THE CORNERSTONES OF INVESTMENT STRUCTURING IN LUXEMBOURG
The structuring of investments across borders is a complex task, requiring a sound and adaptable legislative framework. In Luxembourg, some of the cornerstones of investment structuring are the fiduciary, securitisation and corporate laws according to a panel of specialists during an event held by Luxembourg for Finance on investment structuring.
The idea that the many individuals choose a job primarily based on the salary provided is increasingly being challenged. The same is true for concepts long considered the norm in the financial world; selecting a jurisdiction in which to structure an investment does not solely revolve around the tax regime in place. For most players engaged in this sector, variables such as the political, economic and legal security, a large talent pool, modern infrastructure as well as authorities’ flexibility are just as, if not more, important than certain tax factors. Financial centres with sound legal toolboxes, growing infrastructure, high quality workforce, stable political system and strong economy such as Luxembourg, are therefore the preferred location for many international financial as industrial players.
During a recent roundtable organised by Luxembourg for Finance relating to investment structuring, a panel of specialists discussed the appeal of Luxembourg’s legal framework in relation to investment structuring. Vadim Totskyy, Head of the Cross Product Structuring Department at Deutsche Bank London, elaborated on a number of reasons as to why the bank is adding new structuring operations in Luxembourg. “In terms of the repackaging business, which is fairly large at Deutsche Bank, Luxembourg has become our first choice for new investment products in the last three to five years,” he observed. Totskyy gives two clear reasons for this: the requirement for a european “onshore” jurisdiction, especially for European investors, as well as a robust and diversified legal framework which is critical for these activities.
In terms of the repackaging business, which is fairly large at Deutsche Bank, Luxembourg has become our first choice for new investment products in the last three to five years.
Totskyy noted that two major legal frameworks support this shift: Luxembourg’s fiduciary and securitisation law.
Luxembourg’s fiduciary law “allows for the establishment of a solid legal protection mechanism as well as the use of infrastructure and the local expertise for the benefit of investors.” Totskyy notes that this is particularly beneficial for certain transactions for which traditional Special Purpose Vehicles (SPVs) may not meet the particular needs of a client. “In these cases within framework of the Luxembourg legislation we are able to offer fiduciary notes instead, which allow for a true customization according to the investors’ financial needs and operational requirements.”
Securitisation vehicles are now a significant part of the toolbox and are globally recognized for the security offered, as well as the non-recourse and non-petition clauses provided for within the law, whereas in most other jurisdictions they are included contractually.
The major advantage then, according to Totskyy, is the ability to offer clients a wide range of vehicles depending on their needs. “Some want tailor-made products, for example, in the loan repackaging business which is becoming increasingly popular.” However, while he observes that the fiduciary law has allowed a larger degree of customization, the classic repackaging business using a conventional SPV remains nevertheless a growing activity in the Grand Duchy.
As for the securitisation law, Totskyy notes that it is “robust and successful, especially given it allows for the compartmentalisation of vehicles, which provides additional protection.” This additional layer of protection, he explains, “often leads our clients to make Luxembourg their first choice for securitisation transactions.” Given this, he estimates that over the past 18 months, the number of debt security issuances from Luxembourg is at least equivalent to that of the other eight jurisdictions, with which he also works.
Securitisation activities in Luxembourg have seen strong growth since the publication of the first law in 2004. As Matthieu Taillandier, Partner at Arendt, points out, Luxembourg now has over 1,400 securitization vehicles and approximately 5,000 compartments, with assets estimated at between €350 to €400 billion. Taillandier, notes that “securitisation vehicles are now a significant part of the toolbox and are globally recognized for the security offered, as well as the non-recourse and non-petition clauses provided for within the law, whereas in most other jurisdictions they are included contractually.”
The law is also in the process of being updated to include the possibility for securitisation vehicles to be able to finance themselves by borrowing. “Another important change concerns the possibility that will now be offered to certain structures to carry out active management, which was requested by the market,” continues Taillandier.
Luxembourg has always been at the forefront of framework adaptation.
The third benefit highlighted by the panel was Luxembourg’s corporate law, which aims to provide investors with a legal framework that meets their needs. “Luxembourg has always been at the forefront of framework adaptation – this was notably the case regarding the rapid transposition of both the UCITS and AIFM Directives, as well as the introduction of limited partnership regimes such as the SCS and SCSp to meet the requirements of private equity and venture capital managers,” explains Katia Gauzès, Partner at Clifford Chance.
For Gauzès, a great advantage is the flexibility offered by the corporate law. “Not everything is strictly formalised, meaning there is room for interpretation. The law also easily adapts to the legal framework of other states, so a foreign company transferring its headquarters to Luxembourg does not see all the rules that previously applied change: you can generally preserve around 95% of the legal framework a limited partnership agreement, while adapting the structure to your own needs,” she confirms.
The Luxembourg legislation is also well-suited to creating joint ventures or partnerships between partners from different jurisdictions who seek neutral ground having a stable and flexible corporate law setting. According to Marcus Peter, Partner at GSK Stockman, this is particularly useful for investment fund structures but also for corporate ventures, “if the companies or groups wishing to combine know-how and financial means originate from different jurisdictions, integrating them into a Luxembourg company platform has strong advantages.” He has seen such joint ventures in Luxembourg made between Chinese, Scandinavian and US Investors in particular. He furthermore mentions management participation programs, which increasingly have been set-up for the last years via Luxembourg SCS and SCSps combining the investment made by managers of a group coming from various countries.
Gauzès goes on to highlight that “the neutrality and stability of the country can play in its favour in the case of cross-border transactions, particularly if you have, for example, both German and French investors around the table. To avoid having to choose a governing law between two distinct legislations, Luxembourg can be the neutral and thus natural choice.”
All participants pointed to the fact that one of Luxembourg’s great strengths is the pro-active relationship between the legislators and the market participants allowing both sides to provide added-value to the benefit of enhancing market conditions for foreign direct investment into Luxembourg. This is perhaps the most critically important aspect when considering a jurisdiction for players: the ability of that jurisdiction to listen to the needs of the market and offer new solutions that correspond to the demands of international financial institutions.