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CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
CAPITAL
                                                                              #10
                                                                              2H 2017

The magazine of the Luxembourg Private Equity & Venture Capital Association

     PRIVATE
      EQUITY
      MEANS
 LUXEMBOURG

                                      THE PE
                                 JOB MARKET

                               QUANTIFYING
                                      RISK
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
INDEPENDENT
FUND MANAGEMENT
C O M PA N Y A N D A I F M
  THE DIFFERENCE IS YOUR SUCCESS

                     Specialists in Private Equity,
                     Real Estate and Debt
                       3rd party AIFM & Management
                       Company Solutions
                       Risk Management
                       Substance / Corporate Services
                       Fund Distribution
                       Securitization Solutions

        LUXEMBOURG | IRELAND

                                  www.lis-aifm.com
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
CAPITAL    #10 I 3

                                                                                            CONTENT

                                                                    4. Private Equity and You
                                                                    5. Editorial
                                                                    7. News
                                                                    11. A hands-on approach to luxury
                                                                        and boutique hotels
                                                                    15. Quantifying Risk for Private Equity –
                                                                         Challenges and Approaches
                                                                    18. Are jobs keeping up with Private Equity’s
                                                                         growth?
                                                                    21. Talkwalker talks the talk and walks the walk
                                                                    22. Private Equity means Luxembourg
THE MAGAZINE OF THE LUXEMBOURG
PRIVATE EQUITY & VENTURE CAPITAL                                    27. Unlocking the value of distributed ledger
ASSOCIATION                                                              technology (blockchain) in private equity
Contributors: Thibaut Britz, Julien Frighetto, Luis
Galveias, Dušan Gladovic, Rana Hein-Hartmann,                       28. Bringing Fund Financing Facilities
Dr. Jörg Henzler, Kenneth Kai Siong Iek, Paul                            to the table
Junck, Valeria Merkel, Gabriela Nguyen-Groza,
Nicolas Palate, Nicolas Raulot, Alexandre Rhea,
Hans-Jürgen Schmitz, Jaume Tàpies, Harald
                                                                    29. AIFM and the Depositary: Double
Thul, Sébastien Wiander, Jérôme Wittamer and                             Oversight? Opportunity for
Farabi Zakaria.
Conception & coordination: 360Crossmedia
                                                                         standardisation?
studio@360Crossmedia.com - 35 68 77
Artistic Director: 360Crossmedia/F.W.                               31.	Building up a reputation in South Korea
Cover photo: © DR
                                                                    33. GP-for-hire
                                                                    35.	Market Figures
Disclaimer : To the fullest extent permissible under applicable
law, LPEA does not accept any responsibility or liability of any
kind, with respect to the accuracy or completeness of the           37.	LPEA photo gallery
information and data from this documentation. The information
and data provided in this documentation are for general
information purposes. It is not investment advice nor can it take
                                                                    39.	Show time!
account of your own particular circumstances. If you require
any advice, you should contact a financial or other professional
adviser. No material in this documentation is an offer or
                                                                    41.	About LPEA
solicitation to buy or sell any professional services, financial
products or investments.                                            42.	Events’ Calendar
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
4 I CAPITAL       #10

LPEA

PRIVATE EQUITY
AND YOU
NATIONAL PRIVATE EQUITY CAMPAIGN

                                                                                                                     Source: Invest Europe

E
        stablished in 2010 by 25 found-      economic driver, we know that ordinary        made anywhere in the world, although
        ing members, the LPEA has            citizens often fail to understand the         many apply directly to Luxembourg (or
        been a major player in the pro-      importance of the financial sector and        its greater region) and generate local
        motion of Luxembourg’s private       how it impacts their lives.                   jobs and economic growth.
equity sector ever since. This effort has    Conscious of private equity’s privileged      With the support of the association’s
been more visible abroad, with regular       position in the real economy, the LPEA        members, the LPEA will implement dif-
roadshows in several cities in Europe        has decided to run a campaign with the        ferent initiatives in the last quarter of
and the U.S. In 2017 the association         objective of showcasing how the citizens      2017. This will include reaching out to
emphasised the promotion of the sector       of Luxembourg are exposed to the pri-         people in various forms and inviting
in Luxembourg by hosting the Insights        vate equity sector in their everyday lives.   them to explore how their lives have
conference in April, targeted at the wider   On top of paying taxes and contributing       already been influenced by private
financial centre community present in        to the country’s public pension scheme,       equity. Through the media and by open-
the country and not yet familiar with the    the private equity sector backs compa-        ing the doors of some of our most impor-
asset class.                                 nies that sell food, travel bags and          tant players, we expect to be able to
Now, the LPEA proposes to extend its         motorbikes; funds the development of          explain the basics of the trade, demon-
role as an educator to a broader com-        new communication tools, industrial           strate how the industry adds value to the
munity of stakeholders: Luxembourg’s         equipment and energy solutions; and           economy and feature the professionals
citizens.                                    plays a key role in the funding of innova-    that make our industry.
Despite a financial services industry        tive businesses commonly known as
employing 45.000 people in Luxembourg        start-ups.                                    Stay tuned in to www.lpea.lu and tell your
and representing the country’s main          Moreover, such investments can be             friends not to miss this opportunity!
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
CAPITAL   #10 I 5

                                                                                EDITORIAL

DEAR PRIVATE
EQUITY PROFESSIONALS,

B
              oth in your private life and in your professional activities, a
              recommendation is often more valuable than any sort of
              advertising. In this edition, we have gathered testimonials
              from some of the private equity players present in
Luxembourg to tell you first-hand why they have chosen Luxembourg.
Who better to explain the advantages in operating from this country? As
Luxembourg remains popular in the industry, it’s important to understand
which features stand out and which are currently being developed.
With the sector enjoying such local rapid-growth, LPEA started
monitoring the evolution of the recruitment market in
private equity related positions a year ago. We were
expecting a dynamic market but did not anticipate
reporting a 100% growth in open job positions
within this period!
As private equity becomes a more prominent feature
of Luxembourg’s financial life, the time has come
to better explain what we do. In April
we started by presenting the asset class
to other local professionals with
“LPEA Insights”. Now we are targeting
a much broader community:
Luxembourg citizens. Read about
our education campaign on the
previous page.
We would like to take this
opportunity to thank all of our
members who have contributed
to this edition.
Enjoy your magazine!

