The ALFI European Alternative Investment Funds Conference took place on January 19-20 2016 and was attended by more than 600 delegates.
The conference was opened by Denise Voss with some encouraging figures: since the introduction of the Alternative Investment Fund Managers Directive (AIFMD), Luxembourg has counted 211 authorised AIFMs, 626 registered AIFMs and 950 special limited partnerships. “Clearly alternative investing is coming into the mainstream and is of growing importance to the Luxembourg investment fund centre,” said Denise Voss.
Denise Voss highlighted the proposed Reserved Alternative Investment Fund (RAIF) as the latest innovation in Luxembourg’s drive to enlarge its legal toolbox. “The RAIF is a response for sophisticated investors who are looking for a fund product that offers more flexibility than a corporate vehicle,” she noted.
She also emphasised that the ALFI FinTech Forum has now been officially launched: At a specific ‘FinTech Corner’, twelve innovative FinTech companies used lunchtime to present their offer to the participants during the two days of the conference.
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A socially useful industry
The UN climate change conference in Paris at the end of last year sent a clear signal to the financial sector in general and the investment community in particular. The commitment by 196 countries to reduce carbon dioxide emissions means demand for climate change finance will reach unprecedented levels, said Marc Bichler, Luxembourg’s Ambassador-at-Large for climate change.
Financial flows will come from a variety of sources from within the public and private sectors, with the International Energy Agency predicting $13.5tn in renewable energy investments by 2030. However, there is currently a lack of financial instruments to act as an interface between investors and investable climate-friendly projects, Mr Bichler said. ALFI has participated in a task force aimed at submitting proposals to the Luxembourg government to channel finance to climate change projects.
Meanwhile, CMU, which aims to strengthen capital markets and provide more sources of funding to EU companies, is under scrutiny. Take up of European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF) has been slow and Giovanni Garcea, a Policy Officer at the European Commission, reminded the audience that the rules around these vehicles were currently being reviewed.
The take up of ELTIFs is expected to be faster. The Luxembourg government is currently preparing a draft law to allow the ELTIF to benefit from double tax treaties, provided certain conditions are met. “We may see a specific ELTIF law tailored to the needs of the market before the summer,” said Freddy Brausch, Partner at Linklaters in Luxembourg. According to Agathi Pafili, Senior Regulatory Policy Advisor at the European Fund and Asset Management Association (EFAMA), “we need funds and accompanying tax incentives that meet the needs of all investors.”
Going beyond digital
“In the next two to five years we will see the largest institutional shift in the history of humanity,” That is the view of Leonard Brody, a venture capitalist and Emmy nominee, who has coined “the great rewrite”. The biggest driver of this great rewrite is that technology puts ordinary people, rather than institutions, in a position of power. Capital markets will change, industry incumbents will no longer be protected and customer service will be the most important element of most businesses, he predicted.
What does this mean for the investment industry? For a start, the $13tn that was invested in FinTech last year will double over the next two years. FinTech will change expectations about customer experience; clients will expect the same experience that they receive from pure technology companies such as Apple, Uber and Airbnb.
The wealth of Generations X and Y will exceed that of babyboomers by 2018 and the investment industry needs to be able to attract and keep that wealth. New entrants to the industry will be vying to manage this wealth. Up to 98% of heirs switch advisors, noted Likhit Wagle, of IBM Global Business Services. “Fiduciary advice and deposit taking will stay with incumbents because of regulation, but everything else is fair game,” said Mr Wagle.
Traditional players can respond to the threats by learning how to leverage their key competitive advantage: data. At the moment much of that data is unstructured.
For alternative firms, the FinTech revolution will enable them to disintermediate traditional sources of finance. Private equity and real estate will enjoy greater liquidity through auctions and crossing mechanisms, while hedge fund portals will become more sophisticated.However, it was widely noted that, as in the dotcom era of the late 1990s, some FinTech companies will thrive while some more will fail. “We need to take a step back and see what start-ups are useful and how can we develop them in Luxembourg,” said Nicolas Buck, CEO of Seqvoia.
