“Economic and geopolitical turmoil has slowed growth in the private assets market,” said Vincent Willem, Deputy Head, Professional Banking Services at Banque de Luxembourg. “But I am confident that increased demand for new projects over recent months is part of a broader trend of renewed trust in private asset investments in Luxembourg, and more specifically, represents continued trust in our services,” he added. Analysts forecast that growth in global alternatives’ assets under management is expected to rise by an annualised 4% to 8% over the coming years.
Economic and geopolitical turmoil has slowed growth in the private assets market.
Fresh opportunities
“The outlook in Europe remains very challenging, but the strong growth in alternatives, particularly since 2017, has strengthened the importance of private capital’s contribution to economic development,” said Nicole Thomé, Senior Business Development Manager at the bank. With private assets becoming a fully integrated asset class for portfolio diversification, Banque de Luxembourg sees promising developments, particularly for some asset classes.
“Analysts of the private debt market see the emergence of significant growth. Also, assets under management of Europe-focused infrastructure funds is expected to overtake that of North America-focused funds, partially due to the challenges related to the energy transition in Europe. Distressed debt is forecast to see the biggest uptick in performance, due to the current deterioration in the economy,” she said. However, she notes that care should be taken with real estate investment, where interest rate concerns are limiting opportunities.
Added flexibility
Facilitating this growth is the increased sophistication of private asset fund strategies, such as the use of hybrid structures. These bring a degree of liquidity to funds by featuring a liquid “pocket” alongside the less liquid private assets. “We have strong expertise in this area, delivered through our integrated team which handles both asset classes thanks to our appropriate tools, systems and operational processes,” said Ms Thomé.
Another trend is the so-called “retailisation” of the private asset space which is making it more accessible to a wider range of private individuals. “We are currently analysing this trend from a liquidity, valuation and investor education point of view,” said Mr Willem.
A key driver for this could be the recently reformed European Long-Term Investment Fund (ELTIF) vehicle which provides a clearer framework to investors. While seeing this as an investment opportunity for certain clients, Mr Willem takes a relatively cautious view. “We believe it is crucial for investment advisors to work carefully with private clients regarding this type of investment, which is traditionally designed for institutional or well-informed investors used to longer-term investment horizons,” he said.
The desire to meet market demands to support ESG strategies is another challenge, but Ms Thomé notes this is an opportunity for the bank. “We support some of the largest impact funds launched by major European asset managers, as this is somewhere we have positioned ourselves for a number of years,” she said. “This features a substantial workload but is an area in which we are expanding our expertise,” she said. That the bank has achieved B Corp Certification testifies to their commitment to continuing to develop in this direction.
We support some of the largest impact funds launched by major European asset managers.
Cutting edge fund centre
There remains little doubt that Luxembourg is a key strategic player in the private assets space, with a share of global assets under management of around 17%. “Luxembourg strives for continuous improvement and attractiveness for the market, with a recent example being the July 2023 reform of the Luxembourg fund toolbox,” said Mr Willem.
This included an up-grade of the Reserved Alternative Investment Fund (RAIF) which is used extensively by international private asset managers, mainly due to how it enables swift fund constitution. Furthermore, the law now has Luxembourg in line with European standards on the definition of who can be considered as a “well-informed investor” regarding access alternative fund structures. There are also new exemptions for subscription taxes for some vehicles offering pan-European Personal Pension Products and ELTIFs.
“This clearly confirms our attractiveness as a fund domicile. Even if the authorities must remain attentive to the scale of the administrative burden we face, which seems, unlike in the past, to be increasing more than in some neighbouring countries,” said Mr Willem.
Bright future
Overall, though, the bank is encouraged by the state of the Luxembourg’s banking and funds industry. “We are well positioned to respond to market trends, with our Professional Banking Services offering expertise in custody and depositary banking, brokerage, and other banking services for funds, institutional clients and external asset managers,” said Mr Willem. “We have been a pioneer, helping asset managers create and develop their cross-border liquid and alternative funds since Luxembourg rose to prominence as a fund domicile in the 1980s,” he added.