Jérôme Wittamer, Chairman
Paul Junck, Managing Director

Luxembourg Private Equity
                                                                                                        ©360Crossmedia/LPEA

& Venture Capital Association
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
This moment matters
This is a time to be wide awake to the challenge of change;
to find opportunity in new technologies, new markets and
new situations. This is a moment to connect to deep and
broad capabilities. At times of transformation, Deloitte
never rests in getting to the heart of what matters to make
sure that these moments count.

www.deloitte.lu

© 2017 Deloitte Tax & Consulting
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
CAPITAL       #10 I 7

                                                                                                            NEWS

EQT CREATES ONE FUND HUB

                                                                                             47%
IN LUXEMBOURG
In 2012, EQT decided to manage
future funds onshore. Since then,
eight funds have been
successfully closed across
                                                                                          Share of delegates
General Partners in the UK, the                                                            polled at Invest
Netherlands and Luxembourg.              predictability needed to ensure
Now EQT is taking the next step          a top-quality product and service
                                                                                        Europe’s CFO Forum
in harmonizing and future-               level. The consolidated hub for                in Berlin on May 30th
proofing its fund management             General Partners is managed
with the decision to create one          under the EU directive for                       who claimed their
hub for future domiciliation of          Alternative Investment Fund                    firm was considering
funds in Luxembourg.                     Managers (AIFMD) and is a
The decision to concentrate              transparent and long-term                     domiciling its next fund
EQT’s fund management to                 solution, beneficial for both                     in Luxembourg.
Luxembourg is based on the               investors and other stakeholders.

                                                           MANGROVE RAISES
   ALPHA PRIVATE EQUITY                                    $170 MILLION TO
   RAISES €903 MILLION                                     FUND START-UPS IN
   FOR ITS LATEST                                          EUROPE AND ISRAEL
   LUXEMBOURG FUND
                                                           Mangrove Capital Partners (“Mangrove”), the Luxembourg-based VC
   Alpha Private Equity (“Alpha”) announced the            founded in 2000, announced the first close of its fifth fund at $170
   final closing of its seventh mid-market pan-Euro-       million. With cumulated AuM of roughly $1 billion, the firm expects
   pean private equity fund, Alpha Private Equity          the fund to close at $225 million-$250 million during the fall.
   Fund 7 (“APEF 7”), with total commitments of
   €903 million, significantly surpassing the fund’s       Mangrove’s strategy will remain well focused on start-ups, investing
   target cover of €800 million. The fund is a SICAR       small tickets in early stage businesses in Europe but also in Israel
   managed by the group’s Alpha Private Equity             where the team scouted Wix back in 2008 and which is, to date, the
   Funds Management Company (AIFM) in                      firm’s most profitable exit generating a $550 million value from an $8
   Luxembourg. Investors in the fund include a             million investment. Skype, exited to Ebay in 2005, was, nonetheless,
   diverse group of pension funds, funds of funds,         the deal that placed Mangrove in the international charter of VC firms.
   financial institutions, insurance companies, family
   offices, and government agencies in Europe,             According to Hans Jürgen Schmitz, co-founder of Mangrove, “we will
   United States, and the Middle East.                     continue to invest as a generalist in transformational technologies
                                                           targeting both end consumers and business customers. Next to this,
   Sébastien Wiander, Risk & Compliance Officer,           we also identify specific focus areas which are currently digital health
   shared with LPEA that “as a pan-European fund,          and cyber security”.
   APEF 7 will seek investment opportunities in
   Continental Europe, including Luxembourg. The           The new fund is funded almost exclusively by returning investors,
   choice of Luxembourg as a center of its opera-          “a mix that comprises institutional investors (70%) and family offices
   tions, through the AIFM, has been supported by          (30%)” notes Schmitz. Mangrove is a patient VC encouraging its
   the presence of very qualified local professionals      portfolio companies to strive for breakout success rather than quick
   and by the favorable environment for private            turnaround. From the 30 active companies across their prior funds,
   equity”.                                                they expect a few more of those successes materializing in the next
                                                           couple of years.
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
lternatives
         Shaping
    the Alternative
         landscape

Luxembourg’s
fund structuring
toolbox
You get it all in one place
                      Most of the major private equity fund managers have
                      Luxembourg on their radar or in their fund setup.
                      Why?
                      The country offers a unique and flexible fund structuring environment. There
                      are so many options you can choose from and each of them has the potential to
                      meet your existing and future needs.
                      We can help you get the one that suits you best and help you from the set-up and
                      structuring phase, through investment, to the exit.
                      Our experts have worked on some of the largest funds’structuring in
                      Luxembourg and they’re ready to help you deal with your challenges.
                                                                                                                                                                                                                           1

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    www.pwc.lu
                                                                                                                                                                                                                                                                                                                                                                                                                                                   © 2017 PricewaterhouseCoopers, Société coopérative. All rights reserved.
                                                                                                                                                                                                                                                                                                                                                                                                                                         In this document, “PwC” or “PwC Luxembourg” refers to PricewaterhouseCoopers,
                                                                                                                                                                                                                                                                                                                                                                                                                                          Société coopérative which is a member firm of PricewaterhouseCoopers Internatio-
                                                                                                                                                                                                                                                                                                                                                                                                                                          nal Limited, each member firm of which is a separate legal entity. PwC IL cannot be
                                                                                                                                                                                                                                                                                                                                                                                                                                                          held liable in any way for the acts or omissions of its member firms.
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
CAPITAL          #10 I 9

                                                                                                     NEWS
FIRST INVESTMENTS
ANNOUNCED TO
                                       “INSIGHTS” INTO LUXEMBOURG’S
THE LUXEMBOURG                         RAMPING ASSET CLASS
DIGITAL TECH FUND
                                       LPEA hosted its first “Insights” conference
The Minister of the Economy            on the 26th of April in Luxembourg City.
Étienne Schneider, announced on        With many events already taking place on
July 10th 2017 the first two           the topic of Private Equity in Luxembourg,
investments by the public-private      it was the association’s goal to focus on the
Digital Tech Fund (DTF). The           testimonials of General Partners and
companies selected to each             Limited Partners operating in Luxembourg.
receive €500,000 are iTravel           While Luxembourg is fairly well-known for
(Cologne, Germany) and Nektria         its back office and middle office
(Barcelona, Spain). Both firms         operations, often linking the activity with
already have established entities in   the country’s legal and tax framework,
Luxembourg and will in the coming      LPEA made a point to showcase the
months increase their staff and        existing front office activity and the experts
operations in the country.             changing the face of the growing sector.
Expon Capital, the venture capital     The response couldn’t have been better.
firm responsible for the               The full room at the Philharmonie
management of the DTF fund,            welcomed 330 participants, most of which
reports having received 2000           were asset managers already dealing with
applications of which 200 were         or willing to expand their activities into the
profiled. A heavy task which           asset class.
exceeded the managers’                 Mark Florman, Chairman of LPEQ and
expectations but which now             keynote speaker of the conference, opened
concludes with the first two           the floor with an innovative approach to
investments. More investments are      private equity by introducing the Total
nevertheless expected from the         Return Rate – a new approach to measure
€20 million fund bringing together     the sector’s impact on society. A set of
commitments from the Ministry of       different panels followed covering different
the Economy, the SNCI, Post            topics from venture capital to private debt,
Capital, Proximus, Université du       emerging markets to structuring and
Luxembourg, Arendt &                   successful strategies. The conferenced
Medernach, BIL, Expon Capital,         closed with the untold story of Luxempart

                                                                                                                                    ©DR
High Capital and SES.                  by its founder and CEO François Tesch.

