After more than four successful years following its enactment, the law of June 15, 2004 relating to investment company in risk capital (SICAR) is being modernised to fit industry needs and thereby further benefiting its operational flexibility. The proposed modernisation aims to, among other things, increase the attractiveness of the Luxembourg limited partnership (société en commandite simple or SCS) for risk capital structuring purposes.
The Luxembourg legislature is following a two-fold approach for SCSs, largely based on comments from practitioners and inspired by the needs of the private equity industry. It aims to allow an SCS to also opt for a variable share capital structure, as well as to replicate Anglo-Saxon financing techniques for partnerships.
A flexible tool
The proposed amendments will align the SCS with the other available corporate structures, so as to allow a SCS organised as a SICAR to have a variable share capital (to provide in its articles of incorporation that the amount of its share capital shall at all times be equal to its net asset value). As a consequence, variations in the share capital of the SCS shall be effected by law. They will not have to comply with any measures regarding publication in the Official Gazette of the Grand Duchy of Luxembourg (Mémorial) and registration with the register of commerce and companies (Company Register).
The Luxembourg Council of State (Conseil d'Etat) welcomed this proposed amendment by confirming that the variable share capital structure represents a significant innovation for an SCS organised as a SICAR. It also recommended that a SCS organised as a SICAR with a variable share capital should be allowed to derogate from articles 6 and 17 of the commercial companies law of 1915 (1915 Law), as well as from article 6 of the law of December 19, 2002 on, among other things, the Company Register (2002 Law). This will ensure a consistent application of the variable capital concept.
Non-disclosure of limited partners' identity and commitments
The derogations from article 6 of the 1915 Law and article 6 of the 2002 Law would allow a SCS organised as a SICAR with variable share capital not to disclose their limited partners' identity and the amounts of their commitments to the SCS in the Mémorial and to avoid any registration thereof with the Company Register.
Efficient repatriation of available cash
The derogation from article 17 of the 1915 Law would allow the managing general partner of a SCS organised as a SICAR with variable share capital not only to make profit distributions, but also any other payments whether they represent interests, gains, dividends or capital. This would not trigger the obligation to protect creditors' rights in respect of a fixed capital structure, which could lead a limited partner to be forced to repay any interest and dividends received, if they have not been paid out of real profits. Such a structure consequently allows the managing general partner not only to return any profits on investments to investors, but also the acquisition cost of any realised investments. This enables a flexible and efficient repatriation of excess cash to investors.
Anglo-Saxon financing techniques
The Luxembourg Chamber of Commerce, while commenting on the draft bill amending the SICAR legislation, has confirmed that recent Luxembourg practice has replicated a recurrent financing practice used by Anglo-Saxon limited partnerships. This consists of the capitalisation of the partnership with a minimum share capital amount (remaining fixed), the balance of any financing needs being satisfied on the basis of (interest free) loan commitments from limited partners pro rata to their "equity" participation.
Maximum financing and refinancing flexibility
The replication of this mixed financing of capital and loan commitments permits maximum financing and refinancing flexibility for a SCS organised as a SICAR. Additionally, combined with a Luxembourg special purpose acquisition or financing vehicle (Soparfi), it provides for a tax efficient private equity investment structure.
Legal certainty
The Chamber of Commerce has, in its aforementioned comments, also confirmed that nothing should prevent the limited partners of a SCS to simultaneously be creditors. Consequently, it has suggested that the legislature confirm that for a SCS organised as a SICAR, loan commitments would not incur any risk to be requalified into share capital or capital commitments. This provides legal certainty to practitioners and the industry regarding such structuring.
Positive conclusion
The revisions, which are largely based on the needs of the private equity industry, will surely have a positive impact on the SICAR regime and ensure its continuing success with promoters and assets managers, as well as within the investor community. Furthermore, the increased attractiveness of the Luxembourg limited partnership under the SICAR regime should resonate within the international private equity community and stimulate the use of the SCS organised as a SICAR.
About Loyens & Loeff Luxembourg
Loyens & Loeff Luxembourg is an integrated corporate and tax law practice which comprises more than 125 fee-earners and offers corporate and tax services on a fully integrated basis. Loyens & Loeff Luxembourg handles all matters relating to corporate and commercial law, real estate, investment funds, private equity and venture capital, mergers and acquisitions, banking and financial law, and tax law.
Loyens & Loeff Luxembourg is affiliated with Loyens & Loeff, which has over 900 fee-earners in 18 offices in the Benelux and the main financial centres of the world.
Contact:
Marc Meyers
Tel: +352 466 230 306
Email: marc.meyers@loyensloeff.com
Matthieu Chambon
Tel: +352 466 230 277
Email: mattheiu.chambon@loyensloeff.com
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