Asset managers don’t come to Luxembourg for the weather

Claire Guilbert

4 avril 2024

After reading some comments that speculated on the future of the fund industry in Luxembourg, I wanted to share my honest and personal views on this topic.

I do not have a crystal ball, so cannot say if the predominant role of Luxembourg as a fund domicile in Europe will last forever, but here are my top five thoughts on the topic, based on my experience of helping international asset managers in their cross-border fund and investment activities.

Usual lawyer’s disclaimer: please do not get me wrong, I am not saying that Luxembourg is the only good jurisdiction in which to establish a fund in Europe, but I do believe that the choice of a fund’s domicile is not black or white and that Luxembourg is and remains one of the most attractive choices because of a combination of different factors of high importance for an asset manager.

1. Figures talk for themselves

To set the scene, I would like to share a few key figures provided by regulators and market players:

Luxembourg is the number one jurisdiction in Europe and the number two jurisdiction worldwide when it comes to net assets of domiciled funds, with €5.16 trillion in assets under management as at 31 December 2023.¹
Luxembourg-domiciled funds are distributed in 80 countries, in particular in Europe (thanks to the UCITS, AIFMD and European labels’ marketing passports) but also in Asia, Latin America and the Middle East.²
76% of the top 58 asset management firms have chosen Luxembourg as their first domicile for funds,³ with 19 out of the top 20 global PE houses having operations in Luxembourg, and with more than 600 CSSF-supervised investment fund managers being established in Luxembourg (and about the same number of registered-only managers).

In my view the above statistics clearly demonstrate the attractiveness and popularity of the jurisdiction with international fund managers and the scale of the industry locally.

2. Luxembourg’s success is not a matter of chance

Luxembourg has long-standing fund expertise and experience.

In fact, Luxembourg is always one of the first EU Member States to implement EU legislation, starting with the implementation of the UCITS Directive in April 1988 which enabled the marketing of liquid funds throughout Europe under a single passport.

The implementation of the AIFM Directive in 2013 was another key step in Luxembourg’s positioning, creating a similar passport (though reserved to professional investors) for illiquid funds. Luxembourg was best placed to welcome such alternative investment funds, due both to the many years of experience gained on the UCITS side, and also to its key role as a holding jurisdiction for European PE/RE (and more generally alternative) investments.

As a result, Luxembourg has been a prominent jurisdiction for a long time.

This success is due, in my view, to the sense of collaboration that exists between all the market participants in Luxembourg: when a new regulation is in the pipeline, all join forces to make the most of it, to understand its full extent, to provide practical guidance on it to the industry, and to adapt their own rules, positions and practices accordingly.

A complete and solid infrastructure exists in Luxembourg around a fund vehicle, creating many different entry points and connections, bringing a certain level of comfort and at the same time making it difficult to (want to) get out of fund domicile.

3. Luxembourg is not alone under the regulatory wave

Yes, I agree, it has become “less easy” to establish a fund and the related downstream investment vehicles in Luxembourg due to the multiplication of regulations applying to such structures and the increased scrutiny of their activities and financial flows.

Now, this is not abnormal as such a regulatory framework is built around the evolution of an industry which is becoming increasingly important and becoming more accessible. Also, as for all industries, regulations will always evolve to meet economic, social and political changes, as well as market demand.

But this is not something that concerns only Luxembourg. New regulations are usually developed at EU or even global level, so all jurisdictions are impacted. Whilst it is true that there may be a perception of gold-plating of some regulations, Luxembourg is among the leaders in international fund jurisdictions in responding to regulatory developments and industry wide concerns such as upgrading AML measures.

I do not believe that the regulatory landscape will materially impact Luxembourg’s attractiveness, unless those regulations prevent business being done through Luxembourg (I have in mind, for example, the requirement for funds to hold cash with a credit institution or similarly regulated entity, so excluding electronic payment institutions, and opening a bank account with such a credit institution in Luxembourg can sometimes be quite difficult).

4. The art of fund structuring

The regulatory wave does create a certain level of sophistication among fund products and one can no longer talk about “regulated” funds versus “unregulated” funds, as in practice all funds are “regulated” (the distinction being now whether they are supervised by the regulator or not, which distinction becomes itself blurry sometimes).

On the one hand, this can be seen as burdensome as it increases the complexities around the structuring of a project, but on the other hand it can enable a fund to be tailored for a specific project so as to create a unique product.

But ultimately, there is not one solution that will fit all needs and choosing a jurisdiction for a product involves many different considerations. These include:

Target investors: In which jurisdictions will they be based? What type of investors will they be (professional only, well-informed, retail)? Will they be subject to specific regulations with certain investment restrictions or requirements? What tax status and regime is applicable to them? Will there be a minimum investment? Will they have the right to redeem their interest in the fund?
Target investments: In which jurisdictions will these be based? What type of investments will be involved (liquid, illiquid, asset class, direct versus secondary, strategy etc.)? What tax status and regime is applicable to them? Will the fund use leverage to finance the investments? Will the fund diversify its investments or hold a unique asset instead? What is the holding and exit strategy?
Asset manager: Which entity will manage the fund and the investments? Where is that entity located? Is that entity regulated? Does the manager have a track record already?

Depending on the answer to each of these questions, we will end up with a shortlist of fund domicile and structure options. Indeed, we will rarely tick all boxes and end up with one unique golden option – instead, we will select a fund jurisdiction and structure by balancing interests and prioritizing the considerations which are the most important for the project at hand. But rest assured, in Luxembourg we can invariably find solutions for any project (e.g. by using a different alternative investment vehicle).

5. Why Luxembourg can be an attractive fund jurisdiction

Luxembourg is almost always part of the structuring discussions around fund jurisdiction and offers the following advantages:

Luxembourg provides its famous fund toolbox: a Luxembourg fund is like a LEGO construction, split into different parts which can be joined together in different ways so as to create a multitude of possible products offering different features. This also applies to other investment vehicles, such as the vehicles surrounding a fund (carried interest vehicle, co-investment vehicle, separately managed account, feeder or parallel vehicle), the securitisation vehicle or the simple special purpose vehicle.
Luxembourg has longstanding experience and expertise in fund servicing, able to adapt to sophisticated products and high volumes of operations and able to adjust its offering over time, noting for example the digitalisation of certain services.
Luxembourg is at the heart of Europe, ideal for marketing funds under the European passport and ideal for any type of cross-border operations.
Luxembourg offers a stable legislative, political and economic environment, with a pragmatic and collaborative approach by all market participants.
Luxembourg’s law on collateral arrangements brings the required protection to finance parties lending to a fund or investment vehicle.
Investors, lenders and counterparties worldwide are familiar with Luxembourg fund vehicles, making it easier for all parties to navigate their structure and terms.
The business language in Luxembourg is English, and the regulator also accepts communications and documents in English.

Claire Guilbert, partner at Norton Rose Fulbright, is an investment management and investment funds lawyer based in Luxembourg. Norton Rose Fulbright is a Knowledge Partner of Investment Officer Luxembourg.