Luxembourg’s core funds industry is serving the country and its lawyers well
Being at the centre of Europe, Luxembourg is often in the vanguard of any new EU regulation. The past year has been no exception, with the Grand Duchy’s government among the first to implement legislation affecting the funds and financial services industries.
The past year has also seen Luxembourg affected by the global crackdown on banking secrecy and tax evasion. In April, it agreed to automatically exchange information with the US about bank accounts held by US citizens and residents in the country. It also signed the EU Savings Directive, ensuring the same automatic exchange of information within the EU.
Luxembourg has also been affected by the eurozone crisis. Although its international financial services industry has held up well, what little industrial production it still has is suffering. Lawyers also report that M&A deals continue to be slow.
Nevertheless, the jurisdiction is one of the few in Europe that is still attracting new entrants into its legal market. This year SJ Berwin and Dutch firm Van Campen Liem opened, and Speechly Bircham is moving to bigger offices after it launched in Luxembourg two years ago. Other firms moving there in recent years include offshore firm Ogier and Benelux firm Stibbe.
Niche work if you can find it
“The reason we’re here is the reason other firms are here, which is to serve the funds and corporate structures market,” says Speechlys senior partner Michael Lingens. “Luxembourg’s an important jurisdiction for having intermediary corporate holding structures and companies. It’s a real place rather than a whole bunch of people sitting behind PO boxes. Luxembourg will continue to be an attractive jurisdiction both for tax and regulatory reasons.”
Van Campen Luxembourg partner Aldo Schuurman adds that the office is doing well, with turnover on target and already out of the red.
Funds and private equity have been the mainstay for Van Campen since its launch, with transactions including fund and company formation for investors looking to expand across Europe. The firm has six lawyers in Luxembourg, split evenly between the corporate and private equity, tax and funds teams.
Amsterdam-based partners Marcello Distaso and Marc van Campen also spend time in Luxembourg, and the firm has recently hired a new funds partner, Loyens & Loeff senior associate Manfred Dietrich.
“We expect by the end of the year to reach eight or 10 permanent people in Luxembourg,” says Distaso. “We’re not really aiming to have a lot of juniors, we’re more focused on experienced people. In the industry we want to serve it’s important to have people that can speak the language of the client.”
Both Schuurman and Distaso think there is space in the Luxembourg legal market for a smaller, more flexible firm.
“Many, especially in the private equity sector, feel they’re getting overcharged. They’re willing to pay high fees but they want a hands-on approach,” says Schuurman.
Other firms also believe that smaller is better. In early 2012 Bonn Schmitt Steichen split in two, and 18 months on, Bonn Steichen & Partners partner Pierre-Alexandre Degehet says things are progressing well at his half of the divided firm.
He says Bonn Steichen has built its client base working on the principle that clients want a closer relationship with their advisers and a partner-led service is their main aim. “Just rendering legal advice isn’t sufficient anymore,” he says. “We’re investing a lot of time in understanding the business.”
Speechlys, says Lingens, has found a similar niche in the Luxembourg market. “We have a slightly different take on the market. We’re an alternative to the magic circle or big local firms,” he says.
Speechlys focuses on high net-worth individuals (HNWIs). Most Luxembourg firms have seen the same trend of more HNWIs using Luxembourg to house their assets.
Speechlys Luxembourg managing partner Françoise Pfeiffer says banks are increasingly targeting HNWI clients, while Arendt & Medernach chairman Guy Harles says the firm has been building its private client team substantially.
“There’s been a change in the kind of clients that are banking in Luxembourg,” says Harles. “We have a number of smaller clients who are going back to their home jurisdictions, and on the other hand we have quite an influx of new clients – mainly HNWIs – taking advantage of vehicles that you might use in private banking.”
Lawyers see the changes in the banking industry as positive.
“There’s been some consolidation in the private banking sector and there’s likely to be even more,” reports Elvinger Hoss & Prussen partner Pit Reckinger.
Reckinger says the government gave plenty of warning about the changes. “Nothing came as a surprise but it still represents a challenge for part of the financial community,” he adds.
Molitor founding partner Michel Molitor agrees that challenges will come with the changes.
“There are dramatic structural changes because the government has finally taken the decision to take initiatives instead of simply playing the defensive position, slowing reforms and putting the brakes on everything,” he says. “That’s leading to profound changes in the structure of the financial centre and the structure of the country. We’re totally abandoning a certain type of client and you need to be aware of the consequences.”
