Luxembourg Private Equity & Venture Capital Investment Fund Survey Spotlight on a maturing industry

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1 Luxembourg Private Equity & Venture Capital Investment Fund Survey Spotlight on a maturing industry November 2017

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3 Contents Fund structures 06 Managers 10 Investors 12 Reporting 13 Glossary 14 03

4 Luxembourg is one of the most popular jurisdictions for private equity and venture capital. Whilst historically a local presence in Luxembourg was limited mostly to smaller and/or emerging General Partners, many large international houses have set up and conducted business out of Luxembourg since the middle of the last decade with a considerable and growing local substance. The AIFMD introduced new organisational requirements and specific disclosure rules regarding AIFMs managing AIFs which acquire control of non-listed companies and issuers. Focus shifted from well-known product regulation to manager regulation. PE managers appreciate Luxembourg s business friendly environment. The alternative investments industry accepted the challenge and is governed today by a framework that is eligible to develop into a brand, just as the UCITS Directive. PE managers appreciate Luxembourg s business friendly environment and they have embraced the introduction of the RAIF, which completed the Luxembourg investment fund toolbox by a manger-regulated alternative fund. Our survey will provide you with more insight on recent developments. Camille Thommes Director General of ALFI 04

5 The latest fund raising and distribution figures confirm the good health of the Private Equity industry globally. The sector raised $338 billion over the three first quarters of 2017 marking an increase of 18 percent compared to the same period in In 2016, capital distribution reached an all-time record high of $488 billion, with nearly $1.5 trillion returned to investors since Those distributions, combined with the poor performance and volatility linked to traditional asset classes, have driven a number of new investors to enter the Private Equity world. BEPS, AIFMD and Brexit have forced fund managers to seek longterm, stable solutions. In a fast changing environment, the industry is however facing challenges of an economic and regulatory nature. The incredible concentration of capital (the 10 largest funds closed in Q raised 63 percent of aggregate capital) and the increasing difficulties to deploy capital might temper the investor appetite which, to date, keeps increasing. BEPS, AIFMD and Brexit have forced fund managers to seek long-term, stable solutions. While Luxembourg has been active in the Private Equity field for more than two decades, until recently very few large investment vehicles were established there. In this new paradigm, the appetite for the Luxembourg fund structuring toolbox has increased beyond expectations over the past months. The diverse range of vehicles, from unregulated to regulated products, together with the asset class expertise developed over the years within the professional community and the CSSF are key factors of this collective success. The first edition of the Luxembourg PE & VC ALFI Survey aims at giving a snapshot of the Luxembourg fund industry as at 30 June This survey is unprecedented in that it covers regulated and unregulated Private Equity funds. As the growing trend on the market sees the creation of unregulated PE funds, it was paramount for this survey not to restrict its scope to Luxembourg regulated products. We believe the readers of this survey will gain valuable insights into an industry that cultivates discretion to a point that it is part of its very name and where data and information are rarely disclosed or made public. Nick Tabone Partner - Private Equity Leader Sources: Preqin, PEI, Deloitte research and analysis 05

6 Fund Structures AIFMD regulatory regime Four years after the AIFM Directive came into force, a vast majority of Luxembourg PE funds fall within AIFMD full regime. Even if a PE fund is regulated under AIFMD, it does not mean that the PE fund itself is regulated. Post AIFMD implementation, Luxembourg created the possibility to structure alternative investment funds as unregulated vehicles, with mainly the unregulated Luxembourg limited partnership and the RAIF. AIFMD Compliance Luxembourg product regulatory regimes The full toolkit of Luxembourg fund structuring solutions is being used by fund managers, however, a clear majority of vehicles are structured as SIFs. At the same time, the success of the RAIF product regime, created less than 18 months ago, is undeniable. Unregulated funds are on the rise, mainly driven by the creation of over 1,600 Luxembourg limited partnerships as at June The interviews we conducted with large PE fund managers revealed that the vehicles of choice for future fund structuring will either be unregulated Luxembourg limited partnerships or RAIFs. In both cases, time-to-market and investor negotiation flexibility are the main drivers for such preferences 40% Number of AIFs by Luxembourg regulatory regime 5% 4% 5% 60% 24% Full AIFMD regime Light AIFMD regime 62% Part II RAIF Unregulated SICAR SIF Sources: Registre du Commerce et des Sociétés, Deloitte research and analysis. *Does not cover unregulated funds falling within the so-called AIFMD light regime. 06