                                                                                        LAUNCH OF THE
                                                                                        NEW LPEA YOUNG
                                                                                        PE/VC LEADERS
                                                                                        COMMITTEE
                                                                                        LPEA created a new group dedicated
                                                                                        to the youngest Private Equity and
                                                                                        Venture Capital talents in Luxembourg.
                                                                                        The Young PE/VC Leaders aims at
                                                                                        developing new initiatives in view of the
                                                                                        challenges perceived by the younger
                                                                                        generation of professionals (under 40).
                                                                                        Seven sub-groups were created in the
                                                                                        following areas: Innovation/ technology,
                                                                                        Best practices, Tax, Legal, Promotion,
                                                                                        International Relations and Venture
©DR

                                                                                        Capital.
CAPITAL #10 - PRIVATE EQUITY MEANS LUXEMBOURG - THE PE JOB MARKET QUANTIFYING RISK - LPEA
Can time to market
                                                 be your competitive
                                                 advantage?
                                                 Find out how EY can guide you through the
                                                 Reserved Alternative Investment Fund.
                                                 ey.com/private-equity #BetterQuestions
© 2017 Ernst & Young S.A. All Rights Reserved.
CAPITAL       #10 I 11

                                                                    INTERVIEW

A HANDS-ON
APPROACH
TO LUXURY
AND BOUTIQUE
HOTELS                                                                                                           ©DR

IN THIS INTERVIEW, JAUME TAPIES, FORMER CEO OF RELAIS & CHÂTEAUX,
CO-FOUNDER OF AINA HOSPITALITY INVESTMENT FUND (A FUND THAT
INVESTS IN THE LUXURY HOTEL SECTOR), IN PARTNERSHIP WITH THE EDMOND
DE ROTHSCHILD GROUP, REVEALS THE KEY POINTS OF THE FUND’S BUSINESS
MODEL AND THE REASONS FOR DECIDING TO BASE IT IN LUXEMBOURG.
                       What’s the origin of the Aina                the children of my business partner, Liza
                       Hospitality Investment Fund?                 Masias, used to go to holiday camp. Liza
                       Aina originated in the Principality of       and I worked together previously at Relais
                       Andorra, where I’m from. It’s actually the   & Châteaux, where I was the international
                       name of a place where my children and        CEO until 2013. Liza’s family owns
12 I CAPITAL       #10

INTERVIEW

     several establishments in Latin         How is the Edmond de Rothschild              knew well as owners of the Domaine du
America. We identified an opportunity to     Group working with Aina?                     Mont d’Arbois, a superb Relais & Châteaux
develop this type of boutique hotel (small   Edmond de Rothschild is one of our           in Megève. We shared many values, in
luxurious hotels with 40-100 rooms) in       founding shareholders. When I left my        particular the French art de vivre. To us, it
major European cities and capitals,          position as president of Relais & Châteaux   seemed obvious that Edmond de
whereas Relais & Châteaux are generally      to found Aina, we immediately held           Rothschild would be a sponsor of Aina
located outside urban areas.                 discussions with the Group, which we         from the outset of the project. We are also
                                                                                          honoured to be part of the Edmond de
                                                                                          Rothschild Private Equity platform, which
                                                                                          is contributing its full investment fund
                                                                                          expertise. Several of the Group’s
                                                                                          managers belong to our Board of
                                                                                          Directors, providing us with their
                                                                                          know-how.

                                                                                          Have you achieved the targets
                                                                                          that you set?
                                                                                          The initial goal was to set up a fund with
                                                                                          around EUR 70 million, and to invest in
                                                                                          seven or eight hotels. However, our initial
                                                                                          research led us to launch a larger fund
                                                                                          with boutique hotels as well as larger 4-5
                                                                                          star hotels, provided that they represented
                                                                                          great opportunities. The first fund, Aina
                                                                                          Investment Fund – Hospitality Sub-fund,
                                                                                          was therefore able to raise EUR 153 million
                                                                                          (double what we originally envisaged),
                                                                                          through private and institutional investors.
                                                                                          This enabled us to build a diversified
                                                                                          portfolio of hotels in several European
                                                                                          cities: Vienna, Brussels, Berlin, Eindhoven,
                                                                                          Madrid and, more recently, Paris.

                                                                                          What is your investment
                                                                                          philosophy?
                                                                                          The fund is built on four main areas: the
                                                                                          hotel sector, of course, but also real estate,
                                                                                          corporate finance (i.e. the method used to
                                                                                          structure the transactions) and sustainable
                                                                                          development. These four areas can be
                                                                                          found in each of our projects.
                                                                                          We are able to acquire a hotel, take shares
                                                                                          in an establishment or even undertake a
                                                                                          complete development. For instance,
©DR

                                                                                          we’ve just acquired an office building in
                                                                                          the up-and-coming Belleville district of

“Luxembourg has an outstanding
                                                                                          Paris to turn it into a 119-room hotel. We
                                                                                          are also able to make opportunistic

reputation, in our investors’ opinion,
                                                                                          investments in hotels in distress.

                                                                                          How do you identify opportunities?
whether they are from the US, Asia                                                        Our Research team continuously analyses

or Europe. It has become a global
                                                                                          the market and has developed our own
                                                                                          attractiveness index per city. We have

hub for domiciling companies.”
                                                                                          identified a segment with approximately
                                                                                          66,000 hotels in Europe and our
CAPITAL         #10 I 13