Luxembourg has always been good at developing new niches or expanding existing ones to fill gaps created by the changing environment. New laws to be implemented later this month will introduce a vehicle that could provide an extra incentive for private equity investments through Luxembourg.
The special limited partnership, which modernises the existing limited partnership regime, is being introduced as part of Luxembourg’s implementation of the EU Alternative Investment Fund Managers Directive (AIFMD) on 22 July.
“The idea is to take in this trend for having fully onshore structures and be able to offer the right vehicle for that,” explains Pfeiffer.
The special limited partnership provides flexibility in structuring, ensures confidentiality over limited partners’ identity, and ensures limited liability for limited partners. “It’s good news for lawyers,” says Molitor. “You need to help clients comply with this new legislation.”
Wildgen managing partner Pierre Metzler says clients are already making enquiries about the new structure. “As soon as the law is effective we’ll implement some of these new partnerships,” he adds.
AIFMD generally has provided plenty of work for Luxembourg’s lawyers over the past few years. Reckinger says the jurisdiction is likely to be popular for fund managers seeking an onshore domicile.
“A number of offshore jurisdictions are redomiciling funds into Luxembourg to benefit from AIFMD in the future,” Reckinger says.
“Work is coming to us because of additional regulation, new laws and changes happening in and out of Luxembourg,” adds Harles.
But funds work is not the only game in town, and across the board Luxembourg’s law firms are pretty positive about the past year.
“2012 was one of the better years since 2007 or 2008. 2013 was a bit slower to start but since April we’re quite busy,” reports OPF Partners managing partner Frédéric Feyten.
“We’re still at a very high level of activity in Luxembourg so we can’t complain,” says Metzler. “There are still deals going on, acquisitions or restructurings that require Luxembourg structures. There have been banks closing down or merging.”
“Business has been good,” says Harles. “We’ll probably have a very good year if it continues like this.”
There is not much M&A activity, but there is plenty of restructuring work around.
“There are a lot of private equity structures that were put in place in 2006 or 2007 when there was a peak in leverage,” says Kleyr Grasso Associés managing partner Marc Kleyr. “Most kept standing a few years but because the crisis isn’t over, they have difficulty assuming the charges they have on board.”
Kleyr says the main private equity activity is investors funnelling investments in Asia through Luxembourg holding structures.
Asia is a focus for many in Luxembourg. Elvinger opened a Hong Kong office a year ago to funnel work into the region, and some refer to Reckinger as ‘Mr China’ due to his success there.
The Bank of China and the Industrial and Commercial Bank of China have European headquarters in Luxembourg, and most believe the Middle East interest has lessened in favour of China. “[Asian companies] use Luxembourg as a hub for Europe,” explains Reckinger.
Harles says Asian entrepreneurs are buying “whatever they can find”.
For most Luxembourg firms, building strong relationships with Chinese and other international firms is key to taking advantage of the business in Asia.
Only Elvinger and Arendt are physically present in Hong Kong, promoting Luxembourg as a centre for business and financial services.
Arendt also opened in Moscow last year, and Harles says the office has performed well so far.
Ahead of the game
The future of Luxembourg’s legal market is likely to see a few more firms moving in and a few more consolidating or fracturing. Molitor became the latest to lose a name partner this year, when founder Laurent Fisch went his own way.
The arrival of more names such as SJ Berwin is generally welcomed. “It’s reassuring because it means that there’s some confidence and trust in Luxembourg,” says Molitor.
However, there are challenges for the newcomers. “A number of other firms have been looking at the jurisdiction but it isn’t easy to come in because there’s a shortage of lawyers,” says Lingens.
Established firms are focused on growing underdeveloped areas. While Arendt has looked at private client, Elvinger is expanding its litigation and regulation teams and is also looking at the IT sector.
“Clearly there’s more competition but the independent firms are large and manage to return the best talent. We’re well-prepared for what’s ahead,” argues Reckinger.
For Harles, the future depends on whether the European economy picks up. “What we need is a little more optimism. If you get optimism back there’s no reason why Europe should not be performing,” he concludes.
Key figures: Luxembourg
GDP (2011): $59.2bn
Annual inflation (May 2013): 1.7%
Population (2011): 518,300
Life expectancy at birth: 81
Unemployment rate (May 2013): 6.9%
Source: World Bank, Grand Duchy of Luxembourg Statistics Portal