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Private Equity Workshop
Hong Kong, 11th November 2010
Luxembourg’s role as a European Private Equity
investment center
Moderator: Alain Kinsch, Ernst & Young
Miriam Keusen, KPMG Hong Kong
Yves Knel, Deloitte S.A
Thibaut Partsch, Loyens & Loeff
Contents
I. The Private Equity context
II. Proven PE structures
III. Private Equity operations
IV. Hong Kong - Luxembourg: Withholding tax situation
V. AIFM Directive and Private Equity
VI. Latest trends
I. The Private Equity context
• Quick and efficient approval/setup process
• Direct and personal contact with Supervisory Authority and Tax Administration
• Binding agreements with Tax Administration
• Numerous tax-efficient structuring solutions
• Over 70 Double Taxation Treaties, continuous pipeline of new treaties
• Laws and regulations provide maximum structuring flexibility
• Investor protection
• Stable political, economic and social environment
• Highly qualified and multi-lingual workforce
• Strong established reputation as a European on-shore financial centre
• Presence of global players and services providers
• Strong reputation of Supervisory Authority facilitates cross-border placement
• Accessible: close relationship with market players
• Pragmatic interpretation of laws and regulations
Pro-Business attitude of authorities
One of the world’s most attractive tax regimes
Flexibility, Security and Predictability
Unrivaled
Financial
Infrastructure
Pragmatic &
accessible
supervisory
authority
I. The Private Equity context (cont’d)
Standard Supervision Light Supervision
SICAR - 230
SIF – 1,128
SOPARFI > 25,000
Securitisation Undertakings
25
Regulated: the PE Fund family
Unregulated: the PE Acquisition family
UCI Part II - 637
Source: CSSF September 2010
I. The Private Equity context (cont’d)
• Fund raising / Commitments
• Capital calls • Distribution
• Light Supervision
• Custody • Centr Admin • Audit
• Selection • Monitoring • Development • Mgt + Perf. Fee
• Investments
• Divestment
• Insurance Co’s
• Pension Funds
Banks
• Business Angels
• HNWIs
• Corporate investor
• Fund of funds
• Family offices
• Sovereign wealth
funds
INVESTORS REGULATORY
Auditor
Depositary
Bank
CSSF
FUND MANAGEMENT
Private Equity House (General Partner / Investment Manager)
External Advisor Investment Committee
Private Equity Fund
PORTFOLIO
DI DI DI
DI PE Fund DI DI
Administrator
I. The Private Equity context (cont’d)
‘Cluster’ of PE Skills & Services
Use of Luxembourg for international PE acquisitions
Specialised Private Equity back-office services (accounting, reporting, …)
Specialised Private Equity tax consultants, lawyers and auditors
Specialised SICAR department within Luxembourg Supervisory Authority (CSSF)
Existing local Private Equity GPs (f.ex. Mangrove, BIP, Luxempart), deals (f.ex. IEE,
Skype, SBS Broadcasting)
Existence of Working Groups and Associations dedicated to Private Equity activities in
Luxembourg (LPEA, ALFI etc.)
Private Equity solutions for Private Banking
II. Proven PE acquisition structures
Luxembourg holding - SOPARFI - is a worldwide recognised vehicle for
PE acquisition structuring
Access to Double Taxation Treaties
Low administration costs
Legal and tax structuring certainty
Efficient profit repatriation models
Development of innovative hybrid instruments (e.g. PECs, CPECs)
Key competitive advantages
3i
Apax Partners
Bain Capital
Bridgepoint
BC Partners
Blackstone
Cinven
CVC
Who relies on Lux. PE Acquisition
structures? Examples…
Investcorp
Fortress
KKR
Lone Star
Oaktree Capital
Permira
The Carlyle Group
Warburg Pincus
II. Proven PE acquisition structures (cont’d)
Luxco 2
/ BidCo
Targets
SOPARFI
Hybrids
Management Shareholder
loans
Bank Bank
Loans
Short time to market:
• Fast incorporation of SOPARFI
• Swift confirmation on tax treatment
Limited tax leakage:
• Tax efficient profit repatriation
• No exit taxation
Capital structure:
• Minimum Capital duty leakage thanks the use of hybrids
and a high debt equity ratio (from 85:15 to 99:1,
if properly structured)
• Low gross margin on financing activities (to be
confirmed by the tax authorities in view of the amounts
and risks taken)
No CFC legislation
Fund
II. Proven PE acquisition structures for China inbound
> 25%: PRC may tax
(10% WHT)
≤ 25%: Reduction of
capital gain tax from
10% to 0%
Reduction of capital
gain tax from 10%
to 0%
?? Beneficial
ownership rules in
PRC respected??
