May, 19th 2011

Listening to investors

Workshop Private EquityModerator: Laurent Schummer, Linklaters LLPPanelists: Yves Courtois, KPMG AdvisoryChristoph Lanz, Banque Privée Edmond de Rothschild EuropeHans-Jürgen Schmitz, Mangrove Capital PartnersLars Jonsson, Triton

Private Equity

A leading European regulated private equity centre

Over 300 regulated private equity structures

Over US$ 40 billion of PE/VC fund assets administered in Luxembourg

Growth of 850% over last 5 years

Leading private equity service providers present in Luxembourg

Leading global private equity houses operating in Luxembourg

Luxembourg – a leading European private equity hub

US$ 40 billion in assets Over 300 regulated funds

3iAmerican CapitalApax PartnersBain CapitalBC PartnersCarlyle GroupCinvenColler CapitalCVCFortressGoldman SachsInvestcorp

JP MorganKKRKreditanstalt für Wiederaufbau(KfW)LazardLGT Capital PartnersOaktree CapitalPAI PartnersPermiraUnicapitalTPGWarburg Pincus[….]

Global private equity houses using Luxembourg as a center of excellence

Luxembourg – a leading European private equity hub

The Luxembourg PE tool box

Standard Supervision

Light Supervision

SICAR - 247

SIF - 1196

SOPARFI> 30,000

SecuritisationUndertakings

> 500 (26 regulated)

Regulated:the PE Fund family

Unregulated:the PE Acquisition family

UCI Part II - 629

Source: CSSF 2011

Lightly regulated PE vehicles

0

50

100

150

200

250

0200400600800100012001400

Feb‐07 Dec‐07 Dec‐08 Dec‐09 Dec‐10 Jan‐11

Number of UCI Net assets of UCI  in bn. €

47

115

182221 236 242 244

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 Jan‐11

SIFs SICARs

Source: CSSF 2011

The Luxembourg PE fund environment

• Fund raising / Commitments

• Capital calls• Distribution

• LightSupervision

• Custody• Centr Admin• Audit

• Selection• Monitoring• Development• Mgt + Perf. Fee

• Investments• Divestment

• Insurance Co’s• Pension Funds

Banks• Business Angels• HNWIs • Corporate investor• Fund of funds• Family offices• Sovereign wealth

funds

INVESTORS REGULATORY

Auditor

DepositaryBank

CSSF

FUND MANAGEMENT

Private Equity House(General Partner / Investment Manager)

External Advisor Investment Committee

Private Equity Fund

PORTFOLIO

DI DI DI

DI PE FundDI DI

Administrator

Luxembourg Tax Neutrality

All PE/VC strategies

No or optimally reduced WHTNo/limited taxation at fund level

Minimum tax leakage on capital gains and incomeEnd investor usually achieves same result as direct investment

EU Directives and DTT accessNo or optimally reduced WHTCertainty around tax exposure

AIF

Optional: SPV

FUN

D

STR

UC

TUR

ESP

VIN

VEST

MEN

T M

AR

KET

Investments

INVESTORS

Master/Feeder Structures

HNWI Investment Manager XYZInvestment Manager XYZInstitutional Professional

SIF/ SICAR XYZSet-up as a

FEEDER

CSSFLuxembourg

Authority

Auditor

Legal Advisor

Custodian

Central Administration

Target Investments :VC/PE, RE, HF, securities, cash …

Local Fund, the

MASTER

UK

& in

tern

atio

nal

UK

& in

tern

atio

nal

Luxe

mbo

urg

SIF Umbrella structures

UK

& in

tern

atio

nal

UK

& in

tern

atio

nal

Luxe

mbo

urg

,

s

Some TRENDS :

-Private Equity-SRI Funds-Passion Funds (art, wine, football, …)-US Life Settlement Funds-Infrastructure-Real Estate -Timberland-Pension Pooling

SIF Umbrella StructureInitiator XYZ

Sub-fund 1Long Only Strategy

(plain vanilla UCITS-like

fund)

Sub-fund 2Dedicated to

1 HNWI or its family or

to 1 Institutional

Investor

Sub-fund 3Socially

Responsible Investments: Microfinance

etc

Sub-fund 4

Pensionpooling

HNWIFamily Office,

Family,Individual

Etc.

