised vehicles focusing on Micro-finance, several of these are located in Luxembourg.  They invest through equity or debt into financial intermediaries (local banks, or institutions but also NGOs) which grant a low income population in emerging economies an opportunity to contribute to their sustainable development.

Carbon Finance is another SRI strategy. Stemming from carbon reduction objectives set for European industries by the Kyoto Protocol, Carbon investment vehicles play an intermediary role between these industries looking to decrease their emissions and investing in projects generating carbon reductions in developing countries.

Finally, the trading of exclusive and collectible commodities, such as valuable wines, precious watches, works of art, diamonds, classic cars, etc., is becoming an “in vogue” investment for Institutional clients as well as High Net Worth Individuals willing to diversify their portfolio in tangible assets allowing for de-correlation with the current volatility of traditional financial products and investment instruments.  

Setting up Private Equity funds in Luxembourg

Having attracted fund initiators from all over the world, Luxembourg is Europe’s leading centre for the incorporation of investment funds.  Since the introduction of the CSSF1 regulated vehicles, namely the SICAR2 and SIF3, respectively in 2004 and 2007, Luxembourg is the financial centre of choice for launching sophisticated investment funds, meeting the specific needs of private equity funds with diverse and specific investment strategies as described above.

CACEIS, your partner for setting up a Private Equity Investment Vehicle

The investment strategies and Private Equity specifics outlined in this article are features which CACEIS deals with daily as service provider to more than 140 Private Equity vehicles, being Luxembourg or non-Luxembourg-domiciled, regulated or unregulated investment vehicles.  CACEIS has developed a considerable expertise in this domain since 2004 by setting up a dedicated and specialised Private Equity team.   

CACEIS is a leading securities services provider, owned 85% by Crédit Agricole Group and 15% by BPCE Group4, with a top ranking position in the investment funds servicing business in Europe and worldwide, in which CACEIS has been active for over 25 years.

Full service or modular solutions are offered by CACEIS to Private Equity managers wishing to establish a Private Equity fund, services spanning from company secretary and domiciliation, to investor services, accounting, financial reporting, depository and custody, with a broad experience covering various investment strategies.  Nicolas can be contacted on + 352 4767 2356 or by email at Nicolas.palate@caceis.com      

 

1) Commission de Surveillance du Secteur Financier, the Luxembourg regulatory authorities

2) Société d’investissement à Capital à Risque.

3) Specialised Investment Fund.

4) Banque Populaire and Caisse d’Epargne Group

 


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