A Look at Fund Finance in Luxembourg 2022: Trends, Developments, and Insights
In spite of the difficulties in the global economy and, in particular, the galloping inflation and the resulting increase in the interest rates, the fund financing market remained strong throughout the year. The Luxembourg market was also active, with a large number of transactions, particularly in the first half of the year. The appetite of market participants stayed strong, with an increase in interest for financing continuity funds and secondary transactions.
2022 also saw two important legislative changes for the fund finance sector in Luxembourg. The Luxembourg law of 22 March 2004 on securitization, as amended (the “Securitization Law”) governing Luxembourg securitization vehicles (“SVs”) has been deeply modernized in February, while the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”) (which applies to all security interests granted in connection with fund financing) has been amended in July.
- Modernization of the Securitization Law
The modernization of the Securitization Law has been a boost to the attractiveness of Luxembourg securitization vehicles. The main changes include greater flexibility for Luxembourg vehicles to provide direct guarantee and collateral for the benefit of the creditors involved in the securitization. This flexibility affects many investment fund financings in which Luxembourg securitization vehicles are involved. It will now be possible to simplify the structuring of these financings.
In particular, any securitization vehicle acting as a feeder to a borrowing fund is able to grant guarantees and collateral in favor of the creditors directly, avoiding cascading collateral structure, in certain circumstances. 2023 may provide an opportunity to re-structure and simplify these financings accordingly.
- Amendment to the Collateral Law
The Financial Collateral Law, already known as a strong and flexible instrument used mainly for security purposes in international and national financing transactions, has been strengthened by the recently enacted law of 20 July 2012 (from draft law no. 7933).
The amended Financial Collateral Law now expressly provides for the enforcement of a pledge for any agreed enforcement event other than a payment default, meaning that a pledge governed by Luxembourg law that falls within its ambit (such as a pledge over claims related to investor commitments or a pledge over bank accounts) can be enforced without prior acceleration of the secured obligations. This amendment is a further reminder of the independence of pledge agreements from the secured obligations.
Furthermore, when enforcing a pledge over units of a collective investment undertaking, the pledgee may now demand the redemption of the pledged units at the redemption price provided for by the fund's constitutional documents.
What's in store for 2023
2023 promises to be just as busy from a legislative point of view. The very expected arrival of new ELTIFs following the significant amendments to the Regulation 2015/760 on European long-term investment funds promises the implementation in force of these new vehicles. Luxembourg is naturally positioning itself as the future centre of ELTIFs, largely favoured by its advanced and well-known expertise in investment funds. The revised ELTIF Regulation is expected to be in place by the end of 2023 but no later than beginning 2024. Fund managers are already looking to set up ELTIFs very soon after the revised regulation comes into force. This will certainly create new opportunities in 2023.
While the end of 2022 has led to a temporary slowdown in fundraising in some investment sectors (notably private equity deals), 2023 opens as a year of uncertainty for fund finance market participants. They are now on the lookout for other innovative products, outside the traditional subscription lines, NAV and hybrid facilities, such as a mix of fund financing and securitization. In this regard, the modernization of the Securitisation Law opens up new opportunities. New ways of using existing products (e.g. holding investments for a longer period using NAV facilities) may also provide further alternatives. The rise in interest rates will undoubtedly have an impact on market trends in the year ahead.
With the recent optimistic economic news, the European market could hope for more dynamic fundraising and the deployment of many investment funds in 2023, particularly in favourable sectors such as infrastructure, renewable energy and private debt.
SJL has developed a strong fund finance practice acting for financial institutions, investment funds and fund managers in connection with the financing and refinancing of their activities, including the acquisition and development of investments through subscription lines, the financing of management commitments and structures, and the implementation of NAV facilities for their investments.
SJL has successfully completed over 50 fund financing transactions in 2022.
SJL's lawyers have acquired and developed significant and recognised expertise in this area while working for firms such as Clifford Chance, Loyens & Loeff, EHP and Baker & McKenzie prior to joining SJL. The experience gained in international law firms has enabled SJL's partners and lawyers to develop the skills necessary to provide legal services to demanding international clients, and the experience gained in such a variety of firms also explains why SJL offers a unique approach to the Luxembourg legal market in terms of legal skills, pragmatism and responsiveness.
Antoine Fortier Grethen, head of SJL's Fund Finance Practice, has been recognised by Legal500 as a Next Generation Partner in his field since 2021.