Langham Hall IP: Control and the look-through approach for depositaries in Luxembourg

20th March 2016

Following the introduction of EU Directive on Alternative Investment Fund Managers EU/2011/61 (“AIFMD”), there has been considerable discussion on the scope of the responsibilities of the depositary in private equity-type structures. Most have been resolved, but there are still a few where little definitive guidance exists.

One of these involves the “look-through” principle in the real estate and private equity sectors, where target investment is typically held via an SPV or series of SPVs.  Depositaries are concerned with testing those assets “controlled” by the fund but the nature of control is still the subject of ongoing debate.

How is “control” interpreted in Luxembourg?

According to article 89(3) and article 90(5) of Commission Delegated Regulation (EU) N° 231/2013, 19 December 2012 (the “CDR”), a depositary’s safe-keeping duties shall apply on a look-through approach basis to cover all underlying assets including those assets held by funds or SPV structures which an Alternative Investment Fund  (“AIF”) controls. 

In the AIFMD FAQ (frequently asked questions) issued by the Commission de Surveillance du Secteur Financier (“CSSF”), the regulator has left the question open, considering “the definition of controlled entity as a matter of professional judgement and will depend on the specific structure in question”. The Association of the Luxembourg Funds Industry (“ALFI”) recommends consultation of the Fund’s auditors in case of doubt. Indeed auditors, when reviewing the consolidated accounts of an AIF, may struggle with the same issue.

Assessing whether one entity controls another (in other words, whether a parent-subsidiary relationship exits) is essential to the preparation of consolidated financial statements. The control assessment determines which entities are consolidated in a set of financial statements, therefore affecting the results, cash flows and financial position of a group. Furthermore, depending on the percentage of control, different consolidation methods have to be applied. 

The question of control is crucial in determining the extent of work required to fulfil a depositary’s mandate, and it is important that a potential depositary anticipates the issue during the quotation and on-boarding processes. The depositary should also collaborate with the Alternative Investment Fund Manager (“AIFM”) in ongoing control assessments, as the work required of the depositary will be much more extensive if the look-through approach is applicable and consequently the whole operating model and cost structure of an AIF can be impacted. 

So how could control be determined?

We believe that the consolidation accounting rules are very helpful in determining control and thus the extent of the look-through approach and that the depositary’s control assessment should end up with the same conclusions as would an auditor of consolidated financial statements. 

Even though Specialised Investment Funds (“SIF”) and Investment Company in Risk Capital (“SICAR”) (two regulated Fund regimes in Luxembourg) are not required to file consolidated financial statements in Luxembourg, information that would normally be used for such control tests should be available and kept under review. IFRS in general, and IFRS 10 on consolidated financial statements in particular, provides a definition of control and also has extensive guidance on more complex and borderline control assessments, e.g. control via a large minority holding, potential voting rights, joint arrangements and co-ownership agreements.
Another point that needs to be stressed is that IFRS 10 has also clarified that owning a majority of the voting rights is not necessarily proof of control. Control instead requires that the investor’s power/rights are sufficient for it to unilaterally direct the activities that most affect the subsidiary’s returns. This means, for example, that the composition of the board of directors/managers needs also to be closely analysed during the control assessment. In IFRS 10, there is also a detailed analysis of “protective rights”, or rights to prevent a decision. For instance, a right held by a minority shareholder to veto a CAPEX budget could represent a protective right and significantly undermine the power held by the main shareholder, leading to a loss of “control”. 

In some cases, this question can be very difficult to resolve and looking only at the voting rights and shareholder registers might not be sufficient. Before starting the analysis, it is crucial to have assurance of the completeness of the legal documents that the depositary is reviewing, including the financing agreements and the terms and conditions of any hybrid instruments issued by the SPVs as these could embed potential voting rights. 


Given the control of an asset has risk implications for a depositary and cost implications for an AIF, it is important to apply the right level of technical knowledge and experience in that asset class. There is likely to be a strong risk that applying a “tick box, compliance based” approach will not fully determine the nature of control. Therefore, relying on formalised, widely used accounting principles to form judgements gives the depositary substance behind its decisions and is more likely to generate the right answer when it comes to determining control.

Langham Hall has depositary licences in the UK, Luxembourg and Jersey. It is the market leader for PE AIF depositaries in the UK with over US$40bn of commitments under supervision.

The depositary department at Langham Hall Luxembourg, received its CSSF licence and was launched at the end of December 2015, and is led by Antoine Bonte and Clive Griffiths. Both have an extensive audit background and have significant experience in the analysis and interpretation of consolidated accounts in various GAAPs, and such experience is key in analysing these issues related to control. 

Antoine Bonte

Director of Luxembourg
T.  +352 27 85 15 29
M. +352 661 332 034 


Clive Griffiths 

Director of Luxembourg
T.  +352 27 85 15 30