7 Direct and indirect investments Luxembourg is mainly used as a jurisdiction for direct PE investments with a dominant presence of buy-out funds. Fund of PE funds are, however, over-represented when compared with the global population of PE funds. This might be read in correlation with the higher than average percentage of private banks, family offices and HNWI investing in Luxembourg Private Equity funds, and the strong foothold of this sector in the Luxembourg landscape. From a sub-asset class perspective, VC funds represent 9.7% of the Luxembourg PE fund population. Investment periods The whole range of vehicle types, from unregulated to Luxembourg regulated products, are being used by fund managers. Close to half of the closed-ended PE funds have an investment period of up to two years. For 25 percent of them, the investment period exceeds five years. This large number is partially explained by the over-representation of indirect PE funds. More than 5 years 19.6% 25% Up to 4 years 25% Up to 3 years 80.4% 6.3% Up to 2 years 43% Direct PE Funds Indirect PE Funds billion AuM 629 regulated funds as at September 2017* 07

8 Fund size Luxembourg counts slightly over 80 percent of PE funds managing 100 million or less of assets and very few large PE funds. The average PE fund size in Luxembourg is million. As a number of large PE fund managers have made their decision to establish or reinforce their fund management platforms in Luxembourg, we expect that future surveys would show a significant public increase in the set-up of large PE funds. Above 1 Bn 1.5% Between 500Mn and 1Bn 2.2% Between 100Mn and 500Mn 16% Below 100Mn EuVECA Fund While the European Commission is finalizing the revamp of the EuVECA regime, such label has not met an extraordinary success in Luxembourg with only nine fund managers registered under this label as at 15 September % 100 million average Luxembourg PE fund size Sources: Commission de Surveillance du Secteur Financier, Deloitte research and analysis. 08

9 The whole range of vehicle types, from unregulated to Luxembourg regulated products, is being used by fund managers. 09

10 Managers Origin of fund managers/originators Over 90 percent of initiators of Luxembourg PE funds are based in Europe. While North American players represent a tiny part of the initiators, is likely that more North American players will establish Luxembourg funds in the near future, driven by the AIFMD marketing passport and BEPS. Fund manager origin Management fees Management fees charged by Luxembourg PE funds are representative of the typology of the funds in the market with 40 percent charging between 1.76 and 2 percent. Industry standards for buyout funds indicate around 2 percent for buyout funds below $1 billion and a median at respectively 1.75 percent and 1.5 percent for buyout funds between $1 and 2 billion and above $2 billion. The large number of funds charging less than 1.5 percent is supported by the large number of indirect PE funds in Luxembourg. 1% 7% Fund manager remuneration >2% AND above 2% 7.4% >1,75% AND 2% 40.3% >1,5% AND 1,75% 9% 92% Below 1,75% 43.3% EEA + Switzerland Rest of the world North America 10

11 Hurdle rates and carried interest Hurdle rate and carried interest levels are overall in line with global market practice with a large majority of funds for which the hurdle rate is set around 8 percent and the carried interest at 20 percent. Carried interest >20% 2% 20% 2,16% 80% <20% 18% Hundle rate 13% - 20% 9.5% 9% - 12% 7.1% 5% - 8% 73.8% 0% - 4% 9.6% It is likely that more North American players will establish Luxembourg funds in the near future, driven by the AIFMD marketing passport and BEPS. 11

