In a recent working paper by the Luxembourg Central Bank (BCL), researcher Gabriele Di Filippo examined the use of Luxembourg-based captive financial institutions (CFIs) by investment funds to structure their international holdings and acquisitions. The 2021 data revealed an intriguing detail: less than 1% of inward foreign direct investment (FDI) held via these CFIs was invested in Luxembourg-based companies or assets.

Captive finance companies, typically subsidiaries fully owned by their parent firms and responsible for financing purchases of the group’s products, are a crucial element in this financial landscape. These entities are predominantly found in industries such as automotive and retail.

Di Filippo, the author of the study from BCL’s department of statistics, noted in the report that the investment structures involving Luxembourg CFIs are notably complex and diverse. In 2021, the outward FDI through CFIs predominantly targeted private companies (65%) and real estate assets (35%). Most sponsors of these investment funds were based in the US or UK, yet their investment focus was primarily on Western Europe, particularly the Euro area. The study underscored a varied sectoral distribution of these investments. For instance, in private equity, the largest chunk of outward FDI in 2021 was in information, telecommunications and computer services (17%), followed by utilities such as electricity, gas, water supply and recycling (12%), and then chemicals and non-metallic mineral products (10%). Real estate investments were more concentrated, with commercial buildings receiving 45%, industrial buildings 24% and residential properties 15%.

Di Filippo also detailed that in private equity, the primary destinations for outward FDI were Germany (20%), the UK (12%), France (10%), Spain (8%), Italy (7%), US (6%), Denmark (4%), Sweden (4%) and the Netherlands (4%), collectively accounting for about 80% of the total outward FDI. A similar trend was observed in real estate investments, with Germany (34%), the UK (24%), Spain (8%), Netherlands (5%), France (5%) and Italy (5%) being the top destinations, together constituting approximately 80% of the outward FDI in this sector.

The inward FDI position in 2021 for private companies in Luxembourg was valued at €3.1bn, in stark contrast to a domestic direct investment of just €162m. Similarly, the total direct investment in Luxembourg’s residential real estate market by CFIs was a mere €1.6m in 2021.

Further, in 2021, private companies in Luxembourg represented about 0.64% of the inward FDI position, while real estate targets located in Luxembourg accounted for around 0.26% of the inward FDI position. The study also revealed that in Luxembourg, the primary targets for private equity are companies in finance and insurance, and for real estate, they are office properties.

The 49-page working paper, released on 18 January 2024, is available .