                                                                                                                                                 ©DR
development team continuously analyses          better suited to private banking or family     Why did you choose a
2,000 of them.                                  office clients seeking geographical            Luxembourg corporate structure,
                                                diversification.                               a Specialised Investment Fund
How do you manage and monitor                                                                  (Fonds d’Investissement
your establishments?                            Have you identified enough target              Spécialisé – FIS) for your fund?
Each hotel has its own personality and its      investments for the planned                    “Luxembourg has an outstanding
own management. So we choose the most           launch of your Aina Investment                 reputation, in our investors’ opinion”, whether
suitable business model based on the            Fund II?                                       they are from the US, Asia or Europe. It has
location of the hotels that we find. Then, we   Absolutely. Our index accurately identifies    become a global hub for domiciling
select a brand with an appropriate              potential targets on a real-time basis. Out    companies. Luxembourg is close to all the
distribution network for each situation and     of the ten most visited countries in the       countries in which we invest. The country
an operator to manage the hotel. As             world, seven are in Europe. Furthermore,       offers an exceptionally high number of
owners, we oversee all the tasks and            70% of European hotels belong to               professionals in all areas of expertise. It can
operations and their implementation             independent proprietors, but hotel             also offer a very high quality of service and
through this three-way relationship. This       investments are highly capital-intensive.      highly competitive administrative efficiency.
means using real-time hotel monitoring to       There are many opportunities in European
manage the various hotel indicators such        hotels.                                        How can Luxembourg further
as occupation rates and average prices,                                                        increase its attractiveness?
as well as staff management and pricing,        How long do you keep your hotels?              To increase its attractiveness, Luxembourg
which fluctuate depending on supply and         An average of five years. This is how long     must continue to develop its transport
demand. Our hotels are monitored by             it takes to purchase, carry out works and      network and international links. It should
several Aina teams: an operations team, a       have a track record of at least three years.   also adjust its company management
marketing team and a team of engineers.                                                        costs, which are quite high.
                                                How do you go about reselling
What are the typical investors in               your hotels?                                   Interview by Nicolas Raulot,
your fund?                                      Once we have restructured them, the            Marketing & Communication of
Only ten or so investment funds invest in       hotels can become highly attractive to         Edmond de Rothschild (Europe)
the hotel industry, four in luxury hotels.      institutional investors such as pension
Practically all of them target institutional    funds. These may be strategic or financial
investors. We are of course open to such        investors. We always pit potential buyers         Read the full article on our website:
                                                                                                  www.lpea.lu
investors but our investment strategy is        against one another.
The world is evolving and so is tax.
We’re ready to take up the challenge with you.

                     www.atoz.lu
CAPITAL        #10 I 15

                                                                                               RISK

QUANTIFYING RISK
FOR PRIVATE EQUITY –
CHALLENGES
AND APPROACHES
                                                                                                                       ©DR

                         T
VALUE-AT-RISK (VAR) AS           he AIFMD requires the quantifi-       est from institutional investors for VaR
                                 cation of VaR for alternative         indicators for a number of reasons.
THE MOST IMPORTANT               (illiquid) assets as well, although   Firstly, investors are using risk measures
RISK INDICATOR IN THE            there are no standard models
                         available yet. Apart from formal require-
                                                                       for investment allocation purposes on an
                                                                       overall level. Secondly, they want to have
WORLD OF LIQUID          ments, it is fair to say that many experi-    a measure to quantify the risks of invest-
                         enced market participants in the “illiquid    ing into private equity. Last but not least,
ASSETS IS WELL           world” are not really convinced whether       investors want to get independent input
KNOWN AND                it makes sense at all to calculate VaR.       for their own internal risk management
                                                                       systems.
GENERALLY ACCEPTED       As investors are allocating a higher frac-
BUT STILL OFTEN          tion of their portfolios to alternative       Calculating VaR for private equity funds
                         assets, quantifying the risks related to      is difficult for several reasons. Firstly,
CRITICALLY DISCUSSED.    these assets becomes more important.          market prices and hence data are rarely
                         The objective of the VaR models for alter-    available and thus there are considera-
                         native assets should not only satisfy         ble limitations in using it for risk measure-
                         regulatory requirements but also provide      ment purposes. Secondly, returns of
                         added value to market participants.           illiquid assets are generally not normally
                         Accordingly, there is an increased inter-     distributed and therefore higher
Leading
        Luxembourg
        Fund
        Lawyers

LEGAL AND TAX ADVICE
                       - Client focus
                       - Connected to the market
                       - A global perspective with local expertise
                       - Knowledge and experience
                                                   > loyensloeff.lu
CAPITAL     #10 I 17

                                                                                                                   RISK

     moments of distribution functions
have to be taken into account which           “Despite conceptual challenges,
leads to additional complexity. Thirdly,
assets in private equity portfolios are       the models for measuring the VaR
often extremely heterogeneous and
have to be analysed individually, which       for investments in private equity
makes the exercise inefficient and
expensive.                                    have been successfully
There are quite a few solutions offered in    implemented and are producing
academic literature, but they only work
with plain vanilla portfolio structures and   satisfactory results.”
are hard to standardize for the day-to-
day business of an AIFM. Private equity
managers on the other hand usually rely       to be the most likely outcome. However,       such that monthly data up to the current
on well-known valuation models calcu-         because it is far from certain, we intro-     reporting date are available. This bridg-
lating simple scenario analyses in order      duce probabilities into the valuation         ing problem is addressed by forecasting
to find out what happens to the portfolio     model which is the key difference             the volatility and VaR figures by applying
company value if certain parameters           between simple valuation scenarios and        a specific GARCH model. An appropri-
change (e.g. the discount rate). However,     a true risk calculation. Finally, we gener-   ate model specification delivers a fore-
in terms of risk assessment, we not only      ate a probability distribution of the asset   cast model providing an up-to-date risk/
want to know what could happen but            value through Monte Carlo Simulations         return profile of a specific pre-deter-
also the probability for it to happen.        from which VaR figures can easily be          mined Private Equity exposure. In a final
                                              derived. This is done for each single         step this tailor made PE benchmark will
In order to deal with the above-men-          asset but also for the whole portfolio        be used to forecast the current VaR.
tioned challenges, Luxembourg                 which allows us to quantify diversifica-
Investment Solutions has developed two        tion effects as well.                         Despite conceptual challenges, the
principal models for calculating VaR for                                                    models for measuring the VaR for invest-
private equity investments. Considering       The “benchmark model” is used for             ments in private equity have been suc-
the “look-through” principle, we have a       fund-of-funds. Based on quarterly IRR’s       cessfully implemented and are
“single asset model” which generally          from a Thomson Reuters/Cambridge              producing satisfactory results. Most
works for all kind of income producing        Associates database, and a so-called          importantly, investors are keen to use the
assets even if there is no historical data    “asset allocation” from the manager with      risk figures as proper risk measurement
available. The second approach is a           information about invested strategies,        in private equity is increasing.
“benchmark model” which comes into            countries, regions, vintage years etc. we     Luxembourg has already developed its
play in the case of fund-of-fund struc-       calculate a fund-specific benchmark.          reputation when it comes to UCITS funds
tures where it is extremely difficult or      This benchmark needs to be econo-             and the associated risk management of
even impossible to analyse each single        metrically adjusted in two steps. The first   liquid portfolios. Promoting those risk
underlying asset.                             step is to rescale the quarterly IRR’s of     models for alternative assets on an inter-
                                              the benchmark to monthly returns, with        national scale would strengthen the
The “single asset model” starts with a        a specific frequency conversion and a         reputation of Luxembourg as a leading
valuation provided by the asset man-          so-called unsmoothing methodology             center of competence in terms of risk
ager/advisor or a third-party appraiser       which takes the autocorrelation structure     management for alternative asset
usually as a traditional DCF model (flow      of the time series into account. The typi-    classes as well.
to equity or WACC). This valuation is not     cal multi-lagged autocorrelation struc-
challenged by our models (although they       ture of the PE indices is mainly due to the
can easily be used for plausibility           inherent illiquidity, the smoothing effect                        Dr. Jörg Henzler,
checks) but rather replicated through a       stemming from quarterly appraisals as                             Professor of
so-called “reverse valuation” procedure.      well as stale pricing, for instance due to                        Economics and
In a second step, certain and uncertain       at-cost valuations. This methodology                              Financial Markets
parameters in the model are identified        produces a time series which is usually                           University of Applied
                                                                                                          ©DR

and the uncertain parameters are mod-         three to six months old due to the time it                        Sciences Trier
elled with appropriate likelihood func-       takes the target fund managers to com-                            Member of the Board
tions. The idea behind this is that the       pile the financial statements (“reporting                         of Luxembourg
manager has the best knowledge of the         gap”). Therefore, an additional step is                           Investment Solutions
asset value hence this value is expected      necessary to bridge this reporting gap                            S.A.
18 I CAPITAL        #10

