Unless you've been on Mars for the last 12 months, you will be only too aware of the chaos that has been uncorked following the UK's decision, in June 2016, to leave the European Union.
A seminal moment in European and UK history, ‘Brexit’ has thrown into uncertainty the access UK fund managers will have to EU markets under AIFMD; will there be an equivalence arrangement in place? Will the UK, as a third country, cause an exodus of financial jobs to move to continental Europe? If Goldman Sachs Chairman and CEO, Lloyd Blankfein's tweets are anything to go by, London's financial markets could lose out to the likes of Frankfurt.
What then, could this mean for Luxembourg? Already a highly respected funds jurisdiction for UCITS funds, the Grand Duchy could be set to benefit from UK AIFMs needing to maintain a presence in the EU to continue availing of passporting rights for their fund products.
If a UK manager decides to appoint a third party ManCo in Luxembourg, they will still need to demonstrate that effective portfolio management is done out of the jurisdiction. "The only way to do this is by first having the right knowledge in the company and having enough people to demonstrate the AIFM has the capability to handle and manage the assets," says Timothe Fuchs, CEO of Fuchs Asset Management. "With around 100 portfolio managers, no one can tell us we have no experience."
The other option is to set up a standalone AIFM in Luxembourg and for the UK manager to delegate the portfolio management. A US company with a regulated ManCo can delegate portfolio management back to the US; the same is true for FINMA-regulated Swiss managers.
"I therefore don't see why there couldn't be exactly the same situation with the UK. If they agree with other countries I don't think ESMA can deny the UK. If they have real substance, and populate the Luxembourg AIFM with sufficient people to conduct portfolio management and things are done properly, provided they satisfy the substance requirement I don't think there will be an issue for a UK entity," says Fuchs.
"Brexit is a huge opportunity for Luxembourg because new companies will be established, or for those who already have their own companies here, they will likely need to increase their substance and employ more people. This will benefit the Luxembourg economy."
Even before Brexit, there were already signs that fund promoters were beginning to look beyond traditional Anglo Saxon jurisdictions towards regulated jurisdictions; something that has accelerated since AIFMD has become embedded across the EU.
That is not to suggest that everyone is doing this, the situation is more nuanced. But there are a number of drivers that determine where to domicile funds and typically they will include what investors want, tax treatment, and regulatory treatment, which these days feeds in to a fund manager's ability to market.
"In that sense we see a slightly bifurcated market," says Andrew Brizell, Head of Legal and Group Head of Depositary Services, Aztec Financial Services (Jersey). "First there are those who are repeat raisers, who guarantee top quartile returns. From a structuring perspective, these managers call the shots and are, within reason, free to determine which jurisdiction they base their fund in.
"Then there are those managers who have less flexibility and for which investor requirements can be more imperative. To the extent that these managers are looking to raise from an EU institutional investor base, an EU based fund structure is often the natural conclusion as it can deliver distribution advantages and reduced investor risk capital weightings, increasing the attractiveness of the investment proposition."
Brizell believes that Luxembourg is seen as a relatively palatable jurisdiction, given that Brexit has now happened.
"It is a politically stable country with a flexible legal framework. Luxembourg has an exceptionally wide treaty network, which combined with legal flexibility, makes capital repatriation both within and outside of the EU readily achievable. As a Group, we see a lot of cross border work with Luxembourg involving both EU and non-EU countries," he adds.
James Bermingham is a counsel with Ogier (Luxembourg). He concurs that the Grand Duchy is generally regarded as a safe choice. Without wishing to predict what the landscape will look like post-Brexit, he believes that even if the UK ends up with a hard Brexit at the eleventh hour, for example, there are some fantastic solutions out there.
"When you have a single market for European financial services, if you want a Luxembourg fund and you don't, for whatever reason, want to appoint a Luxembourg AIFM, you can simply appoint one in Ireland. It's cheap, quick and a huge range of options exists that I've never really seen before. It is impossible to summarise them all.
"As a person who built a business from nothing here in Luxembourg, what I would say to people is that money matters. In truth you should spend as little as possible as slowly as possible if you care about being successful. If there is a hard Brexit, UK managers could plug and play using a hosted platform and stay where they are. There's no need to over-react. Focus on the day job because there are some really quite straightforward solutions out there for Brexit," comments Bermingham.
Luxembourg is, therefore, a viable solution to Brexit. It can be used in a cost-efficient way without having to make a huge investment and move lots of people to the jurisdiction. If managers want a more permanent base, and establish their own Luxembourg AIFM – a practice highlighted above by larger fund management groups – they can do so over time, once they have sufficient resources and AUM. For now, smaller and mid-sized UK managers should take confidence that they will still be able to rely upon the delegated model using a third party AIFM.
"There is an overall feeling of positivity here with respect to Brexit," says Kavitha Ramachandran, Director of MS Management Services, a Luxembourg-based subsidiary of the Maitland group, a leading global fund administrator. "We are already feeling the effects of it; a number of insurance companies and PERE managers and also fund distribution groups are moving in to the jurisdiction."
