Question 1: What will be the place of AIFs in the coming years in Luxembourg?
Positioned in the heart of Europe, the Grand Duchy has further cemented its position as second largest investment fund center worldwide and continues to attract investment management firms and investors from Continental Europe, the United Kingdom in the current geopolitical context, but also from the United States and Asia.
In a rather challenging environment, the Luxembourg Fund Industry remained stable in 2018 with AuM in excess of EUR 4,000 Bn* with positive inflows notably in the ETF space. Alternative Investment Funds (AIFs) have grown by an impressive 20% last year versus 2017. With a total of EUR 700 Bn*, AIFs represent today 17% of market share with a leading position of Hedge Funds, followed by Debt Funds, Private Equity and to a lesser extent Real Estate.
We expect this growth on AIFs to continue in 2019 and beyond with existing players strengthening their presence and new names settling in locally.
In a still low yield/interest rate environment, investors are, in the main, favoring less liquid investment strategies whilst capitalising on Luxembourg’s extensive “Toolbox”. I will also add the growing appetite of new investors for asset managers with proven ESG (Environmental, Social and Governance) strategies, which brings us to the conclusion that sustainable investing will soon shift to mainstream.
Question 2: What are the key differentiating factors required to accompany this growth?
From a Servicing Provider perspective, we see three key differentiating factors:
– Agility to deliver responsive and proactive solutions. Asset Servicing Providers must offer a complete suite of services, with scalable technology solutions from traditional banking services – middle office, depositary, transfer agent, fund administration services – to asset servicing such as reporting or financing.
– Proximity with the support of dedicated teams handling the end-to-end process and having a 360° view on transactions, operations, legal and risk framework.
– Expertise to be able to manipulate the flexibility but also the versatility of the Luxembourg Toolbox (UCITS, SIF, SICAR, securitisation vehicles and since 2016 RAIF), allowing service providers to support asset managers in their decision-making.
Clients are looking for providers who simplify their lives, help them build their own offer through a network of experts and accompany their projects. A pan-European actor, part of a large banking group, will be in the best position to offer this complex value proposition.
Question 3: According to you, what are the main challenges for AIF in the future?
Alternative Investment Funds have reached their teenage phase in terms of maturity and growth opportunity with significant potential ahead of us. It requires more clarity on the role of the various providers across the full servicing value chain to allow it to become more mainstream from an investor’s standpoint.
This need to clarify shall strengthen the role of the depositary as the gatekeeper and ultimate protector of the investor.
In providing fund depositary services, it is important to be selective about which funds we will support with a depositary solution. Under AIFMD and UCITS V we have a responsibility to ensure safekeeping of fund assets and to provide restitution for any “avoidable loss” of an asset held in our books on behalf of a fund. Some management companies can be managing specific alternative vehicles and it is important that we are able to quantify these risks and take a reasoned decision about whether to provide this service.
The challenge for depositary banks will be to ensure that asset managers running ESG strategies stick to the terms of their investment policies.
With a growing interest on Socially Responsible Investment, the challenge for depositary banks will be to ensure that asset managers running ESG strategies stick to the terms of their investment policies. To measure the impact of investment strategies on society, service providers must develop specific reporting solutions allowing asset managers and institutional investors to rate their investments according to a broad set of ESG indicators.
Finally, new challenges will also include the ability for providers to reinvent themselves, capitalising on new technologies to gain operational efficiency and develop new solutions.
Asset servicers, leveraging on digital innovation, through artificial intelligence, Data Lake technology, Cloud Computing and, to a lesser extent, Robotics Process Automation (RPA), will become more agile in managing and delivering data in a secured environment allowing an improved operational efficiency.
As for the development of innovative solutions, new technologies are now allowing to deliver data in a secured environment and to extract information in a more creative and efficient way. This brings added value to firms that used to operate multiple legacy systems to support their end-to-end post-trade value chain.