New funds are opting for the Luxembourg SICAV structure to source scarce liquidity Shayla Walmsley reports
With some large pension funds negotiating over recapitalisation of existing funds, it's unsurprising that others should look for a structure they can trust - and that won't cost them in future - when they consider investing in a new one. So it's equally unsurprising that many fund managers are opting to create a Luxembourg-based société d'investissement à capitale variable (SICAV).
Yet it isn't the SICAV that makes Luxembourg a European centre for real estate funds, it's the recently modified special investment fund (SIF). The difference? A SICAV has a corporate structure. Now within the rubric of UCITs products designed for investment in alternatives, the SIF doesn't.
In a recent presentation, Ernst & Young's Mike Hornsby pointed out that the majority of new property funds were SIFs, including all 23 real estate funds launched from Luxembourg in 2008. The data reflected, he said, "the popularity of this regime for real estate fund promoters for a ‘lightly regulated' onshore investment fund vehicle for all types of alternative investment funds".
Marc Cottino, a partner with M&A Investors, describes the SIF structure - which can be set up as a SICAV - as "nowadays the most advanced and soft tool in Europe - maybe in the world finance scenario". In May M&A Investors announced that it had begun fundraising among institutional for a private equity real estate SICAV-SIF with a target of €100m and a first closing of €50m. The opportunistic fund will target relatively small assets valued at between €10m-€20m - around 60% in distressed real estate and residential and commercial in Central and Eastern Europe, the balance in mainly residential developments and renewable energy infrastructure in North Africa.
Not that the SICAV structure comes risk-free. The Commission de Surveillance du Secteur Financier (CSSF), Luxembourg's financial services regulator, has estimated the direct impact of the Madoff affair on Luxembourg-based funds at €1.7bn, and in March it announced the withdrawal from the official list of one of Madoff's casualties: the Luxembourg Investment Fund, a SICAV.
Nor does the structure come cost-free. A SICAV's income and gains are not subject to corporate income tax, municipal business tax or net wealth tax in Luxembourg. Nor are distributions to shareholders or capital gains realised by the shareholders on their shares subject to withholding tax. But investors are subject to an annual subscription tax.
Even so, if this is the moment for the tax-neutral, transparent structure, a structure that allows cross-border targeting of liquidity is all the more timely. "Liquid investors are reluctant to invest," says Ruekel. "For funds where the fundraising has not yet been done, there will be problems. Products have been put on hold. Within real estate, people are waiting and observing the market carefully. My guess is that in Q4 we will see movement."
Getting liquid investors to invest again is the point, and the SICAV offers a structure that allows fund managers to target new groups of investors - both to source liquidity from investors in multiple countries and, in turn, to distribute the fund across European borders.
"The market is tough but wise," says Cottino. "Investors are at the window evaluating new investment opportunities. Get ready today for a second round to be well positioned tomorrow. Our strategy is to beat the clock."
If that's why fund managers favour the SICAV, are there advantages to investors in the fund? In blunt terms, do pension fund investors care either way? Yes, says Danny Latham, European head of infrastructure investment at First State Investors. "The fact that we have such an open-ended structure in place [in the European Diversified Infrastructure SICAV] allows for better alignment between the long-term liabilities of investors and the long-term infrastructure asset characteristics that the fund may hold," he says.
"In other words, this fund structure benefits from positioning itself as an attractive investment partner to key stakeholders such as pension fund trustees. Luxembourg is also a jurisdiction that is well understood by and familiar to our global client base."
Similarly, Nordic pension funds favour SICAVs because, as Christian Schjødt-Eriksen, manager of the Aberdeen's pan-Nordic property SICAV, points out, there exist reasonable tax treaties between the Nordic countries and Luxembourg. The fact that it is a regulated and widely used structure familiar to institutional investors, with an EU jurisdiction, are additional plus points.
So much for the structure. But why Luxembourg - especially when putatively similar structures exist in France, Italy and, notably, Belgium?
"In each European country there is a different way to structure funds," says Ruekel. "Luxembourg attracts multinational fund managers - those trying to sell to investors in more than one country. The SICAV is a flexible structure that can easily adapt to managers' needs. If they target groups and they're unsuccessful because of the market, they can enlarge the target population."
Often, the preference for a SICAV over another structure is purely cultural. France and Germany have tended towards the lower-cost fonds commun de placement (FCP) structure, which has no corporate structure, rather than the SICAV. In March, Warburg-Henderson managing director Henning Klöppelt suggested in this magazine that the German Spezialfond was "more than holding its own" against the SICAV, not only among domestic investors but internationally.
Even if you limit the comparison to SICAV structures aimed at international investors, most agree that until Belgium can compete with Luxembourg in terms of tax stability, it will never compete with it as an alternative location. The advantage for Luxembourg is that its tax treatments are predictable - in contrast to Belgium, mooted as an alternative SICAV centre.
"Belgium, because of its double taxation treaties, is potentially more attractive," says Diana Mackay, managing director of FERI Fund Management Information. "But it's difficult when the Belgian government is inclined to make radical changes to the tax laws retrospectively and with little notice. Tax stability is such an important part of the Luxembourg economy that the government will do nothing to jeopardise that status. It's a more reliable location as a result."