Early signs are that it could prove to be a positive catalyst. Major institutions such as insurance group, AIG, M&G and Lloyds have all taken the decision to move to Luxembourg. Major banking names like Northern Trust have made moves to set up a European banking base in Luxembourg while last month Citigroup confirmed that it was picking Luxembourg as its European private banking hub.
Overall this is positive news for Luxembourg's financial services industry. Still, there is a realisation that it cannot compete with the big financial centres such as Frankfurt and Paris, from an asset management perspective.
"Luxembourg is doing the right thing in focusing on the strengths of its financial services eco system in attracting those businesses planning their post-Brexit strategy. The idea is that we would look to try and share the spoils with other European financial centres," suggests Ramachandran.
It is important to state at this point that there is no overt attempt by Luxembourg to capitalise on Brexit and take business. Luxembourg and London maintain an extremely close relationship.
"If you look at other European cities they are clambering to lure business from the UK but in Luxembourg it is quite the opposite. It is building bridges with London, not raising drawbridges, because it wants to maintain its relationship with one of the most important financial centres in Europe, if not the world," says Lee Godfrey, CEO of KNEIP, one of the industry's leading legal and regulatory report specialists.
There are great things about Luxembourg; its connectivity to the rest of the world is fantastic. The reason Skype, and many others, are located here is because access to other jurisdictions is unrivalled. All the big technology companies are setting up there; Paypal, Amazon, etc.
Luxembourg is investing heavily in infrastructure around IT, security, data lakes and so on. Indeed, in terms of Tier 4 category data centres, there are more in Luxembourg than anywhere else in the world.
"From a business perspective, it is very easy to get in touch with the government, with the regulator (CSSF), and if companies are subsidiaries of international conglomerates then the CEO of Luxembourg will know the CEO of the group. Also, Luxembourg's finance minister, Pierre Gramenga, has connectivity to global finance ministers. All told, accessibility to key decision makers in Luxembourg is second to none.
"That's why, in my view, regardless of Brexit, Luxembourg will continue to be a great place to do business," asserts Godfrey.
Will Luxembourg benefit from some short-term movement of company headquarters? Undoubtedly yes. But so will Dublin. "This is a country of 600,000 people, so it's unlikely we will see an influx of people coming in but we want to remain pivotal in the success of financial services as a whole. Insurance is really strong here, as is financial technology," adds Godfrey.
Improvements continue to take place across all facets of Luxembourg's financial services industry, such as the PE administration sector and more broadly, the fund product sector; as evidenced by the introduction of the RAIF last year.
As Ogier's Bermingham says: "You've got the right legal, regulatory and tax framework in place in Luxembourg and the right service providers. What this basically means is that the largest PE service providers have moved into the domicile to provide a higher level of client service. You have properly qualified ACCA-approved accountants, proper systems, proper financial reporting and so on. The PE administration industry is a long way from the NAV crunching of the UCI world, which is more industrial in its approach."
He says that the days of global fund managers thinking about single jurisdictions are long gone. Even without Brexit, Luxembourg would doubtless become increasingly attractive to PE groups wishing to establish feeder funds in parallel to accommodate different investors.
Bermingham confirms that he is currently working on one prominent private debt fund consisting of four investor pools: two in Delaware, one in the Cayman Islands and one in Luxembourg.
"Domicile questions are misunderstood. The notion is not that suddenly a global PE fund is coming exclusively to Luxembourg (at the expense of other jurisdictions); it might be that they are bringing part of their fund here to capture European LP capital but that's often it. There is international cooperation – not competition – among jurisdictions. That's the reality and it works in our favour at Ogier," says Bermingham.
Interestingly, over at Fuchs Asset Management, they are focusing primarily on private equity, real estate, private debt funds and global UCITS because as an asset class, hedge funds simply have not been developing that much in Luxembourg.
"Under the UCITS regime there is some flexibility now to establish specific strategies which mirror hedge funds. People prefer UCITS to market their hedge fund strategies. Most alternative funds we see being established are closed-end funds," confirms Fuchs.
When asked what needs to improve in Luxembourg, Fuchs refers to two points.
Firstly, he says, the jurisdiction needs to try to attract more quality and trained people here who specialise in specific fields, such as risk management for example.
"Secondly, there has always been good communication between service providers and trade associations as well as the CSSF and Government. That's why business has been developing here and that needs to continue to improve."
To conclude, Peter Jakubicka, Business Development Manager at Circle Partners says that the one obstacle currently in Luxembourg that needs to be overcome to make it the world's leading jurisdiction relates to opening bank accounts.
"Banks are still quite conservative and it still takes a very long time to open a simple custody account. That needs to change and processes need to be adjusted. Or maybe a maverick will come to the market with an electronic platform, similar to what Interactive Brokers has done to the brokerage market. That is something I foresee, not just for Luxembourg but other fund jurisdictions. Banks need to use technology to make their internal processes more flexible."
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