Luxembourg Private Equity and Alternative Investment Funds Seminar Carine Feipel Feipel, Partner Pierre Beissel, Partner Anne-Julie Bellaize, Senior Advisor New York, 5 June 2012

The European regulatory framework... Asset managers aim to navigate funds through big rocks ahead

Europe prepares for governance green paper

EU urged g to g go ahead with tougher bank rules 2

IInvestors t alarmed l d over EU reform process

IInsurers still till uneasy over Solvency II

MiFID review i replies flood in – a record?

The AIFMD – a Th benefit or a hazard?

UCITS IV paperwork will surprise regulators

European regulations on OTC derivatives spark q disquiet 2

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

INDUSTRY FIGURES

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

The European Fund Industry in numbers (31 December 2011) UCITS

Non-UCITS Country

12/30/2011 Assets € millions

Country

12/30/2011 Assets € millions

Germany

907,418

Luxembourg

1,760,155

Luxembourg

336,357

France

1,068,141

France

312,812

Ireland

820,041

Ireland

235,227 ,

UK

648,406

UK

156,704

Germany

226,456

Switzerland

61,504

Switzerland

211,037

Italy

53 598 53,598

Italy

139 697 139,697

Spain

5,535

Spain

150,877

Sweden

3,392

Sweden

147,042

Others

213,702

Others

3,290,269

Total:

2,286,249

Total:

5,633,825

Source: EFAMA International Statistical Release , 2011:Q4

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

European UCITS / Non-UCITS Total Net Assets

EUR bn 2,289 28%

EUR bn 5,868 72%

UCITS Non-UCITS

Source: EFAMA monthly Fact Sheet March 2012

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Luxembourg fund industry Net assets of Luxembourg domiciled UCIs

April 2012 2 225,600

2 500 00 500,00

€billio on

2 000,00

1 500,00

1 000,00

500,00

0,00

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Figures as at 30 April 2012

Source: CSSF

Market shares in cross-border fund distribution Number of Luxembourg registrations during 2011: 96 Growth registrations 2010-2011: G th Luxembourg L b i t ti 2010 2011 11% Total worldwide registrations as at March 2012: 65,931

Other France 10% 1% Germany 1% UK 2% Ireland 13%

Luxembourg

73%

Source: LFF - PwC Global Fund Distribution, Distribution March 2012

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Luxembourg – the European hub for alternative funds ? Private equity q y

Real Estate

Hedge g funds

SOPARFI

Over 300 private Over 212 real Over 1,700 hedge Over 30,000 equity funds estate investment funds and funds of SOPARFIs funds hedge funds Over US$ 37 billion of private equity fund assets administered in Luxembourg g

Over US$ 30 billion of real estate investment fund assets administered in Luxembourg

Over US$ 190 billion of hedge fund assets administered in Luxembourg g

Growth of 850% Growth of 500% Stabilization Constant increase over last 5 years over last 5 years (despite in number the crisis) between December 2008 and 2010 Source: LFF – October 2011 8

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

AIFMD (ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE) Directive 2011/61/EU of 8 June 2011

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

What does the AIFMD regulate?

 Direct regulation of AIFM  Indirect regulation of AIF  Creation of a European market for alternative investments via passport for management and marketing activities

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Definition of AIF  any collective investment undertaking (including investment compartments thereof)  which raises capital  from a number of investors  with a view to investing it in accordance with a defined investment policy for the benefit of those investors  that is not subject to the UCITS Directive 2009/65/EC

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

AIFMD - Scope In scope p  All EU AIFM, which manage one or more AIF  All non-EU AIFM, which manage one or more EU AIF  All non-EU AIFM, which market one or more AIF in the European Union 12

Out of scope         

Holding H ldi companies i / joint j i t ventures t EU pension funds Supranational institutions National central banks Social security / pension systems Employee participation/saving schemes Securitisation special purpose entities AIFM managing only group investments Si l Single i investor t i investment t t vehicles

AIFMD - Exemptions

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EUR 100 million

EUR 500 million

 Open and closed-ended AIFs  AIF may be leveraged  AUM do not exceed 100 million

 Closed-ended AIFs without redemptions for a period i d of5 f5 years  AIF must be unleveraged  AUM do not exceed 500 million

Will unregulated entities (SOPARFIs) qualify as AIFs?

 Yes, if they meet the conditions set out in the definition of AIF  A SOPARFI qualifying as an AIF will not be subject to specific product regulation  Opt-In: Product regulation for unregulated AIFs?

