Should Luxembourg be the Top Domicile for your New Fund?

In our recent webinar, “Why you should consider Luxembourg for your fund project”, our expert panel discussed the legal and regulatory considerations and practicalities of establishing a Luxembourg fund.

Plus, a second expert panel met to discuss Luxembourg regulatory updates, Brexit, live fund operations and the future.

A highly flexible range of corporate structures

The flexibility of the structures available in Luxembourg is what draws many managers to the jurisdiction, explained Rodrigo Delcourt, Partner at Arendt & Medernach. “Luxembourg has a pretty extensive toolbox, which has evolved over the years,” Delcourt said. “This toolbox allows the structuring of alternative funds, real estate, private equity, in a very flexible manner.”

As well as for managers looking to set up new funds, this is ideal for those looking to move funds from other jurisdictions. Delcourt assured that “managers in the region will definitely find structures that are similar to those used in other jurisdictions, such as Cayman, for instance, that are suitable for their needs.”

The range of options scales from very flexible vehicles with low regulation through to those that are highly regulated, with little flexibility, but with other specific advantages. A further attraction of Luxembourg is that there is the opportunity for managers to move from a non-regulated to a regulated structure, and vice versa. "It is very possible to start the vehicle as a non-regulated setup, reserving the possibility to upgrade the vehicle later on," Delcourt confirmed.

“The way that Luxembourg has evolved over the years is to adjust the offer to the needs of the managers, of the investors,” Delcourt summarised. “We have a combination of effort that puts the needs of the industry in the centre. This is pretty powerful.”

A reputation for expertise and reliability

Craig Roberts, Managing Director for MENA at Apex Group, suggested that other managers are drawn to the jurisdiction based on its world-class reputation. “I think what attracts a lot of the managers we work with to Luxembourg is the reputation that it has got,” he said. “It’s setting standards globally, every day, and the service providers and the counterparties that you get within Luxembourg are all very experienced.”

“The driver to use Luxembourg as a jurisdiction is to capitalise and leverage on the expertise,” agreed Florence Stainier, Partner at Arendt & Medernach.

With that reputation for expertise comes a high degree of investor trust and confidence. Glyn Gibbs, Head of Business Development for MENA at Apex Group, expanded on the benefits this brings, saying, “The confidence that Luxembourg gives to your investors can only help your distribution, which is fundamental because you can have the best strategy in the world, but if you don’t have distribution, you’re not going to be successful.”

“The fact that Luxembourg has a global reputation makes it a very, very attractive proposition,” he added.

Access to highly regulated markets globally

One of the leading structures offered by Luxembourg is, of course, Undertakings for the Collective Investment of Transferable Securities (UCITS). The safety and regulation of UCITS is very attractive to investors. “A key benefit of that vehicle is the counterpart of the highly regulated status of the vehicle,” explained Stainier. “It does benefit from the marketing passport, meaning that once a UCITS has been created in one of the EU countries, it benefits from mutual recognition and can be sold in any of the other EU countries.”

But Luxembourg offers more than just access to Europe. “It’s the access it gives you, not just to the European Union, but also to Asia,” added Roberts. “There is so much demand for Islamic structures, particularly out of Asia, where they want a fund that complies with Sharia law.” Luxembourg is world-renowned for such funds, or as Stainier stated, “We do not only accept Sharia-compliant culture, but we promote it. I would say that Luxembourg is probably the first non-Islamic jurisdiction for Sharia-compliant funds.” 

An alternative for UK managers post-Brexit

For UK managers especially, the access to the EU that Luxembourg offers is of the utmost importance, given the upcoming end of the Brexit transition period. “It seems fairly certain that we’ll get to 1 January and single market access will stop, so, importantly, that means no more passporting,” stated Helen Parsonage, Partner at Osborne Clarke. “In terms of UK-based managers looking out towards Europe, we’ve already seen quite a bit of migration.”

Lize Griffiths, Partner at Deloitte Luxembourg, provided some statistics on this migration. “A number that I think we need to keep in mind is the number of Reserved Alternative Investment Funds (RAIFs). As of July 2020, it has reached the 1,000 mark, compared with 690 RAIFs in July last year, and 450 the year before.”

Requirements for establishing a fund in Luxembourg

Gibbs talked through the basic requirements of establishing a Luxembourg fund, some of which are common globally. “There are a variety of roles required,” he began. “At the very top of the tree is a management company, which has oversight responsibility and is the manager of the fund and therefore accountable to investors. Below them sits the depository. The depository’s role is to oversee that the fund is actually doing what it says it is doing. You then have the administrator, which is common to most fund structures around the world, taking care of investor services, accounting, and preparation of financial statements and other types of reporting. Finally, you need a bank for the cash to transfer through.” Single-source solution providers can offer the full breadth of services in Luxembourg to simplify the establishment and operation of new funds there, efficiently and cost-effectively.

Some managers have concerns about the costs of setting up in Luxembourg relative to other domiciles. Gibbs stressed that, though it may seem expensive compared to certain alternatives, there is additional value in “what you get with Luxembourg in terms of regulatory framework, asset protection, investor protections.” He added, “Is Luxembourg expensive? Not really, for what you get for the money.”

Advantages of a single-source solution

For managers wishing to establish a fund in Luxembourg, we offer a single-source solution, acting as a fully integrated ManCo, depositary and custodian, fund administrator, and digital bank, to help you incorporate speedily and efficiently, with just one point of contact to handle onboarding, and one set of KYC.

With 45 offices around the world, we are also fully prepared to support you with fund incorporation in any other jurisdictions.

Contact us today to learn more about the ways we can help you.