Reduction of
capital gain tax
from 10% to 0%
Capital gain :
Ireland
Lux / NL /
Malta/
Cyprus
PRC
Holding
jurisdiction
Include:
• Hong Kong
• Luxembourg
• Mauritius
• Singapore
PRC PRC
Div WHT:
10%
Div WHT:
5% / 10%
Div WHT:
5% / 10%
Luxembourg
Hybrid
payment
Private
Equity Fund
Switzerland
TPEC
Hybrid
Hybrid
payment
PRC
II. Proven PE acquisition structures for China outbound
Exemption of dividend /
exit proceeds in SPV
95% 100% /
exempt if
capital
100% /
exempt if
capital
100%
100% 100%
Foreign tax costs on
dividend repatriation 0% 0% 0% 0%
0%
10% 0%
No. of jurisdictions
outside the PRC 3 2 2 3 3
3 or
4
DTAs in force 88 5 62 61 90 90
Unfavorable
X
Favorable
PRC
Belgium
Target
Hong
Kong
PRC
Target
Hong
Kong
PRC
Luxem
bourg
Target
Hong
Kong
PRC
Target
Hong
Kong
Nether
lands
PRC
Target
NL BV
Hong
Kong
PRC
Target
SING
NL Coop
X
X
X
Potentially
unfavorable
X
X
X Luxembourg ranks # 4 for Chinese outbound investments
II. Hong Kong taxation of funds: Comparison
Man Co
Payor
Investor Co
Man Co
Payor
Investor Co
Non-EU Fund Lux
Investment
Advisor HK
Investment
Advisor HK
Offshore
Funds
exemption
?????
Offshore
Funds
exemption
?????
“Specified
transactions”
exempt
Additional
protection through
DTA HK-Lux:
Taxation only if PE
Board
meetings
outside HK at
different
locations
Board
meetings at
Man Co’s
domicile
II. Proven PE fund structures
SICAR and SIF: the right products, at the right time in the right place
Ability for small and mid-sized promoters to access regulated PE regimes
Brand image as a European regulated on-shore fund regime
Enabler in fund raising
Europe’s most customised fund regimes for Private Equity – choice of legal forms
Tax neutrality
Examples of specific advantages:
Exemption from consolidation
Light reporting rules
No investment restrictionsw within the PE/VC spehere
Pragmatic diversification requirements for SIF only
Key competitive advantages
American Capital
Apollo
KKR
Lazard
Lehman Brothers
LGT Capital
230 SICARs approved
majority between €100mio and € 500mio
Larger: > €1bn
Smaller: < €50mio for banks’ Private
Banking captive clientele
1,128 SIFs approved since 2007
Partners Group
The Carlyle Group
Unicapital
Global Solar
KfW
Large number of attractive
mid market players
Volumes Who relies on Luxembourg PE Fund
structures? Examples…
II. Proven PE fund structures (cont’d)
Investment focus
Venture Capital
Buy-out
Secondaries
Mezzanine
Renewable energy
RE-Opportunistic
PE Fund of funds
Microfinance
Infrastructure
Distressed Debt
SICAR-structure
SICAR Direct Funds
SICAR Focused
Development
SICAR
PE-Funds
Funds Funds
Master-Feeder
SICAR
PE Funds PE Funds PE Funds
PE Fund of funds
Structure
SICAR/SIF
Single Fund Structure
Special Assets
SICAR/SIF
Su
bfu
nd 1
Su
bfu
nd 2
…
Umbrella Structure
Su
bfu
nd 3
Su
bfu
nd 4
III. Private Equity operations
A large number of PE houses have their processing center for PE funds in Luxembourg
Luxembourg is the unrivaled back-office of Europe’s fund industry
Numerous PE Houses have established offices with middle- and back-office operations in
Luxembourg
Third party service providers specialised on PE offer a large variety of services:
Fund accounting and custody services
Fund operations (investor and portfolio transactions)
Cash handling
Capital call facilities / Bridge financing
Key competitive advantages
3i
Apax
BC Partners
Cinven
Colony
CVC
Eurazeo
Who has a PE middle- or back-office
presence in Luxembourg? Examples…
Lone Star
PAI
The Carlyle Group
Warburg Pincus
…
III. Private Equity operations (cont’d)
- SICAR: Exemption of consolidation under LuxGAAP provided by the SICAR law
- SIF: Exemption of consolidation under LuxGAAP provided by the SIF law
- Soparfi: Exemption of consolidation under LuxGAAP provided by sector
regulations: 6 conditions
Consolidation exemption
IV. Hong Kong - Luxembourg: the withholding tax situation
From…
Hong Kong to
Luxembourg
Luxembourg to
Hong Kong
Dividend 0% (1) 0% (1) (2)
Interest 0% (1) 0% (1)
Royalties 3% (1) 0% (1)
Capital Gains 0% (3) 0% (3)
(1) Based on domestic law
(2) Based on Comprehensive Agreement for the Avoidance of Double Taxation
(3) Exceptions might apply
V. AIFM Directive and Private Equity
Background
• As a response to the turmoil in the financial markets, acknowledgment that managers of AIFs “can
exercise an important influence on the markets” and “may also serve to spread or amplify risks through
financial systems”.
