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Major Law Firms Expand into Europe Amid Private Equity Surge
Luxembourg Emerges as Europe’s Premier Hub for Private Capital and Alternative Investments
The Buyside Journal
December 09, 2024 • Estimated Reading Time: 7 minutes
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The legal industry is witnessing a strategic shift as top law firms, Simpson Thacher & Bartlett and Herbert Smith Freehills (HSF), announce plans to open offices in Luxembourg.1 This move aims to leverage Luxembourg's growing prominence as the "gateway to Europe" for private capital.1 This article explores these developments, the motivations behind the expansion, and the broader implications for alternative investments and private markets.
Law Firms Opening Doors in Luxembourg
Simpson Thacher & Bartlett and Herbert Smith Freehills are set to open their Luxembourg offices early next year, marking significant expansions in their European operations.1 Simpson Thacher has recruited three funds partners from "magic circle" rivals A&O Shearman and Clifford Chance to spearhead its new office.1 HSF has also brought on board two lawyers from A&O Shearman and a partner from Maples & Calder.1
Key Highlights:
● Simpson Thacher's Private Funds Expertise: The firm has a renowned private funds practice, advising on substantial fundraisings for industry giants like Blackstone, CVC, and EQT.1
● HSF's Clientele: Herbert Smith Freehills counts major players such as Blackstone and EQT among its clients, highlighting its influence in the private capital market.1
Luxembourg: The Gateway to Europe for Private Capital
Luxembourg has solidified its position as a central hub for private equity and alternative asset managers, offering a favorable legal and regulatory environment, tax efficiencies, and access to a growing retail market of affluent individuals.1
Why Luxembourg?
● Regulatory Environment: Luxembourg's legal framework is conducive to private capital operations, providing stability and flexibility for fund structures.1
● Tax Efficiencies: The country offers advantageous tax regimes that attract fund managers seeking efficient structures for their investments.1
● Retail Market Growth: There is a rising trend of "retailisation" of alternative investments, allowing private equity firms to reach mass-affluent individuals in Europe.1
"The reality is that Luxembourg has become the gateway to Europe for large private equity funds, so if you want to market to European investors, you’re almost certainly going to do that through Luxembourg," said Gareth Earl, head of Simpson Thacher’s European funds practice.1
Implications for Alternative Investments and Private Markets
The expansion of top law firms into Luxembourg signals significant trends and potential shifts in the alternative investments landscape.
1. Growth of Private Equity and Venture Capital in Luxembourg
● Increase in Assets Under Management: Private equity and venture capital funds in Luxembourg saw a 5.7% growth, reaching €174 billion in assets under management in the year to December 2023.1
● Dominant Fund Domicile: Luxembourg accounts for 54% of European-managed private capital funds that have commenced investing this year.1
This growth underscores Luxembourg's attractiveness as a domicile for funds, facilitating access to European investors and markets.
2. The "Retailization" of Alternative Investments
● Access to Wealthy Individuals: Private equity firms are increasingly targeting affluent retail investors, expanding their investor base beyond traditional institutional investors.1
● Innovative Investment Products: Firms like Blackstone have raised $6 billion for private equity funds tailored to individual clients.1
● ETFs in Private Credit: Apollo Global Management and State Street launched an exchange-traded fund investing in both private and public credit, aiming to attract retail investors.1
This trend indicates a democratization of alternative investments, making them more accessible to a broader range of investors.
3. Enhanced Legal and Advisory Support for Private Markets
● Specialized Legal Services: The presence of top law firms in Luxembourg provides specialized legal expertise essential for complex fund structures and compliance with European regulations.1
● Facilitating Cross-Border Investments: Law firms can better support clients in navigating cross-border transactions and regulatory landscapes, enhancing the efficiency of capital deployment in private markets.1
What This Signals for the Industry
For Alternative Investment Firms:
● Strategic Expansion: Firms may increasingly consider Luxembourg as a strategic base for European operations.1
● Regulatory Compliance: With the support of established law firms, navigating the regulatory environment becomes more manageable, encouraging more firms to enter the market.1
● Investor Diversification: Access to the European retail market provides opportunities for diversifying the investor base and raising larger funds.1
For Private Markets:
● Increased Competition: The influx of funds and firms may intensify competition in private markets, potentially leading to more innovative investment strategies.1
● Market Maturation: The professionalization and expansion of services indicate a maturing market, which may attract more institutional investors seeking stability and expertise.1
● Regulatory Evolution: As the market grows, there may be increased regulatory scrutiny, prompting firms to adopt higher compliance standards.1
Conclusion
The move by Simpson Thacher & Bartlett and Herbert Smith Freehills to open offices in Luxembourg is a strategic response to the evolving dynamics of alternative investments and private markets.1 Luxembourg's favorable environment offers significant advantages for fund managers and investors alike.1 This development signals a broader industry trend towards globalization, specialization, and democratization of alternative investments. Firms that adapt to these changes are likely to capitalize on new opportunities and drive growth in the private markets sector.