Apex’s Renaud Oury discusses the trends, challenges and opportunities facing the private equity industry in the Grand Duchy.

What market trends are you currently seeing in Luxembourg?

During the last decade, Luxembourg has emerged as one of the most important hubs for private equity fund domiciliation, capital raising and transaction activity. We are seeing many managers who have previously launched funds in offshore jurisdictions but are now looking to come onshore, often at the behest of their investors. This is not a trend limited to the private equity space, although the structures available and range of service providers in Luxembourg mean that the jurisdiction is particularly attractive to managers.

The Covid-19 crisis has certainly slowed down the sustained pace of investments in the private equity sector, which has been growing steadily for more than 10 years, particularly in Luxembourg. Since the 2008 crisis, markets have been very volatile and interest rates are very low, this makes debt cheaper and pushes yield down. Private equity players have done well in this context, by the very nature of their industry. 

What impact do you anticipate Brexit will have on Luxembourg’s funds industry?

Luxembourg is among the biggest winners from Brexit as businesses shift operations out of UK. Many private equity funds need to guarantee that they have access to the European market to be able to raise capital, which Luxembourg facilitates. To support business flowing from the UK, Luxembourg has created a transitional regime to allow UK investment firms to continue to provide cross-border services into Luxembourg in the event a “no-deal” Brexit.

However, it is worth noting that this regime is only available to those firms with existing mandates, which have contracts in place before Brexit and as such UK firms will not be able to rely on the transitional regime to enter into new agreements after Brexit.

How can funds position themselves to take advantage of upcoming market trends and regulatory requirements?

It is interesting to note that fundraising fell only 4% over the first six months of the year compared to 2019. As private equity has raised a lot of new money in recent years, many distressed businesses may be supported with this capital, if their business models are sufficiently resilient. It is therefore possible that private equity will achieve its best performance since the years following the financial crisis of 2007-2008.

The biggest area of diversification will probably be into private debt combined with an increased interest in distressed transactions over the next 12-24 months. It’s a good time for those managers, including large direct lending firms with distressed situation capabilities to capitalise on the current conditions. 

How has Covid-19 impacted the services that funds in Luxembourg require?

The Coronavirus pandemic brought many challenges to the private equity industry and at Apex we have worked hard to support our clients through this pandemic and market fluctuations. Crucially, we responded to client demand and created Apex Connect, a 24/7 secure portal with online dealing functionality to improve efficiencies and remote accessibility of fund data.

In addition, to improve the ability of fund managers to work remotely, Apex launched a pioneering Digital Bank and Onboarding platform for asset managers via a Luxembourgbased subsidiary, European Depositary Bank. This digital banking solution removes the need for managers to provide physical document copies or the need to send information via mail.

Finally, not only in Luxembourg, but across the private equity landscape, there has been a renewed focus on ESG investment, driven indirectly by the pandemic. Quality ESG data capture, analysis and reporting is critical for ensuring risk mitigation and sustainable returns for investors. We listened to the investor concerns that our private equity clients are receiving about ESG investing and developed an ESG Ratings and Advisory service for private markets.

What should funds look for when choosing their service provider in Luxembourg?

As the number of private equity funds domiciled in Luxembourg grows, so too does the demand for outsourcing of fund administration, particularly as compliance costs and regulatory pressures grow. When establishing and launching a fund in the market, arguably one of the most important decisions you will make is that of which service providers will support you through the process and beyond.

Managers are now increasingly seeing the major advantages to having one provider – primarily the cost and administrative efficiencies achieved, seamless integration and a single point of contact for ongoing management of the relationship. Speed to market is also a clear benefit of using a single-source solution as it can greatly reduce time spent navigating through different KYC processes with multiple providers, which can be a source of great frustration for managers.

Whilst a fund’s initial priority will be appointing a service provider with local expertise and boots on the ground, we encourage managers to take a longer-term view, and assess whether the service provider is well-resourced and positioned to support your business’ needs in the future, and in other jurisdictions you may look to enter.