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

What rules does the AIFMD aim at introducing?             15

Registration of all AIFMs unless nless out o t of scope/exemption scope/e emption Harmonized conditions for autorization Conflict of interest rules Risk management rules Liquidity management rules Rules for the valuation of assets Rules of delegation Custodian/depositary requirement Transparency requirements Rules in relation to leverage g Rules applicable to the acquisition of control by AIFs Marketing and third country rules 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Marketing : New passport and private placement regimes  EU AIFM / EU AIF

 Distribute under EU Passport (from 2013)

 EU AIFM / Non-EU AIF

 Distribute under National Private Placement Regimes (until at least 2018)  Distribute under EU Passport (from 2015)

 Non-EU AIFM / EU AIF

 Non-EU AIFM / Non-EU AIF

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 Distribute under EU Passport (from 2015) Distribute under National Private Placement Regimes (until at least 2018)  Distribute under National Private Placement Regimes (until at least 2018)  Distribute under EU Passport (from 2015)

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Consequences for U.S. based PE manager  US PE manager has no European investors for the non-EU AIF it manages: NO IMPACT  US PE manager has European investors in the AIF it manages: IMPACT  US PE manager g wishes to use an EU AIF vehicle/regime g without EU investors: IMPACT  US PE manager wishes to use an EU AIF vehicle/regime with EU investors: IMPACT

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

AIFMD: Timeline

Nov 2010 Vote off the Directive

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8 June 2011

21 July y 16 November 2011 2011

 Directive 2011/61/ UE

Entry into force

ESMA advice to European Commission

July y 2012

22 July y 2013

Issue of Level 2 measures by EC expected

Transposition into national law/ passport for EU AIFM/EU AIF

2015

2018

Passport for third country AIFM + AIF

Expected end of private placement regimes

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

AIFMD - Level 2 measures

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Current status

 Various provisions of the AIFMD to be detailed by implementing measures off the th European E C Commission i i  ESMA advice on 16 November 2011

implementing

measures

received

on

 EU Commission draft regulation released in March 2012  EU Commission final regulation expected in July 2012

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Discussion points

 Calculation of assets under management  Delegation  Third country cooperation agreements  Calculation and use of leverage  Depositaries  Professional indemnity insurance

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Implementation of AIFMD in Luxembourg

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Methodology and content  Draft bill divided into three parts:  First part: implemention of AIFMD  Second part: amendment of existing product regulation (SIF, SICAR, UCITS, etc.)  Third part: creation of a Luxembourg limited partnership  Main option taken - depositary:  a credit institution (in accordance with Directive 2006/48/EC)  an investment firm (in accordance with Directive 2004/39/EC)  Option for closed-ended closed ended funds: other professional – specific depositary status created

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Timing

 Luxembourg intends to be a first mover  Deposit of bill with Parliament prior to end of first semester 2012  Vote by Parliament anticipated prior to end of 2012

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

KEYNOTE ADDRESS BY

ANDREW DOUGHERTY MANAGING DIRECTOR, HEAD OF ALTERNATIVE AND INSTITUTIONAL SOLUTIONS AT

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BNP PARIBAS

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

TRENDING TOPICS FOR ALTERNATIVE INVESTMENT AND PRIVATE EQUITY FUNDS IN LUXEMBOURG

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

1. AMENDMENTS TO SPECIALIZED INVESTMENT FUND LAW

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

SIF – basic features         

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Lightly regulated Multi-purpose/policy investment fund vehicle No Promoter requirement (no deep pockets) Qualified investors only Risk diversification Structuring options: SICAV, SICAF, FCP Custody and Central administration in Luxembourg Subject to independent audit Tax exempt except for 0.01% tax on AUM

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

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SIF – Structuring example Investors

SIF

Custodian Central administration

Compartments

A

B

C

Audit SOPARFI

Target (30% - risk spreading)

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Portfolio/asset management: • Client • External manager

SIF – changes (law of 26 February 2012)  Requirement for:  a risk management procedure  a management of conflicts of interest  a procedure allowing to check and monitor the status of qualified investors  deadline: 30 June 2012  The SIF may no longer start its activities before having been approved by the regulator  Delegation conditions are aligned on AIFMD (deadline: July 2013)  Option for one SIF compartment to invest in a separate compartment of the same SIF 30

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

2. DEBT FUNDS AND SHADOW BANKING

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Shadow Banking  Discussion at G20 summits in November 2010 and 2011  European Commission Green Paper – Shadow Banking (03/2012) • • • •

What is shadow banking? What are the risks and benefits? What are the challenges for supervisory and regulatory authorities? What regulatory measures apply in the EU?

 L Luxembourg b b ki law banking l applies li to t « professionals f i l carrying i on lending operations engaging in the business of granting loans to the public for their own account. »  Exclusions: • • • • 32

se ces to parent services pa e t and a d subs o of pa parent e t group services SIF Securitization Vehicles (SV) 2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Structuring Solutions

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

(1) SIF Structure

Investor(s)

3

1.

Qualifying Borrowers

2.

Specialized investment fund (SIF) in the form of (i) a public limited liability company (SA) organized as an investment company with variable capital (SICAV), (ii) a common fund (FCP-SIF), or (iii) Lux Special Purpose Vehicle (SPV) controlled by SIF

3.

Qualifying Investor(s) (corporate/funds/FO/UHNWI)

4.

Investor(s) contribute capital to SIF

5.

Alternative (1): SIF or SPV lends to Borrowers (via senior or mezzanine loans, debt securities, wholly or partly p y drawn-down loans, etc))

6.