RECRUITMENT

ARE JOBS KEEPING UP
WITH PRIVATE EQUITY’S
GROWTH?
HOW IS LUXEMBOURG DEALING WITH THE                                                                          TWICE THE OFFERS
                                                                                                            LPEA has been monitoring the positions
SOARING RISE IN PRIVATE EQUITY JOBS?                                                                        advertised in open job platforms2 for the
                                                                                                            past year and has concluded that the
                                                                                                            keyword “private equity” has been gain-

P
          rivate Equity (PE) is in the busi-   requests for experts in private equity is                    ing popularity. From 405 jobs posted
          ness of growing firms’ value in      perceived in the recruitment market with                     related to “private equity” in July 2016,
          the market. However, what has        some concerns on the availability of                         requests doubled to 805 in one year, an
          been most remarkable these           resources to fuel the sector’s growth.                       impressive increase which peaked at
past years is the growth of the private        Many of the requests come from the “PE                       864 in February 2017.
equity market itself. The asset class is       departments of Luxembourg-based ser-                         These figures should be taken as a refer-
attracting more investors and therefore        vice providers such as corporate ser-                        ence and not as an absolute value given
calling for more managers. According to        vices, law firms and consultancy firms”                      that several positions may be repeated in
Preqin1, in the past 10 years, an average      notes Gabriela Nguyen-Groza, Executive                       different platforms while others, notably
of 241 firms entered the private equity        Search Consultant. Julien Frighetto,                         C-level offers, may not be advertised at
and venture capital market each year.          Managing Consultant at Edouard Franklin                      all. Nguyen-Groza details the typical set-
Luxembourg is no stranger to such              focuses on the surge in requests coming                      up for a company settling its first office in
growth, with more GPs and LPs continu-         from “central administration and fund ser-                   Luxembourg: “we usually recruit the Head
ing to set foot in the country. A surge in     vices”. Many requests are also coming                        of Luxembourg (a highly-skilled Financial,
                                               from “oversight functions in accounting,                     Tax or Risk profile, very well-connected
                                               legal risk and compliance” says Rana                         locally) who will put the basis of the activity

        “At the                                Hein-Hartmann, Director at Funds
                                               Partnership, “smaller and mid-sized PE
                                                                                                            here. This person works with service pro-
                                                                                                            viders during the first months of the office

        moment,                                companies started to set up asset man-
                                               agement teams locally, although that is
                                                                                                            and afterwards he or she will recruit sev-
                                                                                                            eral highly qualified executives to work

        front                                  not yet the norm in Luxembourg”.                             within the entity in Luxembourg”.
              ©DR

office candidates                                PRIVATE EQUITY JOB POSTS IN LUXEMBOURG DOUBLED WITHIN ONE YEAR

from the UK are                                   900

applying to                                       800

senior vacancies,
but there is not
                                                  700

the plethora of                                   600

jobs available to                                 500

them. In time, this
will change.”
                                                  400
                                                                                                                                                                    Source: LPEA

                                                  300
Rana Hein-Hartmann                                      2016-07 2016-08 2016-09 2016-10 2016-11   2016-11 2017-01 2017-02 2017-03 2017-04 2017-05 2017-06 2017-07
CAPITAL      #10 I 19

Regarding recruitments from Service
Providers, the evolution to in-house
                                             example, where compensation packages
                                             increased significantly comparing to a few               “We have
executives is very smooth, as they have
deep expertise and long experience of
                                             years ago. The shortage in experienced
                                             PE profiles, as well as the arrival of a cer-            been very
working with PE clients, provided that       tain number of executives, will pull up the
                                                                                                      active in

                                                                                                            ©DR
there is a “no-compete” clause conflict,     compensation level in Luxembourg”. “The
as this clause is the norm in work con-
tracts in Luxembourg. “People coming
                                             mid-level bracket of €60-85k wages is
                                             already 20% better than the average sala-        the recruitment of
from service providers are generally
very attracted to PE firms as they see the
                                             ries for equivalent roles in London” points
                                             out Hein-Hartmann.                               more operational
passage from a client-services firm to
working within a PE house as a challeng-
                                             A solution to increase the talent pool is to
                                             recruit outside of Luxembourg, especially        PE professionals
ing and professionally rewarding step
forward in their career. They are people
                                             in positions less exposed to local specific
                                             knowledge. Outside Luxembourg is not so          for bigger clients
with a very ‘hands-on attitude’, who are
attracted to the ‘inside’ work of a PE
                                             distant with the country’s borders as far as
                                             15 kilometres away from other financial          which have to
house” concludes Nguyen-Groza.               neighbourhoods. The “Greater Region”
                                             surrounding Luxembourg has for long              face the
EVOLVING TALENT POOL
Recently, at an LPEA presentation in
                                             been a source of talent with a pool of 11
                                             million inhabitants. But the sector may as       increasing
London, Martin Eckel, Head of Legal at
Oaktree Capital Management addressed
                                             well go further away. “We are already see-
                                             ing a big shift of talent from the UK,           volume of work.”
the difficulties of finding and retaining    Eastern Europe and Southern Europe.
local talent in Luxembourg. Such an          The Luxembourg Financial Centre needs            Julien Frighetto
obstacle is not actually new to              to market themselves with high level grad-
Luxembourg. The banking and invest-          uates in finance from the top universities
ment funds industries also faced the         in Europe” notes Hein-Hartmann. To this          Groza reminds that “Luxembourg’s offer
same comments years ago and today            recruiter, the challenge is not so large “the    of internationally oriented schools has
fuel a financial sector estimated at         talent pool, because it is here, but the         increased in the last few years. There is
45,000 employees.                            employment law which unfairly falls on the       now even English or French sections in
Frighetto notes that “the PE sector’s        side of employees in most cases. More            public schools for free. Plus there is the
rapid growth has created a mismatch          rights to companies to take action against       tremendous opportunity for children to
between work offer and work demand.          poor performance and poor behaviour              easily become multilingual”. An advan-
Such shortage of profiles is making sala-    would drive positive performance and             tage that adds to the growing cultural
ries (and therefore general costs) to        growth”.                                         scene is the easy access to other major
rise”. He adds that “Luxembourg has to       For Frighetto, talent is attracted with          cities such as Paris, Brussels or
develop its talent pool to ‘normalize’ the   “competitive compensation packages               Frankfurt. Investments in infrastructure
situation and to sustain the sector’s        but also with good work-life balance”.           such as the tram line to open at the end
growth on a long-term basis”.                While quality of life is difficult to estimate   of the year also makes it easier to live
Nguyen-Groza notes that the rise in sala-    and compare, local authorities are mak-          closer to the job than professionals living
ries “is recurrent in some lines of busi-    ing a lot of effort to create a welcoming        in busy London.
ness, the latest being Compliance, for       environment for expatriates. Nguyen-             In summary, great candidates follow
                                                                                              great jobs and Luxembourg is adapting
                                                                                              to attract the very best talent.

