Why is private equity the driving force behind innovation and job creation in Europe, and Luxembourg? (2024)

At the recent Luxembourg for Finance anniversary, Prime Minister Bettel stated that “The financial sector should be proud"1.

This quote serves as a reminder of the positive impact private equity has on the financial sector (particularly funds), the economy and society as a whole. With this in mind, what is private equity’s role in economic growth?

What is private equity?

Private equity (PE) is a form of investment where managers (i.e., PE houses) buy (parts of) companies with growth potential, bringing their expertise and financing to boost the development of these companies, and sell them within the horizon of four to six years.

The companies can either be mature companies or younger ones (usually then focusing on more specific innovation). All sectors of our day-to-day life are covered: from health to all types of industrial companies, from tech to agriculture and from food and energy to communication and transportation.

When investing in mature companies, it could either be through a majority stake, with the view to take control and implement a new strategy, or through a significant minority shareholding, gaining specific governance rights while at the same time giving those companies the capital and power to expand their development.

The pace of these investments has continuously grown across the globe, with total investment reaching USD 600 billion in 2000, USD 4.4 trillion 20 years later, and the anticipation that it will exceed USD 9 trillion by 20252.

How does private equity impact the economy, innovation and job creation?

PE firms do not simply sit back and observe the management of companies they invest in. Rather, they actively participate in management and work to implement enhanced strategies that add value, drive growth and improve financial performance. This approach not only benefits the companies themselves, but also positively impacts the overall economy, innovation and job creation: indeed, by bringing expertise and resources to the companies they invest in, PE houses help said companies improve their operations, increase efficiency, save costs and therefore become more competitive and create jobs.

The positive influence of private equity can be encapsulated by six key pillars:

Innovation: Start-ups and SMEs, especially those active in the technology and digital industries, are the innovation and growth engine of the European – and even worldwide – economy. By offering the financing and assistance needed to enable companies to realize their full potential – by focusing on skill development, training and mentorship in order to boost creativity – PE investments directly contribute to the innovation capacity of our economy.

Today, it is estimated that 25,000 companies in Europe are backed by private equity, with 17,800 of these being SMEs3.

Talent: The primary influence of PE is likely to be seen in the realm of employment. The employment rate is a key indicator of the health of an economy, and creating jobs is crucial for the wellbeing of society. PE firms invest in companies to promote growth, which in turn leads to job creation. In fact, a recent study from Invest Europe4showed that PE-owned companies in Europe created 103 566 jobs in 2020, corresponding to a net increase of 2%, while the European job market, as a whole, contracted by 1,6%. Furthermore, today, PE-owned companies employ 10 million people in Europe, representing more than 4,3% of the total workforce.

Increased capital access: Private equity firms typically have access to large amounts of capital (also known as “dry powder”) that might otherwise be unavailable from conventional sources, such as banks, that they can use to finance businesses. This is particularly critical for smaller businesses or those in fields which are considered risky by conventional investors.

Additionally, PE firms are less strict than banks in terms of repayment terms or covenants, and provide companies more flexibility to cash back their investments, which is extremely welcomed by companies in launching phase.

Infrastructure development: All over the world, keeping pace with demographic changes and the expectations and behaviours of citizens has become increasingly challenging. Linked to this, governments face growing difficulties to finance the construction or maintenance of infrastructure projects aligned with demographic/citizen trends. More and more, we see private equity companies partner with governments to build and develop critical infrastructure assets, such as roads, airports, utilities, as well as infrastructure which encourages sustainability – the latter a reflection of how PE can direct capital to positively impact societies.

Social impact: PE firms are playing a growing role as a facilitator for sustainable investments, responding to ESG (environmental, social and governance) criteria. They push the companies they invest in to adopt socially responsible behaviors, and also provide resources and expertise to businesses seeking climate change solutions and firms focusing on increasing access to healthcare and education in marginalized regions.

To illustrate this ESG trend and success, as at the end of 2020, sustainable investment products accounted for 11% of total net assets domiciled in Europe, more than doubling in net assets since 2018. In 2020, sustainable funds also attracted over half of the net new money invested in the investment fund market5.

Financial performance: While not all PE funds are profitable (a recurring figure suggests that between 83 and 90% are profitable), data analysis and studies have shown that the investment performance of PE funds outperforms investment yields of listed companies over short, medium and long-term horizons. Indeed, the average internal rate of return for PE investments is, when looking at historical data – 30 years of PE existence – for Europe, around 15% when the overall economy was around 6-7%6. This outperformance is even bigger when looking at more recent years, probably driven by the growing experience and expertise of PE managers.

