Asset managers have long used Luxembourg as a hub for reaching out to new markets. Funds domiciled in the Grand Duchy are distributed in more than 80 countries across all major regions.
With a mature regulatory environment, strong track record and recognized brand, Luxembourg offers an efficient, relatively low-risk option to access investors and markets worldwide. RBC Investor & Treasury Services' Johan Lindberg, Head of Nordics for Client Coverage, and Kerstin Lindgren, Director of Client Coverage for the Nordics, outline some of the key benefits and issues around establishing a fund presence in Luxembourg.
Focusing on what matters most
“You come to Luxembourg to be investable—to access global capital and investors from outside and inside your home market," explains Lindberg. “The rules and structures are well established. Seeing that a fund is domiciled in Luxembourg puts investors at ease and enables fund managers to focus on what matters. Rather than having to reassure investors about the structure of their fund, managers can spend time discussing the most important issues, such as investment strategy, performance and risk management."
Domiciling a fund in Luxembourg enables fund managers to focus on what matters
A key reason for Luxembourg's success as a hub for fund management is its early and full commitment to incorporating the European Union’s Undertakings for Collective Investment in Transferable Securities (UCITS) liquid fund structure into local legislation. "It was a first mover in this respect, and the fact that UCITS is fully integrated into local regulation means that funds domiciled in Luxembourg are compatible virtually wherever they are marketed. On top of this early adoption, Luxembourg has built up a broad and deep pool of talent in the industry, providing managers with the resources and outsourcing options to bring their funds to international markets, he adds.
Luxembourg has built up a broad and deep pool of industry talent
Luxembourg's efficient, established processes and experienced service providers help to decrease the risks involved in setting up a fund, while at the same time offering potentially high rewards in the form of access to global capital. This combination has resulted in Luxembourg being the leading exporter of UCITS funds in Europe, with a 57% share, ahead of Ireland with 33%, and France and Jersey at 3% each.1
Lindberg notes that Luxembourg funds are strong performers in overseas markets and are also viewed favourably by investors in a manager's home market. This appeal provides yet another opportunity to raise capital as home-market investors see an opportunity to invest in an offshore fund managed by a local name that they trust.
Finding the right fund operating model
Fund managers have a range of options for setting up a fund in Luxembourg, with different structures coming with different degrees of commitment and control. One of the easiest is a model in which a manager essentially “rents" a sub-fund under an existing Luxembourg Management Company (ManCo). Based on this arrangement, the manager establishes their fund under an umbrella fund of the ManCo. It is ring-fenced from other sub-funds but shares a Board and service providers for fund administration, custody and depository oversight.
Managers have a range of options for setting up a Luxembourg fund
“This approach allows for faster time to market, with some cost savings at the set-up stage, and may appeal to smaller or newer managers who are not yet in a position to make a bigger move into Luxembourg," notes Lindgren. “A potential drawback is the lack of control over Board and service provider selection."
Further along the spectrum in terms of commitment is the option for a manager to establish their own SICAV (Société d'investissement à Capital Variable) collective investment scheme under an existing ManCo. The key difference in this approach is that it gives the manager control over Board selection, with fund administration and support services still largely delegated to the ManCo. And for managers ready to fully commit to Luxembourg, they can opt to set up their own ManCo, giving them control over all aspects of operations. Lindgren notes that many aspects of fund administration and support services are still outsourced in this arrangement, but the manager does have full control over selecting the service providers.
Flexibility to adapt as needs evolve
Lindgren notes that, as managers grow, there is flexibility to adjust their fund structures over time. “Sub-funds can be moved between umbrella funds, so if a manager started off renting a sub-fund, they can later set up their own SICAV or ManCo and shift the rented sub-fund to their newly established umbrella fund."
As managers grow, there is flexibility to adjust their fund structures
The ability to transfer sub-funds allows managers to gradually increase the control they have over their operations relatively seamlessly, as they feel ready to increase their commitment to a presence in Luxembourg.
Lindgren also points to the need for managers to select a transfer agent that is familiar with the various markets in which the funds are being marketed, including a solid understanding of local market practices and investor requirements, combined with established links to distributors and other intermediaries.
For all managers, from those taking a first look at Luxembourg to those who already have some experience of the market, Lindberg concludes that there is a wealth of experience to be tapped into. “The pool of service providers and advisors is deep, and they’re always more than happy to sit down and talk with a manager about how to make full use of all that Luxembourg has to offer."