Alternative (2): SIF or SPV acquires fully drawn-down loans discounted or not, distressed or not

7.

Alternative (3): SIF or SPV acquires partly drawn-down loans discounted or not, distressed or not

4 SIF SPV (L) 5/6/7 Borrowers Borrowers Borrowers Borrowers

34

2

OR:

1 Borrowers

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

(2) Basic Structure

1. Borrower 2. SPV (unregulated)

Investor

3 3. SPV controlled by Investor

4 SPV (L)

4. Investor contributes capital or lends via subordinated loan to SPV

2 5. SPV (i) lends to Borrower (on-off transaction) or (ii) acquires fully drawn-down single portfolio of loans discounted or not, distressed or not

5

Borrower

35

1

2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

(3) Basic Structure 1. Qualifying Borrowers 2. SPV (banking license?)

Investor(s)

3

4 SPV (L)

4. Investor(s) contribute(s) capital or lends via subordinated loan to SPV

2

5/6/7

Borrowers

3. One or several qualifying Investor(s) (i.e., off-shore fund, discuss if off-shore fund is regulated or not or if it managed its db by regulated l t d manager))

1

5. Alternative (1): SPV lends to Borrowers (via senior or mezzanine loans and assimilated) - [risk] 6. Alternative (2): SPV acquires fully drawn-down loans, discounted or not, distressed or not (several borrowers)) - [[risk]] 7. Alternative (3): SPV acquires partly-drawn loans, discounted, distressed or not (several borrowers) [risk]

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Tax considerations on various structuring solutions

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Debt fund structuring – SIF / double LuxCo structure 

Investors

  

SIF Yield

Debt instruments



LuxCo 1 Tax consolidation

IFL

LuxCo 2

 

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LuxCo 1 and LuxCo 2 fully-taxable but interest received under loan offset against yield under debt instruments no withholding tax on payment made by LuxCo 1 under debt instruments Access to double tax treaties

 

SIF tax exempt no withholding tax on payment made by SIF (limited exceptions)



non-resident investors not subject to Luxembourg tax

Interest

Loan assets

LuxCo 1 financed with debt instruments (e.g. CPECs) from SIF LuxCo 2 financed with interest free loan (IFL) from LuxCo 1 LuxCo 2 acquires loan assets LuxCo 1 and LuxCo 2 enter into a tax consolidation

Debt fund structuring – Securitisation vehicle (SV)

Investors



Interest or dividend

 

SV  

Interest on debt claims

Debtor

39

SV can adopt the form of a fund or a company SV funds are not subject to income taxes SV companies p are subject j to corporate p taxes (corporate income tax and municipal business tax) but interest and dividends are tax deductible = small taxable margin g

SV not subject to net worth tax no withholding tax on dividends distributed by SV

Key considerations  Source country / beneficial ownership issues  Regulatory supervision European regulators’ regulators concerns over shadow banking  Operational flexibility  VAT exemption on management fees

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

3. LIMITED PARTNERSHIP

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Luxembourg reverse hybrid structure (as currently used) Lux SCOSA GP

US Inc. LP

SCS Debt instruments

Yield

SCS (société en commandite simple) with Lux SCOSA (société coopérative sous forme de société anonyme) as general partner 

LuxCo LuxCo 11 Tax consolidation

LuxCo 1 & LuxCo 2  No substantial taxable base

IFL



LuxCo 2 Yield AcquiCo

Debt D bt instruments

 

Tax transparency: SCS not subject to corporate income tax nor municipal business tax (no commercial taint) non-resident id t investors i t nott subject bj t to t corporate income tax no withholding tax on distributions by SCS y no double tax treaty

Target

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Luxembourg reverse hybrid structure (as currently used) Lux SCOSA GP

US Inc. LP

SCS Debt instruments

Yield

Reverse hybrid  SCS = pure flow-through for Luxembourg tax purposes  SCS = corporation and LuxCo 1 = disregarded from a US tax perspective: interest paid by LuxCo 1 (deductible in Luxembourg) is not recognized on an accrual basis in the US (tax deferral)

LuxCo LuxCo 11 Tax consolidation

IFL

LuxCo 2 Yield AcquiCo

Debt D bt instruments

Target

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Limited partnership - main features (as proposed)

 Modernization of the current Luxembourg limited partnership ( (société iété en commandite dit simple) i l )  More flexibility in terms of management  Creation of capital accounts  Additional confidentiality  Creation of an unincorporated limited partnership  Various tax provisions ensuring complete tax neutrality: abolition or limitation of commercial taint theory (Geprägetheorie)

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2012 Luxembourg Private Equity and Alternative Investment Funds Seminar - New York - 5 June 2012 © Copyright Arendt & Medernach

Contact us 

Carine Feipel   Partner  New York  Tel : 212-554-3541  [email protected]

 Pierre Beissel  Partner  Luxembourg  Tel : +352-407878792  [email protected]

Anne-Julie Bellaize  Senior Advisor (Tax)  New York  Tel : 212-554-3541  [email protected]