Over recent years, net assets under management in alternative funds in Luxembourg —private equity, real estate, private debt, infrastructure or hedge funds—have grown phenomenally. But when it comes to closing time, how to ensure the process runs smoothly, quickly and correctly?
More and more, asset managers procrastinate on the liquidation of their structures because they prefer to focus on other tasks. This means the increasing number of structures to liquidate on their to-do list makes the topic urgent.
Monica LaFleur and Viktor Van Vriegal are two of the alternative investment fund managers of a large and very successful alternative investment fund that is well defined and is coming to its maturity. Their core strength is fund raising. Their fund is domiciled in Luxembourg but contains multiple investors from a variety of countries and holds many different entities.
Monica and Viktor’s business is running very well. Their top priority is client satisfaction and making sure they run the business, that is, managing investments, de-investments. Each de-investment leaves some empty entities behind.
Don’t have time to read the whole blog entry? Then watch our “Blog in 1 minute” video for a quick summary of its main points:
The time to close these companies is, in many cases, postponed due to lack of resources. This results in unexpected and useless costs, and quite possibly a few headaches. This is the reason why Monica and Viktor are looking for solutions to help them with this massive amount of work.
Liquidation is something that all players in fund management face. When our fund managers Monica and Viktor worked with their team to set up the fund, they incorporated a large number of entities as the fund grew. After the fund has divested an investment and distributed returns to investors, they need to get rid of all the entities they opened for the purpose of this investment.
Let’s talk about voluntary (solvent) liquidation
Liquidation is a process by which a company’s existence is brought to an end, and the law classifies it into two types: voluntary (by way of shareholder(s)’ decision) or judicial (by way of a court order). This scenario is a voluntary solvent liquidation, and in this blog we are only referring to the voluntary liquidations of solvent Special Purpose Vehicles (SPVs)* in Luxembourg. There are of course other liquidations, but we won’t cover those conditions here.
*A Special Purpose Vehicle (SPV) is a separate legal entity created by a parent company for a specific objective, often to isolate financial risk.
The de-investment phase of the fund is looming on the horizon
In the case of the fund Monica and Viktor are overseeing, however, the fund has started to de-invest, so they need to think about exiting companies.
What’s going through their minds? Certainly a sense of responsibility that the liquidation goes well, but also an overwhelming feeling of the enormity of the task and its administrative burden. They feel alone. While they loved working with their team to set up and manage the fund and it attracted a lot of players making the venture very successful over its lifetime, now they just want to be finished. There is a lot to do before Monica and Viktor close the fence.
A conversation between Monica and Viktor
Monica: “Viktor, I’m feeling a bit uneasy and there is just so much to do to liquidate our structures. This work needs to be done correctly. What are other players on the marketplace doing? What are our risks? Are people in- or out- sourcing this work? What challenges might we face?”
Viktor: “I know what you mean. There are just so many aspects in liquidating our SPVs and fund entities. How should we terminate our contracts? What’s the cheapest way of liquidating the structure? How to reduce and manage our risk?”
Monica: “I am a bit worried about how we can avoid delaying the liquidation when the company still needs to receive a payment or is still at risk? And our staff is so overloaded at the moment and we aren’t a huge firm. We could do it, but we could really use some advice and to be honest the team would be just as happy as I would be to get technical expertise so everything goes without a hitch.”
Viktor: “I’m also worried about delays. I mean, what would the cost be if we delay the liquidation of even one of the companies? And we have quite a few entities, don’t forget!”
Monica: “I think we have done a great job so far Viktor. The investment was successful, but are we sure about the level of cash we need to keep in the structure to pay all the costs until the closing of the liquidation? And then, there are the tax considerations. What’s the level of tax charges at exit we can expect?”
Viktor: “We already have a large number of entities to terminate. I know we have plenty of other priorities, however costs keep running in these structures. Can we be sure that there are sufficient cash reserves to cover guarantees, contingent liabilities, tax risks, unfunded commitments or representations and warranties?”
