Looking at the way two of the largest economies of the world have developed, a saying I heard many many years ago comes to my mind: “America is run by lawyers – the UK is run by accountants.” With ever-increasing regulation imposed on the investment fund industry that undoubtedly plays a crucial role in the Grand-Duchy, one is tempted to add: “Luxembourg is run by auditors.”
Endorsed by the International Valuation Standards Council, or IVSC, a new association labelled Luxembourg Valuation Professionals Association, or LVPA, exited stealth mode this week and attracted a room full of valuation professionals for its inaugural event. Its objective? Amongst others: representing the valuation profession with regulators, standard-setting bodies, and other professional organisations, in a challenging and ever changing environment.
Whilst LVPA is not restricted to any particular asset class or even the fund industry, I consider the well-received launch of this organisation a very important milestone and signal to the international private equity community specifically. Since the implementation of the Alternative Investment Fund Manager Directive, or AIFMD, and the well-timed revamping of the limited partnership regime, Luxembourg has seen unprecedented growth in attracting the world’s leading private equity houses, allowing them to mirror the model that was already successfully implemented for traditional mutual funds which put Luxembourg at the top of the fund industry in the world: local management company, outsourced portfolio management, local governance and oversight.
Learning curve
The industry had quite a learning curve though: traditional fund domiciles such as the Channel Islands, Delaware or Cayman Islands benefited from their long-standing history, as they have supported Private Equity General Partners - GPs - sometimes from their first fund vintage all the way up to the multi-billion mega buyout funds that we all know and love today. This includes building a trustful relationship with investors - Limited Partners, LPs - auditors, lawyers and other stakeholders, and probably also f**ing up (and learning along the way!) on every single aspect of the LP/GP relationship, from key men events, GP breakups, LP disputes, over confidentiality breaches, incorrect calculations of carried interest distributions, to outright fraud.
Zooming in on financial reporting, the de-facto standard that evolved in this very process are accounting standards generally accepted in the United States, known as “US GAAP”. Unlike other reporting frameworks, it specifically caters for the private equity industry, and the various committees at the level of the standard setter and industry bodies do recognize the importance of financial reporting for closed-ended funds investing in illiquid assets. With a few hiccups (that’s a story for another time …), US GAAP is a permissible framework also in Luxembourg, but the devil is in the details.
Intricacies
Unlike their peers from overseas, market participants in Luxembourg have had to wiggle their way through the intricacies of valuation and financial reporting thanks to the European lawyers’ habit of referring to Invest Europe (or EVCA as some outdated Limited Partnership Agreements still refer to) or International Private Equity Valuation Guidelines, known as IPEV, which play a somewhat limited role in other fund domiciles.
Luckily, IPEV and US GAAP are not conflicting frameworks, but the lack of institutional knowledge of dealing with mega-funds has always been a source of friction in Luxembourg. Tapping into guidance specifically designed for US GAAP did not always help to ensure that all stakeholders shared the same understanding.
To me, the launch of the LVPA is a major building block in ensuring that Luxembourg as the world’s leading fund domicile has a seat at the table and is able to reconcile the needs of all market participants, allowing the regulator to voice their concerns, auditors to align on their interpretations of legal and regulatory requirements, and practitioners to implement adequate policies and procedures. I believe this will be a major contribution to Luxembourg’s reputation as a private equity powerhouse, demonstrating that we have outgrown the early days of “let’s figure out what’s going on here”, and live up to the high expectations of the international investor community.
Nic Müller is CEO at Avega Capital Management SA, an independent, owner-managed Alternative Investment Fund Manager in Luxembourg.