Thought Leadership

The Opportunity in Luxembourg During Covid-19

Fabrice Mas

The novel coronavirus has rattled markets around the globe, wiping out years of financial gain. It’s caused a historic spike in unemployment and has many investors running for liquidity, depositing record amounts of cash and bracing for a prolonged period of negative growth. Those who remain engaged, however, should have investment partners who are well equipped to withstand the crisis.

Specifically for investors in private equity and real estate (PERA), the pandemic impacts both fund domiciling and fund administration. Domiciles weathering the pandemic today are those that prepared for it yesterday. They are nations which put into place crisis protection measures and continuity plans in the aftermath of 2008, and have applied lessons learned to great effect during the pandemic. A good domicile provides optionality in fund and management agreement structure, allowing LPs and GPs alike to tailor an arrangement which suits their needs. Such advantages exist in Luxembourg.

Similarly, fund administrators need to have been ready to continue their service and should foster an adaptive workforce as the pandemic wears on. They must practice good governance and enable transparency between clients and their portfolio companies, facilitating communication and data flow.

PERA investors shouldn’t settle for subpar service – if anything, the fund servicing suite needs to be a value add in times as uncertain as these. So, if you’re not thrilled with the status quo, consider the long term benefits of switching to the right partners.

The Luxembourg Advantage

Disruptive events cast a new light on operations, spotlighting pain points. In this context, resilience, the ability to continue operations and protect investors’ interests despite circumstance, is paramount for domiciles. A fund’s nationality should not present problems but solve them.

Whereas previous recessions centered around solvency concerns, significant and indefinite lockdowns have spurred much of this crisis. Regulators in Luxembourg were prepared for this improbable eventuality, though. Over the past few years, Luxembourg required businesses to create comprehensive continuity plans and test their efficacy, and as a result, many firms transitioned seamlessly to remote work.

Beyond preparation, Luxembourg has set itself apart through a proactive approach to Covid-19, rapidly identifying and resolving issues. For example, Luxembourg engaged in cross-border regulation to preserve continuity for companies on a case by case basis, and they’ve postponed certain regulatory filing deadlines, allowing firms to focus on more pressing items. Luxembourg loosened restrictions so that investors and fund administrators can spend more time on impacting client outcomes and less time dealing with red tape.

Before Covid-19, Luxembourg was already regarded as the industry standard domicile. Opening its arms to PERA post-2008 led to an explosion of investment funds and a virtuous cycle of industry and regulatory sophistication, which led to an even greater amount of investment and further sophistication. Furthermore, in 2013 Luxembourg implemented the Special Limited Partnership framework similar to that which existed in Britain. Its familiarity and managerial flexibility instantly made it a popular choice for international investors, thereby increasing the resources available to domestic administrators and regulators. The Reserved Alternative Investment Fund (RAIF) is also a well-liked option, as it is easy to setup, invest and market across the EU.

Luxembourg came into the crisis with a robust PERA ecosystem in place. Business friendly regulation, a wide variety of fund structures and a complete fund servicing network make it an attractive home for a fund under any circumstance.

It’s also worth noting the broader strategic implications of Covid-19 as it pertains to fund management and administration. We envision a world with greater emphasis on ESG mandates, incorporating health and wellbeing more fully into the definition of investment. Having an administrator who can help synthesize ESG criteria relevant data will be necessary to meet investor demands – that exists in places like Luxembourg accustomed to ESG interests, and among companies with the infrastructure in place to parse through complex reporting.

Tools to Withstand Covid-19

A strong fund administrator is also a critical piece to the puzzle. Of course they need to have a company culture and network which continues to thrive from home, but more importantly, they must have the tools and expertise necessary to help fund managers support existing portfolio companies.

That means selecting a fund administrator who prioritizes transparency and active communication. Data granularity has long been a touchpoint, and now more than ever, information flow is crucial. Fund administrators should have the technology required to ease this information flow, providing up-to-date, accurate, and tailored information on investments. Their tech should also assist with reporting.

A fund administrator should be capable of justifying asset valuations, as well. Time will tell how the industry reacts to Covid-19, but a focus on fund governance, particularly in regards to valuations, is certain to come. In the next audit season, valuing portfolio companies will be a time consuming and scrupulous process, so having a trustworthy fund servicer will be key.

Ultimately, withstanding the crisis takes a partner bank who houses all the services an investor needs – from credit to third party management to custodial and banking services. They need to maintain a global footprint and have connectivity around the globe, even as we work remote. A single home allows for greater operational fluidity and saves time and money compared to dealing with multiple partners. The right partner bank is an expert in all areas tangential to PERA investment.

These considerations all boil down to the same point: how are your fund administrator and domicile making life easier? The crisis is a stressful time for investment managers and their business partners should be there to lighten to load. So, to better weather the storm, consider the upside of domiciling funds in Luxembourg, and make sure your administrator is prepared to add value over the indefinite course of this pandemic.