There can be no doubt that Luxembourg has been an exciting growth hub for Alternatives to watch in the past few years. Despite the uncertainties surrounding the Covid-19 crisis and its impact, Alternative investments still have a major role to play in the success of the future growth of AuM. Vincent Lebrun, Tax Partner and Alternatives Leader at PwC Luxembourg, cautions however that Luxembourg would be foolish to rest on its laurels in this area and must continuously strive to be innovative and competitive.
“Today, Alternatives is the financial services sector with the largest revenue growth for us, but also in terms of resources and growth potential and it has overtaken that position from Asset and Wealth Management. Four or five years ago, I began to believe that this was going to happen. At that time, most people remained sceptical. It’s an important and visible area of growth for Luxembourg and has the legislature’s attention.”
Alternative funds have been an important vector for growth since the introduction of the AIFM Directive into national law in 2013. In the second quarter of 2019, Luxembourg counted EUR0.76 trillion in regulated Alternative assets and is the number 4 domicile for Alternative funds in Europe, accounting for 11.8% of total AIF assets in Europe.
Vincent says that investors in the Luxembourg market should widen their approach moving from a Private Equity-only to Alternatives. Even if PE represents an important part of Alternatives, and even if in recent years we’ve seen rapid growth in the attractiveness of Luxembourg. This is because the largest fund managers are looking to have a multi-asset strategy, which they can manage from one location.
“In Luxembourg, on top of Private Equity, we should not underestimate Real Estate, Alternatives and Debt Funds if we want to remain competitive. Fund Managers don’t want to cherry-pick – looking for one jurisdiction per type of investment – they want a one-place strategy. So we need to make them happy in Luxembourg to stay and not change their preferred jurisdiction of choice.”
Keeping Luxembourg a prime location for Alternatives
Alternatives are going to continue to be a growing segment in the future financial success of the Grand Duchy. AuM in Luxembourg Alternative funds are expected to reach EUR 1.1 trillion in 2025, and the growth in all asset classes should be particularly spectacular.
“The perception we have as advisors,” Vincent continues, “is that Luxembourg is very attractive and seen by fund managers as attractive. But this shouldn’t leave us complacent. We should try and attract talent from other jurisdictions. The Luxembourg environment (players) seem to catch only the echoes of what we are trying to say to them. Staying still is by no means an option but, on the contrary, we need dynamism and innovativeness. We need to have our eyes wide open and look around to see what the US is doing, what Ireland is doing or the UK post hard-Brexit, because that is where the competition is going to develop. At one point you can be sure, the UK will try to come up with something very attractive to lure business back following Brexit.”
Competitiveness is key and the attractiveness of Luxembourg should be high on everyone’s agenda. To achieve this, Vincent reflects, the players’ commitment to assess themselves and to be self-critical is key. Knowing what works and what doesn’t will help the country to improve.
“Over the last couple of years, from a holistic perspective, the many new EU pressures – on both the regulatory and tax side – have heeded a certain period of time that is characterised by a lack of security for the players. With all the new rules and jurisprudence, fund managers need a lot of guidance from the local authorities. We should not underestimate the impact of this on the environment and our work. What is absolutely required is that the Luxembourg authorities are clear, robust and agile and open to feedback.”
At the same time, investors have become more sophisticated and demanding of fund managers in terms of transparency and reporting. They are also being far more selective in their fund choices and allocations, and are placing continued downward pressure on fund manager fees.
One may say that Covid has impacted fund managers because the crisis has also played a role in the constriction of costs and this means there will be rationalisation on price.
Sustainable finance – strategic choice for Alternatives investment managers
One can barely have a discussion about the future of the fund industry without discussing sustainable finance, and the importance of including ESG criteria in investment decisions. Over recent years, these considerations have become mainstream.
Since last year, the external forces impacting the Alternatives industry have considerably changed. Both from an investor and regulator perspective, the Alternative funds ‘manufacturers’ and ‘distributors’ are confronted with new standards and expectations. The Alternatives industry is now directly targeted by laws and regulations that impose governance, investment and disclosure standards serving ESG (Environment, Social, Governance) goals, making sustainability a strategic matter on the same level as investment performance.
Sustainable finance has thus two angles: regulatory compliance (must-have) and a business strategy. The business strategic angle is, in comparison with preceding regulatory changes, even more important, since it’s not only shaping the regulatory compliance, but it’s decisive for the competitiveness and ‘economic sustainability’ of the financial institutions.
“Sustainable finance (and ESG) is a trend we are seeing a lot of mainstream fund managers get into. This is something of which the Alternatives industry needs to be aware. Because, while the mainstream is moving, we know that these are more complex structures to set up so we have to move quickly and smartly. What is stopping other jurisdictions from looking at what Luxembourg does and doing the same thing, or innovating and offering advantages in an entirely new way?”
“We should carry out a detailed due diligence in our system to see what more we can do. What our strengths and weaknesses are, what changes should we implement and what changes should we be asking the legislators to make?”
Luxembourg has to make sure that it keeps, and even improves on, the qualities that differentiate it from other jurisdictions and make it easy to market – cross-border opportunities and access to other markets, a unique toolkit of investment products, flexible structuring options, a favourable and predictable tax environment, quick decision making and the ability to shape regulation (and these are just some).”
“There is a clear trend that Luxembourg fund managers are setting up more middle/front offices on the ground. For the country, this translates into a substantial number of employees. It’s good for the economy and so is attracting quality talent from other jurisdictions. But the government needs to consider tax advantages so we can help relocate people to the Luxembourg system. Luxembourg is the best place to be for Alternatives and it needs to stay high on the government’s agenda to keep the country attractive.”