        “Good professionals in                                                                1. 2017 Preqin Global Private Equity & Venture
                                                                                              Capital Report
        Luxembourg are well                                                                   2. Platforms monitored: eFinancialCareers.lu,
                                                                                              Jobs.lu, LinkedIn and Monster.lu.

        respected, well paid and
             ©DR

their companies are doing the best
they can to keep them happy.”
                                                                                                                    Luis Galveias,
                                                                                                              ©DR

Gabriela Nguyen-Groza                                                                                               LPEA
Finally, the planets
align for
blockchain
Out of Luxembourg comes
FundsDLT, a blockchain-based
product in development for asset
managers created by KPMG, InTech,
and Fundsquare.

Please visit www.fundsdlt.net
to experience this new platform.

www.kpmg.lu

                        © 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of
                        independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
                        All rights reserved.
CAPITAL           #10 I 21

                                                                                                      START-UP

TALKWALKER
TALKS
THE TALK

                                                                                                                                                              ©DR
AND WALKS
THE WALK
FROM TECHNOPORT INCUBATOR TO MONITORING
700 GLOBAL BRANDS, THE SUMMARY OF A
LUXEMBOURG SUCCESS STORY.

A
             rriving in Luxembourg in 2009,       ity of Luxembourgers and finds in the
             very little was happening in the     greater region a valuable pool of resources.     Thibaut Britz,
             entrepreneurial start-up space       As we write, 23 positions are open mostly        co-Founder,
             and few could suspect that one       in IT, marketing and sales.                      Talkwalker
of Luxembourg’s success stories was
about to emerge.                                  FINANCING
Talkwalker was founded back then by               Despite the start-up status, money has not
Thibaut Britz and Christophe Folschette,          been a recurring issue. The two founding
two young Luxembourgers disappointed              partners welcomed on-board Robert
with the perspective of “career jobs”. Britz,     Glaesener who joined the firm in 2010 as
by the age of 17, had already created “blue.      an investor and CEO. Additional private
lu”, the first local full text search engine in   funding of €3 million followed in 2013 from
Luxembourg. With an academic back-                local individual investors but only in

                                                                                                                                                        ©DR
ground in computer science it didn’t take         January 2017 did the firm reach out for fur-
long for the two to develop a service to          ther funding. Amsterdam-based Main
monitor brands’ online presence. Today            Mezzanine Capital pooled a €5 million           greatly from the Luxembourgish govern-
Talkwalker monitors social conversations          mezzanine loan from wealthy individuals,        ment help, especially from the Jeune
and pictures from 150 million websites in         family offices and (former) entrepreneurs,      Entreprise Innovante programme and sub-
187 languages across the globe, providing         an option mentioned by Britz to further         sidies to participate in business fairs
its clients with automated reports on how         finance expansion. With subscription plans      abroad. If something could change, it
consumers interact with their brands.             starting at €500/ month, the company has        would be to be awarded a subsidy in the
                                                  been able to fund its growth with a consist-    very first two years of activity for which we
INTERNATIONAL FOOTPRINT                           ent base of 700 clients. Nevertheless, Britz    did not receive any salary, in order to allow
Starting at Technoport incubator in 2010,         doesn’t exclude the possibility of seeking      everyone committed to start a business.”1
the company continued its growth moving           out new investors in the future.                As for the future, “the market is very com-
later to the Lux Future Lab and more                                                              petitive and requires companies to inno-
recently to a dedicated office in the city        A CASE STUDY WITHIN                             vate and be big to succeed” says Britz.
centre hosting most of its 150 staff. Three       LUXEMBOURG START-UPS                            After developing artificial intelligence to
business development offices in New York          Although already a “case study” in the          perform image recognition, Talkwalker will
(opened in 2015), San Francisco (opened           Luxembourg entrepreneurial landscape,           continue investing in keeping up its innova-
in 2017) and Frankfurt (opened in 2017)           the team tries to ignore that local status to   tive lead. Eventually it will finally get its first
complete the footprint.                           continue focusing on international develop-     client from Luxembourg!
Recruitment has not been a problem for            ment. Anyway, there are no major remarks
the fast-growing firm. Although having a          about the local resources available for         1. A €50.000 grant is now available in the context
                                                                                                  of the Fit4Start programme for the first 4 months
very international team, it employs a major-      start-ups according to Britz: “we benefited
                                                                                                  of activity.
22 I CAPITAL      #10

COVER STORY

PRIVATE EQUITY
        MEANS
LUXEMBOURG

                                                 F                                             “We like the
                                                          or the last few decades a majority
                                                          of Private Equity (“PE”) houses
                                                          have set up back-office struc-
                                                          tures in Luxembourg and started      region’s macro-
                                                 to use Luxembourg as a hub for their
                                                 European operations. Over the last five       environment.”
                                                 years, with the introduction of the AIFM
                                                 Directive as well as the increasing pres-
                                                 sure from the OECD BEPS project (“Base        result of significant changes in the inter-
                                                 Erosion & Profit Shifting”), the substance    national political and tax environment but
                                                 of these PE houses has been constantly        are also a combination of locally driven
                                           ©DR

                                                 reinforced and the operating model sig-       initiatives and innovations, long-term
                                                 nificantly upgraded, moving from passive      political and economic strategies, and
 JEAN-YVES HÉMERY,                               back-office structures to very active         the collective efforts of all the market
 INTERNATIONAL DELEGATE                          European Hub structures frequently            players towards a single goal: Let’s make
 OF ORANJE-NASSAU,
                                                 headed        by      Luxembourg-based        Luxembourg THE prime location for PE in
 WENDEL
                                                 Alternative Fund Managers (“AIFMs”). PE       Europe. Although there is still a long way
 Having been present in Luxembourg
                                                 businesses started effectively with vari-     to go to achieve the principal objective,
 since 1930, the Wendel Group has
 chosen to develop its private equity            ous portfolio companies offered by            which is to onshore to Luxembourg the
 business here owing to the country’s            Luxembourg but are now very often pack-       offshore PE funds, Luxembourg should
 very high level of stability and the            aged together with AIFMs and different        not be shy of saying that it has achieved
 safety of its legal and tax systems and         funds that together provide a real logisti-   a great deal so far and is probably in the
 the favourable environment in terms of          cal advantage which goes beyond the           best position to offer PE houses all they
 the competence of the various players           substance of the initial objective. With      need in the current environment.
 (supervisors, bankers, lawyers,
                                                 more than 6,000 PE professionals,             Let’s take a few concrete examples and
 auditors), all key components in
 having a long-term vision, which is a           Luxembourg is now home to the top 13          look at the main reasons for this success,
 pillar of the Group’s strategy.                 PE players worldwide. The changes             which has certainly not come about by
                                                 which are happening now are not only the      chance!
CAPITAL         #10 I 23