12 Investors Investor type As expected in a PE environment, most asset managers raise funds from institutional investors. It is interesting to note, however, that a small portion of the fund managers indicate that they do not have institutional investors among their investor base. Our analysis suggests that these are mainly funds of PE funds set up for private clients and HNWI. Number of investors per fund When it comes to Private Equity, the investor base by fund is generally limited. The collected data confirm this trend, suggesting that over 75 percent of funds have 25 or less investors. Institutional 81.3% % Private Bank 15.3% % Family Office 10.7% % HNW Individuals 55% % Retail 3.3% Investor liquidity Surprisingly, despite the illiquidity of the asset class, close to 20 percent of Luxembourg Private Equity funds are open-ended (with restrictions). This is also reflected by the substantial proportion of funds calculating NAV more regularly than on a quarterly basis. Our analysis points in the direction of indirect Private Equity funds, where portfolio when appropriately composed and diversified can generate liquidity when reaching maturity. 19.8% More frequently 24.1% 80.2% Quarterly 52.2% Semi-Annually 15.9% Closed-ended fund Open-ended fund Annually 7.8% Sources: Deloitte research and analysis 12

13 Reporting Currency Only half of Luxembourg Private Equity funds are denominated in Euro, 42 percent of the funds are denominated in US dollar, while the remaining funds (7 percent) are mainly denominated in British Pound. 51% Fund GAAPs Luxembourg Generally Accepted Accounting Principles are the most commonly retained accounting standards. While IFRS are less used, 12 percent of the funds are preparing their financial statements in other GAAP, mostly US GAAP. This data does not reflect specific investor reporting which may be performed in line with fund GAAP. 42% 6% 12% 7% EUR USD Others 82% Lux GAAP Others IFRS Consolidation Fully leveraging the consolidation exemption for Private Equity investment vehicles, most funds are not consolidated. 1.6% 95.4% Not consolidated Consolidated 13

14 Glossary AIFMD Alternative Investment Fund Managers Directive, Directive 2011/61/EU of the EP and of the Council of 8 June 2011 CSSF Commission de Surveillance du Secteur Financier (Luxembourg supervisory authority for the financial sector) Direct fund Fund directly investing in target assets EuVECA European Venture Capital Fund Regulation, Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds GAAP Generally Accepted Accounting Principles HNWI High Net Worth Individual IFRS International Financial Reporting Standards ILPA Institutional Limited Partners Association Indirect fund Fund investing in other Private Equity funds Invest Europe Association representing Europe s private equity, venture capital and infrastructure sectors, as well as their investors. LP Limited Partnership NAV Net Asset Value PE Private Equity RAIF Reserved Alternative Investment Fund 14

15 SCPs Société en commandite spéciale (special limited partnership) SICAR Société d Investissement en Capital à Risque (investment company in risk capital) SIF Fond d investissement spécialisé (specialized investment fund) SPV Special Purpose Vehicle VC Venture Capital Survey Methodology This survey was conducted by the ALFI and Deloitte based on consultations with fund managers and 44 Luxembourg depositaries and fund administrators, reconciled where possible, with official lists and data. The statistics are based on a selected market sample of 433 Luxembourg domiciled Private Equity funds representing an aggregate of 32.4 billion, i.e. approximately 44 percent of Private Equity assets managed through Luxembourg regulated vehicles. Unless specified otherwise statistics are calculated based on the number of funds in the survey sample. 15

16 Contacts Nick Tabone Partner - Private Equity Leader ntabone@deloitte.lu Dany Teillant Partner - Tax dteillant@deloitte.lu topfeiffer@deloitte.lu Pierre Masset Partner - Advisory & Consulting pmasset@deloitte.lu Deloitte is a multidisciplinary service organization which is subject to certain regulatory and professional restrictions on the types of services we can provide to our clients, particularly where an audit relationship exists, as independence issues and other conflicts of interest may arise. Any services we commit to deliver to you will comply fully with applicable restrictions. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network ) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see to learn more about our global network of member firms. Deloitte provides audit, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500 companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights, and high-quality service to address clients most complex business challenges. To learn more about how Deloitte s approximately 245,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter Deloitte Tax & Consulting Designed and produced by MarCom at Deloitte Luxembourg.