Closing up shop…what could go wrong?
Lack of resources
More recently, the war on talent has created a scarcity of human resources, of which you can get more details in one of our previous blogs, An even finer balance: is the human resources shortage the game changer for the operating models in alternatives? This human resource component could sway the decision for asset managers that are understaffed to seek external help and we see this situation in Luxembourg from interim people to full service provision.
Later in their conversation, Monica and Viktor explore some possibilities to tackle their issues.
Monica: “Do you think we have the expertise for all we have to do?”
Viktor: “You and I have the expertise to oversee it all, but we might need more expert hands on deck.”
Viktor: “I’m more concerned about the increasing number of companies to liquidate. I know we have lots of other priorities, but keeping these entities alive has a cost. Have you heard about the simplified liquidation process? Could it be a solution to speed up the process?”
Monica: “Tell me more.”
Victor: “Simplified liquidation–or better, simplified dissolution–means that the company is dissolved, without liquidation. Automatically, at the time the company is dissolved, all the remaining assets and liabilities are transferred to its sole shareholder. There are some conditions, of course, to apply the simplified liquidation process, but it’s faster and cheaper. For instance, there’s no need to appoint a liquidator or an auditor to the liquidation. As we have many companies with a sole shareholder, we could consider this option and save time and efforts from everyone.”
Monica: “Simplified dissolution will definitely help us. We should consider it, but it doesn’t solve our lack of resources. It’s the main responsible factor in the delay of liquidating entities. Charlène from the HR department was suggesting we get a hand from our colleagues in London. They could take over some parts of the process. Another suggestion from Charlène is to have a secondment. What do you think of these two ideas?”
Viktor: “I like that. These people are more than welcome, but it would only work if we find the right people, train them and oversee the work. Don’t forget — you and I remain responsible and accountable for the quality of the job. This isn’t easy to manage if we use secondees who will only remain for a short period or if we deal with colleagues in another office. Are we ready for this? I’m afraid this solution requires a lot of investments to be effective and isn’t sustainable in the long run. Is there a quick fix solution that could fit for the long term as well?”
Monica: “What about outsourcing this work?”
Viktor: “Isn’t it expensive?”
Monica: “Keeping our companies alive while they shouldn’t be is also a cost. This is a quick and efficient solution and we can keep it until we have enough sources internally. They have the expertise, we can keep an oversight of the work performed and, above all, it solves our lack of resources problem. We will be able to set a clear plan and liquidate our companies without delay.”
Viktor: “Okay, let’s discuss and see with a service provider.”
Expert view on market trend – simplified or normal liquidation?
Click here to expand or collapse for more details
Voluntary dissolution/liquidation of a company/entity
In Luxembourg there are two direct ways of eliminating an entity
1. Normal (solvent) liquidation process or voluntary liquidation. This is a three-stage procedure
First stage: dissolution and appointment of the liquidator
Second stage, once the liquidator has finished his mission: auditor’s appointment
Third stage: close of the liquidation proceedings
2. Simplified (solvent) voluntary dissolution
In Luxembourg, there exists a so-called “simplified liquidation route” when there is a sole shareholder, although this concept is somewhat misleading since this is in essence a dissolution with immediate effect and without formal liquidation (and consequently without the need to appoint a liquidator). The procedure is straightforward, with the sole shareholder appearing in front of a Luxembourg notary to resolve upon all the required decisions. In this case, the shareholder not only takes over all assets and liabilities of the subsidiary, but it also takes over all the guarantees, risks and commitments.
Here are the pros and cons of both liquidation processes.
Simplified dissolution
+ Quicker (single deed); + Applied by all notaries; + Less expensive.
– Need 3 certificates from authorities; – No control on the time to receive the certificates; – Practical aspects of the liquidation still to be done by the sole shareholder; – Only possible if a sole shareholder; – All liabilities/commitments transferred to the sole shareholder.