• The draft Directive prescribes the rules for the authorization, on-going operation and transparency of
the managers of AIF.
• Scope of the Directive
• Distribution of EU products
• Capital requirements
• Custodian
• Valuation
• Risk and liquidity management
• Remuneration
• Conflicts of interest
• Reporting and disclosure
• Distribution of Non-EU products
Key provisions
V. AIFM Directive and Private Equity (cont’d)
Timeline:
• Informal agreement at EU Economic and Financial Affairs Council (ECOFIN) on 19th October
• Vote in European Parliament (currently scheduled for November 11th)
• Formal vote by Council
• Publication in Official Journal of the European Union
• + 20 days entry into force
19th October • Transposition into national law. Existing AIFMs “to take all necessary
measures to comply with the national legislation stemming from [the]
Directive”.
+2 years
• AIFMs existing before transposition to submit application for
authorization (specific exemptions). Note: no such grandfathering
for marketing activities.
+1 year
• Passport regime for non-EU AIFM and non-EU AIF may enter into
force (first “delegated act”) +2 years
• National private placement regimes may be
abolished for non-EU AIFMs and non-EU AIFs
(second “delegated act”)
+3 years
Entry into force
V. AIFM Directive and Private Equity (cont’d)
Challenges
Scope: very broad
- exemptions very limited
- de minimis provisions uncertain
- grand fathering provisions not
clear
Risk management
Enhanced transparency and
reporting requirements for PE
Service providers and delegation
Investors access pending
third countries provisions
Luxembourg managers regulation Existence of regulated management
companies
Implementation of the AIFMD
A precedent: the UCITS success story
The regulator A pragmatic approach
Product regulation A solid track record of PE lightly regulated
products with independent and regulated
depositary and fund administration
Opportunities
V. AIFM Directive and Private Equity (cont’d)
Luxembourg today:
Unregulated (managing) general partners of SIF or SICAR
Management companies for UCITS and UCI (Ch. 13 -14)
Private Asset Manager
Manager of non-coordinated UCIs
Impact:
Luxembourg management entities are regulated – except general partners
Capital requirements already fulfilled
Delegation of services subject to prudential supervision/monitoring
Luxembourg‘s answer to: Manager
Luxembourg today:
Specialising of Supervisory Authority in the PE sector
Impact:
Selection of preferred European Supervisory Authority
Luxembourg‘s answer to: passport
V. AIFM Directive and Private Equity (cont’d)
Luxembourg today:
Independent custodians for SICARs and SIFs
Long lasting experience with third country investment funds
Impact:
Challenges due to potential tightening of depositary functions, as well as liability
provisions
Luxembourg‘s answer to: EU custodian
Luxembourg today:
Long lasting experience with administration of PE funds
Impact:
Services providers prepared for implementation of new valuation requirements
Service providers already up to new standards
Luxembourg‘s answer to: Administration, Reporting, Valuation
VI. Latest developments / trends
Abolishment of 0.5% capital duty; only non-recurring flat registration fee
No withholding tax on dividend distributions to treaty countries
Future development regarding subscription tax for microfinance vehicles (State Budget 2010)
Review of existing DTTs (Art. 26 OECD)
Negotiation of new DTTs
Consolidation
Limited partnership modernisation
Tax - Legal
Listing
Migrations/redomiciliations to Luxembourg
Trends
Opportunistic strategies
Green PE funds
Infrastructure PE funds
Distressed / turnaround PE funds
Strategies
Hong Kong, 11th November 2010
Questions?
Thank you for attending