                                                                                                                                               ©DR
                                                                                                     PETER VELDMAN, MANAGING
                                                                                                     DIRECTOR, HEAD OF FUND
                                                                                                     MANAGEMENT, EQT
                                                                                                     The decision to create a hub for future
                                                                                                     EQT funds in Luxembourg formed a
                                                                                                     natural part of EQT’s growth strategy.
                                                                                                     We are looking at ways of future-
                                                                                                     proofing every single part of EQT, and
                                                                                                     consolidating the GP presence is one
                                                                                                     way of doing this. With Luxembourg,
                                                                                                     we can be sure that future funds are
                                                                                                     managed under the AIFM Directive
                                                                                                     within the EU, which is an important
                                                                                                     consideration for us. We also like the
                                                                                             ©DR

                                                                                                     region’s macro-environment and its
                                                                                                     ability to offer one-stop solutions for
                                                                                                     deal structures. On balance,

1
                                                                                                     Luxembourg is the best long-term
         COMMUNITY OF
        A                                        for the level of skills, development and qual-      solution for EQT.
        EXPERTS AND TALENTS                      ifications of its employees. It can be in no
        WHO HAVE SHARED THEIR                    doubt that the skills of people who special-
        PASSION FOR PE FOR                       ise in PE contribute strongly to the attrac-

                                                                                                   2
        MORE THAN 25 YEARS                       tiveness of the country. Beyond the                        N ATTRACTIVE AND
                                                                                                           A
When Luxembourg started to look at PE as         technical skills that all the professionals in            SUSTAINABLE GATEWAY
a real and different strategic opportunity, it   this industry have developed, genuine                     FOR PE INVESTMENT AND
mainly focused on the banking sector, but        expertise has also been gained over the                   CAPITAL-RAISING IN
at the same time it led the Asset                years in the PE business model. Far from                  EUROPE
Management industry, along with the U.S.         the old model of passive LBO (“Leveraged          What Brexit revealed more than a year ago
The expertise and reputation of                  Buy Out”), the PE business model has              is that an attractive tax and regulatory
Luxembourg built on the Asset Management         played a much more active role in develop-        framework without political stability is not
industry was therefore probably one of the       ing targets and assisting the potential for       sustainable in the long term. This is also a
main cornerstones of the foundation of the       growth, both locally and internationally. This    reason why Luxembourg is today the prime
PE community which serves PE businesses          change has helped to reinforce the attrac-        location for PE as it has always demon-
today. According to the World Economic           tiveness of PE to Luxembourg’s employees          strated a form of continuity and political
Forum’s 2015 Human Capital report,               while the country’s strong multicultural bias     stability which is second to none. Although
Luxembourg contains the highest propor-          has enabled it to attract levels of interest in   Brexit plays an effective role in accelerating
tion of the world’s most highly qualified peo-   PE which are unavailable to almost all other      the re-allocation of key functions to
ple. In other words, the study ranked            EU countries without such a lack of cultural      Luxembourg (such as risk management
Luxembourg “First”, ahead of Singapore,          or language barriers.                             and oversight), the Luxembourg authorities
                                                                                                   have always actively pursued the develop-
                                                                                                   ment of this market by setting up a “PE
“Private Equity is and will continue                                                               proof” regulatory and tax framework. Since
                                                                                                   2004, when the SICAR law was enacted,
to be the rising star of the                                                                       there have been many initiatives to come
                                                                                                   up with new laws or to develop specific
Luxembourg economy.”                                                                               vehicles dedicated to the PE industry.
Since 1798 in Finance.
 Since 1973 in Luxembourg.
Since 1998 in Private Equity.

M.M.Warburg & CO Luxembourg S.A. · 2, Place François-Joseph Dargent · L-1413 Luxembourg
                             Telefon +352 42 45 45-0
                       businessdevelopment@mmwarburg.lu
                                www.mmwarburg.lu
CAPITAL       #10 I 25

                                                                                    COVER STORY

      The Luxembourg special limited part-
nership (“SCSp”) and the Reserved
                                                   “The Luxembourg authorities
Alternative Investment Fund (“RAIF”) are
now completing a toolbox which is able to
                                                   have always actively pursued
compete with those in any other jurisdiction
but which, above all, offers to PE managers
                                                   the development of this market
a comprehensive list of attractive, flexible
and very competitive solutions from a “time
                                                   by setting up a “PE proof”
to market” standpoint. This Luxembourg
toolbox, which includes AIFMD-compliant
                                                   regulatory and tax framework.”
vehicles, is “tried and tested” and therefore
probably one of the best ways to gain              BEPS project, is the response of countries      better adapt to the new expectations of
access to EU Investors.                            and the ability of their business communi-      their customers, including Chinese, Islamic
                                                   ties to adapt to changes and to incorporate     as well as Green Private Equity players.

3
        ROACTIVE, REACTIVE
       P                                           these changes into local law when required.

                                                                                                   5
       AND BUSINESS-ORIENTED                       On 7 June 2017, Luxembourg signed the                   AST BUT NOT LEAST –
                                                                                                          L
       ENVIRONMENT                                 Multilateral Convention at the OECD in                 AN OUTSTANDING
At the current time no amount of confident         Paris, underlining once again its commit-              AND UNDISPUTED
economic predictions or indicators can tell        ment to transparency in tax but also its               QUALITY OF LIFE
us how an economy will perform in the              rapid implementation of the BEPS meas-          All of us have heard someone dispute the
future or what changes will be needed to           ures agreed by the G20 and the OECD.            potential attraction of Luxembourg, a tiny
keep up with developing economic circum-           The Luxembourg government has consist-          country without mountains or sea borders
stances in five, ten or 20 years’ time. What       ently pursued proactive economic devel-         at least once. Although we should admit
matters more, now that a number of signifi-        opment policies, while easy access to           that, on the face of it, this statement is true,
cant changes have been made, such as the           senior civil servants has always been a key     those who express such a view should
                                                   pillar of growth in the Luxembourg econ-        probably just look at the facts and figures
                                                   omy. PE is and will continue to be the rising   produced by our leading financial com-
                                                   star of the Luxembourg economy and it is        mentators which indicate no compromise
                                                   no coincidence that Luxembourg, with its        on the quality of life. The Independent and
                                                   business-oriented mindset, is now a per-        Business Insider UK, in a survey carried out
                                                   fect match for the PE community.                by InterNations and published in 2017,
                                                                                                   ranked Luxembourg as the safest country

