Luxembourg’s first private markets fund vehicle was created exactly two decades ago this summer. Sicar is the French acronym for Société d’Investissement en Capital à Risque, or investment company in risk capital. Lawmakers, led by then-finance minister Luc Frieden and encouraged by the industry, embraced a whiff of entrepreneurship when they gave life to Sicars in 2004.
A Sicar is a public or private company that raises funds to invest in risk-bearing capital. It was the first private equity vehicle in Luxembourg and benefits from a streamlined status under Luxembourg corporate law, as well as a favourable regulatory and tax regime. By 2022, some 350 Sicar fund units were registered, with collective assets valued at approximately 62 billion euro, according to Luxembourg For Finance.
“The people who created the Sicar were like startup entrepreneurs. They had an idea, no guarantee it would work, but it did, and it has grown tremendously,” said Hans-Jürgen Schmitz, managing partner at Mangrove Capital Partners. “None of this infrastructure existed in 2004, making it a bold move to enter an asset class where the entire industry was primarily focused on Ucits and the liquid market. It was a significant risk to venture into this new direction that wasn’t on anyone’s radar at the time.”
Competitiveness
Schmitz spoke at a recent panel hosted by the Luxembourg Private Equity Association that also included Keith O’Donnell, managing partner at Atoz Tax Advisors, and Gilles Dusemon, partner in the investment practice at law firm Arendt & Medernach.
Back in 2004, the Sicar regime was inspired by wider discussions at the European level about competitiveness. At the time, policymakers in Brussels still felt the EU had the potential of becoming the world’s most competitive economy by 2020, under a process known as the Lisbon Strategy to create jobs and boost growth.
‘It was a bold bet back then to go into that asset class where the entire industry was focused on Ucits alone.’
Hans-Jürgen Schmitz, Mangrove Capital Partners
Luc Frieden, Luxembourg’s finance minister at the time, embraced that thinking and tabled a tax efficient way to invest in risk-based ventures in 2003, just after the dot-com crisis. Less than a year later, the new Sicar law took effect. This legislative move aimed to position Luxembourg as a prime location for private equity and venture capital funds, which were crucial for the growth and innovation of European SMEs.
“When you look now, fast-forward 20 years, we can say that these objectives were not only certainly achieved but by far surpassed,” said Dusemon.
Initially, the Sicar regime faced scepticism. The Luxembourg financial sector, primarily focused on Ucits (Undertakings for Collective Investment in Transferable Securities), was not accustomed to the complexities of private equity. However, the industry quickly adapted, recognising the potential of Sicar to attract significant investment.
Reservations overcome
“In the beginning, it was quite a challenge because Luxembourg wasn’t known for this type of activity,” said O’Donnell. “While many players were aware of private equity, they weren’t familiar with administering it. Some people questioned how they could serve as a depository for a listed security or a share in a company when they didn’t fully understand the process. There were many discussions around these issues, but gradually, people began to overcome their reservations and find ways to get comfortable with their responsibilities.”
Early adopters of the Sicar regime, such as Mangrove Capital Partners, demonstrated its viability by successfully raising and managing funds under this new structure.
The success of Sicar laid the groundwork for subsequent developments in Luxembourg’s financial sector, building its global status as the world’s biggest private equity hub outside the United States. In 2007, the introduction of the Specialised Investment Fund (SIF) provided another flexible tool for alternative investments, broadening the target audience towards high net worth investors. This was followed by the implementation of the AIFMD (Alternative Investment Fund Managers Directive) in 2013, further aligning Luxembourg’s regulatory framework with European standards and enhancing its attractiveness as a hub for alternative investment funds.
‘Bold bet’
“The success of the Sicar regime led to the SIF becoming possible in 2007. It was a bold bet back then to go into that asset class where the entire industry was focused on Ucits alone,” said Mangrove’s Schmitz.
“We had to start somewhere,” O’Donnell explained. “Unlisted assets weren’t really common back then. We had experience with some real estate funds, but similar questions arose: how do you evaluate a property held by one company that’s owned by another company? There had been some preliminary thinking on this, but the Sicar framework was particularly useful. It provided a clear legal structure, and everyone could say, ‘We now have a specific law to follow.’
“Regardless of the service provider, we all worked within this framework, specialized, and invested accordingly. This approach allowed us to create a robust ecosystem. Given the industry’s growth since then, we were fortunate to have started when we did. As the sector expanded and regulation became more prominent, we were already prepared and equipped to handle it.”
Luxembourg today is home to a thriving private equity and venture capital industry, supported by a robust regulatory framework and a dynamic financial ecosystem. The principles established by the Sicar regime have been integrated into other investment structures, such as the SIF and the Raif (Reserved Alternative Investment Fund).
Maintaining the edge
Nevertheless, like in 2004, maintaining Luxembourg’s competitive edge in the ever-changing global financial markets is still top-of-mind in the fund industry. Three key recommendations for now-prime minister Luc Frieden emerged from the discussions: addressing housing challenges to attract and retain talent, reforming the taxation of carried interest, and enhancing administrative efficiency through digital tools and streamlined processes.
“This is more of a challenge for prime minister Luc Frieden than for the finance minister, but it must be addressed to maintain our competitive edge,” said O’Donnell. “We frequently hear from private equity executives in the UK who are considering relocating due to dissatisfaction with the UK’s current direction. Luxembourg needs to position itself as an attractive destination for these professionals.”
Mangrove’s Schmitz addressed the need for predictability and efficient administrative and regulatory procedures. “This is crucial for both the private equity and venture capital industries, which seek not just a single solution but a multifaceted approach. It’s clear that both practitioners and policymakers recognize this need, but we must also address the basics.”
‘Luxembourg needs to position itself as an attractive destination for these professionals.’
Keith O’Donnell, Atoz Tax Partners
“Operating in a global industry, we see how quickly things can be done elsewhere—such as creating a company in a day or opening a bank account in two days. In Luxembourg, it takes six weeks to create a company, three to six months to open a bank account, and up to a year to obtain a licence, all while costs continue to rise. We need to fix these fundamental issues to remain competitive.”