Standard liquidation
+ Allowed with several shareholders; + Allowed with long liquidation process; + Can start quickly; + The liquidator manages the liquidation process; + The liquidator can be chosen within the group; + Advance on liquidation proceeds possible; + Action against the company/liquidator limited to 5 years.
– More expensive; – Takes more time.
There can be a difference of opinion between Private Equity and Real Estate assets, for example, about which liquidation option to use, even if there is no clear pattern. Some players may prefer to use the simplified dissolution because it’s easier and less costly since the process has been standardised. Some people, however, prefer the standard liquidation because it helps them to keep the risk at the level of the entity that’s being eliminated. This way, they don’t spread those risks to other entities. It depends more on the fund’s strategy and their risk appetite.
There are many technical steps in a liquidation process, including obtaining regulatory approval, terminating contracts, managing outstanding liabilities and making interim distributions. There are risks inherent in the commitments, and pledges that have to be fulfilled that can delay the liquidation.
To sum up, the pros of the simplified dissolution process are the decrease in costs and in the number of actors involved. The simplified dissolution can go fast. On the other hand, the standard liquidation is still useful when you want to keep control on the liquidation’s timing and when you want to avoid transferring the risks to the shareholder.
Expert view on market trend: Insourcing? Outsourcing?
Click here to expand or collapse for more details
A few years ago, fund managers would create a very large number of entities and they wouldn’t care so much about the administration costs. Why? Because these fees didn’t represent such a large part of the profitability. What we see now is that they are being more conservative, and paying more attention to limiting these numbers. This is a clear trend that we see with fund managers who want to liquidate as many entities as they can to reduce those administration costs.
This leaves the option of outsourcing, and more and more assets managers, for example, are particularly keen to outsource. Historically, the liquidation process was a responsibility of a fund’s directors or the central administration. However, the use of a third party adviser as liquidator has become increasingly common.
There are many benefits in adopting this alternative, but one of the strongest arguments, after reducing the administrative burden on the team and, therefore, reducing the pressure, is the expertise of an external advisor.
Drawing up of a liquidation plan, including the order of the liquidations.
Management of the liquidations themselves, including the choice of an external liquidator, if necessary to assist in the process and help not to forget any steps.
Closure of the structure.
Managing the timing of the final pay-out.
Conclusion
Although it isn’t possible to cover everything here, you can see that, as is the case of Monica and Viktor, the liquidation process is complex and can be very intimidating.
It isn’t necessarily that they couldn’t deal with all the problems we have listed above. They are professionals with a small and dedicated team after all. Rather, it’s more that most of the time fund managers lack resources to deal with the amount of work to handle the liquidation quicker and more efficiently to avoid unexpected costs.
Monica and Viktor need to move on with the liquidation process. There are several trends on the market. Some actors create a dedicated team to deal with their liquidation. The purpose is to limit the interference with other tasks asset managers have to deal with, but building a trusted team is a long process.
Other actors outsource this process with the purpose to move faster and reduce the pressure on their teams. Using a trusted business provider also helps in bringing expertise and with many other challenges—tax, administration, automation of these activities, follow up—throughout the process.
Finally, players that don’t choose one of these options are usually delaying the liquidation of their entities.
Monica and Viktor will make a decision. And it just may be a case of “do what you do best and outsource the rest.”
Want to continue the conversation? Feel free to contact us.
Pierre-Yves Gillet, Tax Partner, Accounting, Compliance and Reporting, Alternative Investments, at PwC Luxembourg
The quicker you liquidate a company after de-investment, the cheaper it is.
François Guyot, Managing Director, Entity Governance & Compliance, at PwC Luxembourg
“It’s really interesting to see the trend in the market — which tends to be more mature — is following, as we see more and more investment managers taking into consideration the winding-up at an earlier stage. We can only encourage them to follow this route as it concurs to a safer and more efficient process.”