The success story of Luxembourg as a worldwide PE hub

If private equity has seen prosperous growth on a global level, Luxembourg has succeeded in establishing itself as a prominent global hub for the sector.

Today, according to the Luxembourg Private Equity and Venture Capital Association (LPEA), 90% of the European Private Equity and Venture Capital funds and 19 out of the 20 largest worldwide PE houses are conducting business out of Luxembourg, where the total assets under management exceeds EUR 500 billion7, and is projected to increase at an annual growth rate of 10%, driven in part by factors such as Brexit, monetary policy tightening in North America and Europe, and the anticipated growth of the younger Asian private equity market.

One of the main strengths of Luxembourg is undoubtedly its “business friendly” environment, with successive governments willing to protect, develop and enhance the attractiveness of the country.

This “business enabler commitment” from politics has provided the sector in Luxembourg with flexible and powerful tools necessary to structure itself in a very competitive way. This started with the SICAR regime introduced in 2004, soon completed with the SIF, the SCSp and the RAIF.

And today, all these structures have successfully contributed to the radiance of Luxembourg for PE: it is estimated that the sector has around 300 SICAR, 1,500 SIF, 2400 SCSp and 620 RAIF8.

This success story has also materialized in job creation and opportunities. Out of the 51,000 people working in the financial services industry, it is estimated that 8,000 are related to private equity. On top, it is also estimated that additional 1,400 jobs remain unfilled for the sector in Luxembourg9. Attracting skilled individuals is a continuous challenge, and providing support and a specialized training framework for the PE industry is necessary and will be paramount in helping fulfil new roles, such as those pertaining to fundraising and investor relations.

Lastly, PE in Luxembourg directly supports innovation, sustainable investments and start-ups. The government has placed a strong emphasis on innovation with, for instance, the creation of the Luxembourg House of Financial Technology (LHoFT), which serves as a Luxembourg’s fintech centre, and on sustainable investment with the launch of the Luxembourg Future Fund, which promotes sustainable development in key strategic sectors of Luxembourg’s economy. Private equity’s early involvement has been crucial in the success of many initiatives promoted by these organizations. A recent example of this success is the Luxembourg PE-backed medical booking application Doctena that has become a European leader and a flagship for Luxembourg’s start-up ecosystem.

Challenges ahead

In conclusion, private equity can sometimes been decried, but its positive impacts on the real economy and our day-to-day life cannot be denied, be it in terms of job creation, wealth creation, innovation and ESG. This is particularly true for Luxembourg, where PE’s weight in terms of jobs creation and motor of innovation is, proportionally, much heavier than our neighbouring countries.

Yet, private equity firms, investment funds, and portfolio companies encounter unprecedented challenges. They feel the need to invest capital in the midst of unparalleled economic and geopolitical instability, escalating competition, and growing stakeholder demands. Achieving prosperous deals is contingent upon their capacity to act swiftly, promote rapid and strategic expansion, and generate higher worth throughout the entire transaction process.

It is therefore key that the government continues to work hand-in-hand with all professional actors of the financial sector to ensure that Luxembourg remains at the competitive edge.

1Financial sector “should be proud,” Bettel says at LFF anniversary, Delano News, 21 February 2023

2Preqin Special Report: The Future of Alternatives 2025

3Invest Europe – Private Equity At Work, 2022.

4Invest Europe – Private Equity At Work, 2022

5Association of the Luxembourg Fund Industry (ALFI) (2020/2021). Statistics- Net assets under management in Luxembourg funds. Available at: ALFI - Statistics (Accessed on: 23 February 2023)

6Invest Europe – The Performance of European Private Equity, Benchmark Report 2021

7“Voici où 1.400 emplois bien rémunérés sont disponibles”, Luxemburger Wort, 15 January 2023

8«Le Luxembourg, royaume du Private Equity», Paperjam Grand Dossier Private Equity, June 2019

9“Voici où 1.400 emplois bien rémunérés sont disponibles”, Luxemburger Wort, 15 January 2023

Why is private equity the driving force behind innovation and job creation in Europe, and Luxembourg? (2024)


What are the advantages of Luxembourg funds? ›

For fund managers, Luxembourg has other significant advantages besides its investor appeal. It provides access to European investor capital, along with a robust network of local experts, including lawyers, auditors, fund administrators and alternative investment fund managers, most of whom are fluent in four languages.

