Luxembourg: looking good

The Cayman Island’s loss will be Luxembourg’s gain if the EU’s AIFM Directive passes as written.

Many GPs are clamouring for Luxembourg, according to private equity and real estate fund administrator Augentius, which recently launched operations in what it says is one of the most sought-after offshore fund locations.

The one huge advantage for the country over other offshore locations is that it is a member of the European Union.

If the EU’s draft AIFM Directive passes as written, non-EU funds must apply for a “passport” to market within the EU. To do so, they must prove they are subject to regulatory oversight that is equivalently rigorous to that of the EU.

As the directive is currently written, the earliest a non-EU fund would be able to market within the EU is three years after the directive goes into effect. For funds in popular offshore jurisdictions such as Mauritius and the Cayman Islands, this would effectively halt their European marketing. But for funds registered in Luxembourg, a founding member of the EU, business could continue as usual.
Luxembourg’s regulatory regime is indeed rigorous. After 17 Luxembourg funds had to halt redemptions due to investments with Bernard Madoff, the country has made registration and other processes more rigorous and thorough, and consequently it takes longer to register there than in other jurisdictions. This high level of oversight might help fund managers woo wary LPs.

At the same time, Luxembourg has many enticements for fund managers. The creation and refinement of SICAR and SIF products in recent years have made the country more attractive to the private equity and property communities. SICAR is a fund structure specially designed for European private equity and venture capital funds. SIFs are used by a variety of investors and can invest in a wide range of securities. Both have tax advantages and afford investors flexibility.

Unsurprisingly, Luxembourg’s population of investment funds has grown throughout the financial crisis. At the beginning of 2008, the country was home to 2,868 registered funds. By October 2009, there were 3,454 registered funds. Meanwhile, in the Cayman Islands, the number of registered investment funds fell from an all-time high of 10,291 in the third quarter of 2008 to 9,838 in the third quarter of 2009.