                                                   4
                                                          A PRIME                                  in the world for expats and as having the
                                                          LOCATION                                 best healthcare system in the world. The FT
                                                          FOR LISTING                              also recently commented on Mercer’s
                                                   Did you know that Luxembourg is the num-        Quality of Living Survey, where Luxembourg
                                                   ber one market in terms of listed interna-      was ranked 20th and London 40th, glob-
                                             ©DR

                                                   tional bonds in Europe and the world’s          ally. With the second highest Gross
                                                   number one exchange for international           Domestic Product per capita (“GDP”) in the
  SEBASTIEN PAULY, HEAD OF                         securities listings? Issuers can list in        world (Qatar is first) and a growth projection
  FINANCE LUXEMBOURG,                              Luxembourg in as little as 24 hours and         for national GDP of 4.7% for 2017,
  OAKTREE CAPITAL                                  have a choice of two markets, amongst           Luxembourg is more than equipped to con-
  MANAGEMENT                                       which is the so-called Euro-MTF market for      tinue to invest in its hard and soft infrastruc-
  For PE/RE/DD houses of any type and              which the PE Industry has always had a          ture and to strive for excellence and the
  size, the main drivers in using
                                                   strong appetite. This market is generally       highest quality of life as well as offer the
  Luxembourg as an investment hub are
  the flexibility of the marketplace, its          seen as more flexible and is often selected     best environment for international busi-
  smooth and quick adoption of EU/                 by PE houses to list bonds aimed at financ-     nesses, skilled professionals and their
  OECD regulations, and the wide                   ing the growth of their portfolio companies     families.
  variety and availability of experts who          (add-ons) or at refinancing their pre-acqui-
  are able to advise efficiently                   sition external debt. Relying on its vast
  throughout the entire lifecycle of an            80-year experience, the Luxembourg Stock
  investment. Luxembourg is also well
                                                   Exchange keeps on diversifying to new
  known for its stability, which is one of
  the reasons why Oaktree decided to               markets such as those for CoCo Bonds
  list funds out of Luxembourg before              (Contingent Convertible Bonds), Dim Sum                                Alban Aubrée,
  Brexit took place.                               Bonds (Renminbi), Islamic Bonds (Sukuk)                                EY Luxembourg
                                                                                                                    ©DR

                                                   and, more recently, Green Bonds, so as to                              Private Equity
law is our art

                                     the leading business
                                   law firm in Luxembourg

                     95 experts covering
             the full spectrum of Private Equity

LUXEMBOURG     DUBAI   HONG KONG   LONDON   MOSCOW   NEW YORK   PA R I S
CAPITAL         #10 I 27

                                                                                       TECHNOLOGY

UNLOCKING THE VALUE OF
DISTRIBUTED LEDGER TECHNOLOGY
(BLOCKCHAIN) IN PRIVATE EQUITY

N
          ot long ago, distributed ledger          PROPERTIES OF DIGITAL LEDGER TECHNOLOGY (DLT)
          technology (DLT) was dismissible
          sci-fi hype, a faraway idea interest-
          ing but not yet relevant. However,
times have rapidly changed: DLT, commonly
called blockchain, is revolutionising the tra-
ditional and alternative asset management
sectors while producing real use cases in
banking, real estate, hedge funds, and pri-
vate equity (PE). Prominent examples in PE
include Northern Trust Corp’s use of block-
chain for record-keeping, or Citi-Nasdaq’s
partnership enabling payment services.
PE players face many challenges remedia-
ble, perhaps, by DLT.

CHALLENGES IN PE:
Intense competition, tight profit margins, and
investors’ cost sensitivity have created rising
cost pressures and necessitated new stand-
ards of efficiency and scalability.                POTENTIAL USES:                                   “DISTRIBUTED LEDGERS” are ledgers that are
                                                                                                     shared, replicated, synchronised, and spread
Simultaneously, the increasing volume of           • 
                                                     investment analysis, sourcing, and
                                                                                                     across multiple locations. DLT allows parties in a
investment strategies, regulatory hurdles,           decision-making;                                value chain or ecosystem to share data securely
and reporting requirements bring additional        • administration of investments; and             in near real-time, thereby opening up new
complication.                                      • ash-flow management.                           opportunities for peer-to-peer collaboration and
In operational terms, PE is ripe for evolution.                                                      transactions.
Standardisation has not yet taken place,           For example, creating digital identifiers for     “BLOCKCHAIN” is a type of DLT. It shot to fame
                                                                                                     because it powers the bitcoin cryptocurrency and
data is managed across disconnected plat-          portfolio companies would enable them to
                                                                                                     is now commonly used as a synonym for DLT.
forms, and technological solutions seem to         gather and share information, which would
                                                                                                     “SMART CONTRACTS” are self-executing
be lacking compared to other financial             streamline investment analysis, decision-         contracts programmable on a distributed ledger.
sectors.                                           making, and due diligence processes.              Standardised, fully-automated, and autonomous,
Now would be the time for PE firms to invest       Administrative processes like transactions,       they can ensure that agreements are fulfilled by
in better technology. Both decision-makers         capital calls, distributions, charges, and        all parties, automatically and nearly in real-time.
and administrators stand to gain from DLT.         financing could also happen via DLT. Cash-
                                                   flows and contracts could additionally be         tribution supply chain players, from custodians
BENEFITS OF DLT:                                   done using smart contracts, as could the          to transfer agents to asset service providers,
• real-time transaction settlement and auto-      handling of investor rights, shares, and units,   harmonising a currently fragmented ecosys-
  mation: smart contracts can automate the         meaning transparency and real-time infor-         tem. As an auditor who often leads operational
  validation of, for example, transactions or      mation accessibility and reconciliation.          discussions with clients, I am looking forward
  automatic payments;                              Industry players must be on the lookout for new   to revolutionary tools like this one.
• transparency and disintermediation of dis-      tools and start thinking about how DLT tech-
  tributed data: this results in there being one   nologies may create value within their value
  single source of truth, significantly decreas-   chains. One future offering is FundsDLT, a DLT-
  ing the amount of reconciliation work; and       powered platform for asset managers cur-                                  Valeria Merkel,
• notary function: blockchain can guarantee       rently in the testing phase. Under development                            Associate Partner,
  the authentication of documents and the          in Luxembourg by KPMG, InTech and                                         Audit at KPMG
                                                                                                                       ©DR

  traceability of records.                         Fundsquare, FundsDLT will interlink fund dis-                             Luxembourg
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