InstitutionalBank,

Insurance Cpy,

Pension Fund,Re-ass. Cpy,

FoF

ProfessionalPrivate Banker

IFA

CSSFLuxembourg

Authority

Auditor

Legal Advisor

Custodian

Central Administration

Target InvestmentsEquities, bonds, target funds,

MFI, cash, PE, RE, others

Investment Manager 1

(ESP)

Investment Manager 1

(ESP)

Investment Manager 2

(US)

Investment Manager 2

(US)

Investment Manager 3

(UK)

Investment Manager 3

(UK) …

…

Tax Neutrality - Luxembourg DDT Network

EuropeandCentralAsia1. Albania9. Denmark17. Iceland25. Macedonia33. Romania41. Switzerland

2. Armenia10. Estonia 18. Ireland26. Malta34. Russia42. Turkey

3. Austria11. Finland19. Italy 27. Monaco35. San Marino43. Ukraine

4. Azerbaidjan 12. France20. Kazakhstan28.Moldova36. Serbia44. Un. Kingdom

5. Belgium 13. Georgia21. Kyrgiztan29. Netherlands37. Slovakia45. Uzbekistan

6. Bulgaria14. Germany 22. Latvia30. Norway38. Slovenia

7. Cyprus15. Greece23. Liechtenstein31. Poland39. Spain

8. Czech Republic 16. Hungary24. Lithuania32. Portugal40 . Sweden

46. Argentina48. Brazil50. Mexico52. Trinidad &Tobago

America47. Barbados49. Canada51. Panama53. United States

AfricaandMiddleEast54. Bahrain57. Lebanon60. Qatar63. U.A.E.

55. Israel58. Mauritius61. Syria 64. South Africa

SouthandEastAsia65.China68. Indonesia71. Mongolia74. South Korea

66. Hong-Kong69.Japan72. Pakistan75. Thailand

67. India70 Malaysia73. Singapore76. Vietnam

56. Kuwait59. Morocco62. Tunisia

Updated: July, 2010

60 DTTs in force

16 DTTs pending

AIFMD – How will Luxembourg adapt ?

Lux AIF (UCI/SIF/SICAR) Highest compatibility standard

Lux AIFM Highest compatibility and « UCITS ManCo » track record

Prudential supervision Already standard

Depositary requirement Already standard

Transparency requirements Already standard

Delegation Already standard

Passporting capabilities Luxembourg sets global standard for distribution/placement

Support services AIFMD anticipation

Luxembourg – a global PE centre

LEGAL / TAX

Stable, flexible and predictable on-shore legal and tax regime for AIF through:

Regulated AIFSpecialised Investment Fund (SIF)Risk Capital Investment Company (SICAR)Unregulated AIF

Financial holding company (SOPARFI) for Luxembourg or foreign funds

Strong investor protection

EXPERIENCE

Over 20 years experience in structuring AIF

Strong industry involvement through ALFI / LPEA, including dedicated training in all AIF assets classes

Specialisation in custodian banks and central administrators

Tailor-made AIF and SPV solutions for international managers / sponsors / initiators

MARKETPLACE

Central location, with highly qualified multi-lingual workforceGood connections to other European financial centresStable government with strong political support for the financial services industryLeading investment fund/ financial centre in Europe and #2 globallyResponsive, pragmatic and accessible regulator and tax administration

Proven PE structures

SICAR and SIF: the right products at the right time in the right place

Ability for small and mid-sized promoters to access regulated PE regimesBrand image as a European regulated on-shore fund regimeEnabler in fund raisingEurope’s most customised fund regimes for Private Equity – choice of legal formsTax neutralityExamples of specific attributes:

Exemption from consolidationLight reporting rulesNo investment restrictions within the PE/VC spherePragmatic diversification requirements for SIF

Key competitive features

Proven PE structures

SOPARFI :a worldwide recognised vehicle for PE acquisition structuring

Access to Double Taxation TreatiesLow administration costsLegal and tax structuring certainty Efficient profit repatriation modelsDevelopment of innovative hybrid instruments (e.g. PECs, CPECs)

Key competitive features

Proven PE structures

Luxembourg is the unrivaled back-office of Europe’s fund industryNumerous PE Houses have established offices with middle- and back-office operations in LuxembourgThird party service providers specialised on PE offer a large variety of services:

Fund accounting and custody servicesFund operations (investor and portfolio transactions)Cash handlingCapital call facilities / Bridge financing

Key competitive features

A large number of PE houses have their processing center for PE funds in Luxembourg

Market Challenges

• AIFMD• Dodd-Frank Act• FATCA• Solvency II• Basel III• Forthcoming pension fund reg

•Attractiveness of Luxembourg- Growing popularity among institutional investors, Family offices, HNWIs- Increased quality and competitive landscape for administrations and trusts- Political and industry drive to develop PE- Modernization of the SCS in the pipeline (to bring it more in line with the UK partnership)

• Tax- Transfer pricing international standards- Substance and VAT reviews- Taxation of carried interest & new circular on taxation of highly skilled workers

• Key challenges- Raising new funds- Deploying undrawn commitments- Achieve operational efficiencies- Increased compliance and risk management costs- Addressing investors needs (Solvency II, Basel III, transparency requirements)- Exiting through IPOs- Competition with strategic buyers- Access to debt markets- Salvaging distressed deals

• Challenging PE fund raising• LBO markets are functioning again• More LBOs will default on their debt• Refinancing of large LBOs will be problematic• Increasing consumer business deals in Asia and emerging markets• Strong secondary market

REG

ULA

TIO

NS

MA

RK

ETSTR

UC

TUR

ING

PE FIRM

S

More risk management, compliance, restructuring, secondary transactions

Listening to investorsThank you

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