€3.8 trillion! That’s the total of world assets represented by Private Equity in June 2020 according to our sources. Almost double compared to 2008. – Private Equity in Luxembourg –

The Grand Duchy of Luxembourg is the leading financial center in Europe and is home to 90% of European investment funds specializing in this financial technique, testimony to its attractiveness. In less than 20 years, the volume of assets under management in the private equity sector has reached more than €400 billion according to estimates by the LPEA.

According to European sources, private equity provides 10.5 million jobs in Europe in businesses financed by private equity funds, out of a total active population estimated at 234 million people. Nearly 23,000 companies in Europe have recourse to private equity, 14,500 of these SMEs. By supporting businesses, private equity has led to the creation of more than 173,000 jobs.

Private equity has thus established an important role for itself in society.

But what is Private Equity?

Private equity is an alternative investment tool which stands out from other more classic forms of investments such as real estate, stock exchange, etc.  It involves taking equity stakes (buying shares) in unlisted companies and selling them again after a period of five to eight years to generate capital gains.

It’s a way of bringing together and matching the needs of an investor with cash to spare and an unlisted company in search of capital to finance its growth.

The initial transaction is carried out either by way of a capital increase or by buying the shares of exiting shareholders.

For the investor, the advantage is being able to buy an asset or a business and sell it again in due course while at the same time having repaid all or part of the borrowings contracted to fund the initial investment thanks to the profits made by the target company. This is what is commonly referred to as an LBO (leveraged buyout).

Opposite of private equity: public equity. What does this mean?

It means investment in companies listed on the stock market.

A distinction needs to be made among several types of investment:

• Venture capital: investment in start-ups or other relatively new businesses. Venture capital funds often specialise in a particular activity.
• Growth capital: these are funds that invest in more mature businesses that are in search of finance for their growth plans.
• Buyout funds: a buyout involves the acquisition of all the shares of the target company. LBO (leveraged buyout) refers to acquisition financed by borrowings, while MBO (management buyout) as its name suggests is when the shares are acquired by the company’s own managers.

Regulated or non-regulated?

The Luxembourg financial sector distinguishes between regulated and non-regulated funds. What’s the difference?

A regulated fund has to report regularly to the CSSF (Financial Sector Supervisory Commission).

Depending on its size, a non-regulated fund can operate without having to report much information, except to its own investors of course.

Luxembourg: a financial market in full expansion

Some figures: €400 billion according to the LPEA, including commitments. €148 billion in assets under management at the end of September 2019. Luxembourg is home to 90% of European investment funds.

There is admittedly a wide choice of investment vehicles available. Since 2004 when the SICAR regulated venture capital fund was created, the range on offer has grown, particularly with the creation in 2016 of the non-regulated RAIF (Reserved Alternative Investment Fund).

There are currently 271 SICARs, 1,517 SIFs (specialised investment funds), 2,400 SCSps (special limited partnerships) and 618 RAIFs. 

At present the trend is four RAIFs to every UCITS (undertaking for collective investment in transferable securities regulated by a European directive).

Initially very favourable to the sector, tax arrangements have evolved. We will address this point in our next article, on ATAD I & II.

The financial centre attracts numerous international asset and fund managers.

It is well organised. For example, the LPEA (Luxembourg Private Equity & Venture Capital Association) brings together as many as 300 players from the sector.

ALFI, the Luxembourg Association of Investment Funds, is another non-profit association (ASBL) bringing together investment funds.

Luxembourg’s political and financial stability is certainly a significant factor in attracting new entrants, others being its triple-A credit rating, its government’s pro-business attitude and last but not least the presence of more than 140 banks.

Who are the investors? 

Private individuals, business angels, etc. In many cases investors group together and entrust their assets to investment funds that specialise in the quest for successful and promising targets, such as Expon Capital or Mangrove Capital Partners for example. There are as many as 130 investment companies in Luxembourg in search of potential star performers.

Institutionals represent 77% of investors, followed by private banks, family offices and lastly high net worth individuals.

Crowdfunding exists in Luxembourg too.

Private equity: strengths and weaknesses

Apart from the potential returns to investors, target companies also benefit from investors’ experience, and this growing sector also plays a significant role in society, creating new wealth and jobs in Europe, in an economic context that otherwise seems to have run out of steam.

Nevertheless, it also represents risks for investors.  Returns can take longer than expected to materialise and do not always reach the targets counted on. There is often strong pressure within the targets, precisely because of these high expectations.

Private equity can also be seen as a new way in for US and especially Chinese capital, which may then take control of some of Europe’s finest jewels.

Private equity also has to be seen as a way for European States to preserve their sovereignty by limiting the arrival of capital from Asia or other emerging regions.

CÉLIANCE: a new player in private equity in Luxembourg. What are our winning points and competitive advantages?

In 2021, CELIANCE put together a skilled team with strong experience in the private equity sector. Our aim is to offer our future clients a range of services that is at the same time both comprehensive and different from that of the leading players in town.

In particular, the CELIANCE team will be able to bring to bear its great expertise in financial evaluation, especially for determining NAVs (net asset values).  You will be able to read more about this in our forthcoming publications on this subject.

PROXIMITY, RESPONSIVENESS, AGILITY and EXPERTISE are the main winning features of this new, young, ambitious team.

In June 2021, CÉLIANCE will also join the famous LPEA association.

Our sources:
– Paperjam
– LPEA

 Don’t miss our forthcoming publications:

• We will talk to you about the ATAD II arrangements and their impact on private equity in Luxembourg
• You will discover our experience and our offer on NAVs (net asset values)
• What type of vehicle should you choose for your private equity?