Why is private equity so successful? ›

They emphasize the ability of private equity firms to infuse capital into struggling companies, potentially saving them from bankruptcy and preserving jobs. These firms have the financial resources and strategic expertise to carry out changes needed by whoever owns them while streamlining operations and driving growth.

What are the positive effects of private equity? ›

Since private equity funds have far more control in the companies that they invest in, they can make more active decisions to react to market cycles, whether approaching a boom period or a recession. The result is that private equity funds are more likely to weather downturns.

How does private equity affect society? ›

Private equity is a critical driver of societal wealth, far exceeding its role as a mere financial tool. It fosters efficiency and innovation, contributing significantly to overall economic prosperity.

Is Luxembourg the leading center for investment funds in Europe? ›

The European leader and world no. 2 in terms of net assets of domiciled funds, Luxembourg has €5,200 billion in assets under management, i.e. 26.2% of the European Union (EU) market in 2023.

Why do companies invest in Luxembourg? ›

Political & social stability

Luxembourg is renowned for its political and social stability, providing a solid foundation for businesses to thrive. The country has a long history of political stability, with a strong commitment to democratic principles and a reliable legal system.

Why is private equity good for the economy? ›

Increased capital access: Private equity firms typically have access to large amounts of capital (also known as “dry powder”) that might otherwise be unavailable from conventional sources, such as banks, that they can use to finance businesses.

Why private equity is the best career? ›

Private equity investors work with portfolio companies over the long-run, often 5-8 years. Hedge funds investments can be as short as a few weeks. So private equity teaches you the art of long-term view. Private equity also gives you the ability to work closely with the company over an extended period of time.

What is private equity and why is it important? ›

Private equity is a form of financing in which a PE firm invests money in a business in exchange for an equity or ownership stake. Private equity is typically a majority investment, in which the investor buys a controlling stake – more than 50%; however, some PE firms also do minority investment.

What are the pros and cons of private equity? ›

Pros and Cons of Alternative Private Equity Investments
  • Profit Potential. Private equity investments have the potential for significant profit. ...
  • Flexibility. ...
  • Resilience. ...
  • Portfolio Diversification. ...
  • Minimal Effort. ...
  • High Risk. ...
  • High Barrier to Entry. ...
  • Loss Potential.
Jun 13, 2023

Why is private equity unique? ›

Private equity investors believe that the benefits outweigh the challenges not present in publicly traded assets—such as complexity of structure, capital calls (and the need to hold liquidity to meet them), illiquidity, higher betas than the market, high volatility of returns (the standard deviation of private equity ...

What is the power of private equity? ›

Wealth Creation: Empowering Investors and Entrepreneurs

Investors who allocate their capital to private equity funds can benefit from high returns on investment. Additionally, entrepreneurs seeking to expand their businesses or launch innovative ventures often turn to private equity firms for funding.

Why do people like private equity? ›

Examples of solid answers to the “why private equity” question: You want to work with companies over the long-term instead of just on a single deal. You want to get exposed to the operations of companies and understand all aspects rather than just the financial ones (note: “exposed to,” not “control” or “improve”).

Why is private equity better than public? ›

Key takeaways

Public equity refers to ownership in publicly traded companies, which are available to anyone with an investment account. Private equity has historically higher returns but isn't available to everyone and has downsides that include higher risk, higher fees, and lower liquidity.

How does equity impact or affect our economy? ›

When incomes are more evenly distributed, fewer individuals fall below the poverty line. Equity-enhancing policies, particularly such investment in human capital as education, can, in the long run, boost economic growth, which, in turn, has been shown to alleviate poverty.

What are the benefits of Luxembourg? ›

As one of the safest countries in the world, Luxembourg is a very pleasant place to live, thanks in particular to its top-rate health system, its attractive salaries, the beauty of its landscapes and its diversified cultural offering. The country also has one of Europe's most attractive social security systems.

Why do people put their money in Luxembourg? ›

Tax regimes in Luxembourg

Taxation in Luxembourg is characterized by its favorable tax regime, which has contributed to the country's reputation as a 'tax heaven' and a desirable location for businesses and high-net-worth individuals.

What are the advantages of sources of funds? ›

The advantages and disadvantages of the different sources of finance
Source of financeAdvantages
Family and friendslow interest money may not need to be paid back
Bank loaneasy and quick to access can get a significant amount of money at one time
Overdraftquick access allows emergency purchases
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