There and back again

Alternatively to stating “Lux or bust”, one could ask “is Lux a must?” As we traversed Europe and asked different GPs that very question, some answered a resounding “no”.

For non-European GPs who rely on the marketing passport to distribute their funds across Europe, the answer is likely to be yes. But for GPs based in the bloc, the picture is slightly more nuanced, with some of them outright avoiding Luxembourg.

Let me indulge you in a story I hear all too often when speaking to private equity firms based in Germany. The tale tells of an ambitious emerging manager incorporating their very first fund in the country. Once they see success and look to raise fund number two, they make the journey to Luxembourg to domicile their next platform there.

Then, they meet the regulator in Luxembourg. For fund number three, the German GP returns to where they came from.

“Luxembourg is slightly more tax efficient than Germany,” admits one CFO from a German midmarket private equity firm. “However, when you weigh the financial benefits against the increase in workload and regulatory obligations – bottom line, for us it didn't work out.”

The LPs investing in the funds do not seem to mind either. “Generally, fundraising takes longer rather than being outright impossible,” shares Georg Metzger, senior economist at KfW. “Established managers are faring comparatively well, while emerging managers are facing the most challenges.”

An explanation for this could be the LPs backing German funds. According to statistics from the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften, the biggest sources of funding for private equity funds in 2021 were public investors (34%) followed closely by other asset management funds (31%), pension funds (12%) on par with family offices and private investors (12%), and finally insurance companies (9%) and credit institutions (8%).

The biggest LPs backing German private equity firms are not under the same scrutiny as traditional institutional investors such as pension funds and endowments, and might as a consequence be more open to a locally grown fund.

Small bier
Still, private equity is a small share of Germany´s fund landscape. According to data from the Deutsche Bundesbank, published in August 2023, the country is home to €104bn in assets held in closed-ended funds. Out of this, 15% are private equity funds, 9% are venture capital and 8% are fund-of-funds.

Germany's government is set to further improve these conditions and make the country more attractive for private funds. The Zukunftsfinanzierungsgesetz comes, among others, with a VAT exemption for alternative investment funds.

While some firms will still opt to domicile in Luxembourg and get an AIFM to assist with the management, this practice is increasingly common among the country´s fund-of-funds managers.

But operational burdens are not the only reason for remaining in Germany. “Local funds provide more transparency and security, both for founders and LPs,” shares another CFO with us. “Private equity operates predominantly in the Mittelstand and the leadership of portfolio companies feels more assured when everyone is sitting around the same table and half of the attendees are not calling in from different parts of the world.”

Overview: PE funds in Germany (2022)
Source: Christoph Scheuplein, Study 470, “Private Equity in Germany”, February 2022, published by Hans Böckler Stiftung

	Number of	Percentage	Overall volume	Fund volume overall
€0-99m	29	9%	€1.7bn	0.3%
€100-299m	69	21%	€13bn	2%
€300-499m	45	14%	€17bn	3%
€500-999m	59	18%	€40bn	7%
€1,000-1,999m	46	14%	€64bn	12%
> €2,0000m	83	25%	€399bn	75%
	331	100%	€534bn	100%