Luxembourg is on the road to strengthening its position as a private equity hub in the coming years. The market in Luxembourg is expected to grow by at least 10 percent every year until at least 2025, an expansion that is driven by three main factors. The first is the country’s flexible company law and regulated structures such as SIFs, SICARs, and RAIFs. Secondly, Luxembourg boasts of a highly international, experienced workforce which makes the sector innovative and competitive. Thirdly, the European passport for Alternative Investment Fund Managers will continue to help grow the local market.
Luxembourg is on the road to strengthening its position as a private equity hub in the coming years
What will also provide a real boost is a recent agreement from the European Council on ELTIF 2.0, an update to the original legal framework dedicated to long-term alternative investments that can be distributed on a cross-border basis. The update includes an easing of the rules and lighter requirements for retail investors, which for them means access to a potentially high-yield investment class.
Private equity: attractive conditions in the near future
Due to steadily climbing inflation and the resulting aggressive tightening of monetary policy, the market has seen turbulence and valuation risks which have led to tougher funding conditions. Private equity managers have become more cautious, evidenced by a substantial drop in global buyout volume. Despite this current environment in which we see quite a bit of risk, private markets can offer attractive investment opportunities in diversified portfolios.
Historically, funds that were raised in a downcycle, for example, funds that were raised in 2009, in the wake of the 2008 crisis, benefitted from lower entry multiples and faster top-line growth, so their performances on average were very good. We now see similar conditions, and expectations are high for 2023 and 2024 vintages. While we cannot predict the future, the prospects look good in the coming years for private equity investors thanks to the opportunity to buy targets at lower valuations. What is vital is to have discipline. A prudent strategy is to spread your Private Equity commitments out, over four to five years. As always, it is important to diversify across manager, type of strategy and regionally.
Our preferred strategy against the current uncertain and volatile market backdrop is secondaries. Secondary funds are those that buy other funds or positions which need to be sold for various reasons such as cash flow issues or distress. Secondaries are typically the first beneficiaries of uncertain, volatile, and stressed market environments What is important to note about these funds is that, in an uncertain environment such as the current one, the price differential (discount to NAV) is greater, which results in an attractive risk-return profile.
ESG gives added value to private equity
ESG has been the talk of the town these past few years, and the ongoing energy crisis has accelerated the phenomenon. If you look at private equity specifically, ESG has moved from a marketing tool to a real driver of value creation, and private equity firms now understand their central role in reaching global sustainability goals.
For investors, an important point is that fund managers who really take ESG into account strengthen their risk management, because ESG is about adopting a long-term view and taking seriously our responsibility to the future. Also, a fund built around ESG also takes social factors into account, which broadly speaking means that it invests in companies less likely to face disruptions from labour issues, accidents, or poor working conditions. Similarly, private equity managers that launch ESG funds invest in companies that exhibit good governance, which is ideal for investors.
Private equity is riskier than other investment classes, so obviously if you want to invest in one, you need to be very well-informed.
ESG private equity funds are finding young, enthusiastic investors who are drawn not only by the lower risk profile but also by the appeal of impact investing, that is to say, making a positive impact on society. What do ESG funds look like? While they are often local or focused on one region, they can also have a global perspective. One such fund Degroof Petercam offers focuses on renewable energy, specifically wind turbines in France. These funds have much more than an ethical appeal, because they often give a good return, and the bottom line is generally positive.
Private equity is riskier than other investment classes, so obviously if you want to invest in one, you need to be very well-informed. Part of this is having frank and transparent discussions with the fund manager to learn as much as possible about the fund. This is why once a quarter on average, Degroof Petercam organises exclusive meetings about its selected private equity funds and invites potential investors to join. As diversification is also very important, investors may also opt to invest in a vintage fund – all funds from one year – with just one ticket.