Real estate – Luxembourg assets on the rise
ALFI’s annual Real Estate Investment Fund Survey in conjunction with EY Luxembourg revealed that real estate assets in Luxembourg had reached more than €39bn by the middle of 2015, up from €32bn a year before. The total number of REIFs increased by 10% from the last survey and, since 2006, the number of direct REIFs has grown by a compound annual rate of 16.45%.
Further growth in both funds and assets is likely over the coming years given that many non-EU real estate funds do not have a third-party passport under AIFMD.
Private equity – change in investor perception
There are now more than 950 special limited partnerships in Luxembourg, which are used to a large extent for private equity investments. Private equity exits last year totalled $220bn, the second highest total after 2014. “Next year will be a strong year for private equity for the simple reason that a lot of money went back to LPs over the last two years and needs to be reinvested,” said Alain Kinsch, Country Managing Partner and EMEIA Private Equity Fund Leader at EY Luxembourg. The increasingly regulated nature of private equity is changing investor perceptions and higher allocations from public bodies, including pension funds, can be expected.
Hedge funds – demand for liquid funds
The hedge fund industry is in good health with more new fund launches in 2015 than in 2014, and with 50% of managers expecting to launch funds this year to meet the changing demands of investors and markets.
New hedge funds will increasingly be launched onshore as European institutional investors seek EU-regulated funds. Many of these may be parallel structures set up in jurisdictions like Luxembourg, rather than the relocation of existing funds.
Despite a year of relatively poor hedge fund performance, many investors are satisfied with their hedge fund investments, according to William Jones, founder of Luxembourg’s ManagementPlus Group. “Investors are looking to hedge funds to diversify their portfolios rather than relative outperformance,” said Mr Jones.
Some conference participants expressed concerns that the expansion of central bank balance sheets worldwide will lead to market turmoil. At least one investment manager felt that any future crisis might be caused by an over-issuance of cheap corporate debt. The advice to hedge funds was to truly hedge their portfolio.
Emergence of alternative financing
Of the $8tn of assets managed in global alternative funds, two-thirds are managed in hedge and real estate funds and 25% is in private equity. Private credit and infrastructure represent just 5% of the industry. By 2020, infrastructure and private credit are expected to become a much bigger proportion of the whole. A survey by the Alternative Investment Managers Association (AIMA) on private debt in 2015 found that a third of members participated in debt and credit strategies.
Debt and credit funds can open opportunities in niche markets such as lending to SMEs, said André Prüm, Professor of Banking and Financial Law at University of Luxembourg. These types of opportunities are being encouraged at EU level through the Capital Markets Union (CMU) initiative, and at national level via public and private initiatives. For investors, the attraction of these investments is yield, stability and diversification.
Debt funds for real estate investment are proliferating, said Pierre Weimerskirch, Managing Director, Luxembourg Investment Solutions. “Yields on loan products are close to those on core real estate,” Mr Weimerskirch added.
Regulators are starting to pay attention to the sector and the European Commission is to assess funds which originate loans. Nathalie Dogniez, Partner at PwC Luxembourg, pointed out that Luxembourg Specialised Investment Funds (SIFs) are permitted to originate loans.
AIFMD – next steps
AIFMD is now a fact of life for European alternative investment managers and many have embraced the opportunities.
Investors in real estate funds, for instance, are often reassured by a local presence and appreciate when their assets are managed by local structures and managers who have knowledge of local dealflow. In this sense, AIFMD offers an additional layer of comfort.
In private equity, fundraising is periodic, so not all managers have had a chance to test whether the AIFMD passport provides distribution advantages.
The possibility of obtaining the passport has moved closer for investment firms in some third-party countries. Richard Stobo, Team Leader for Investment Management, ESMA, announced that the assessments of the US, Hong Kong and Singapore would be completed by the end of June 2016. Meanwhile, assessments of six additional countries – Bermuda, Canada, Japan, Australia, Cayman Islands and Isle of Man – will also be undertaken by June. Those that pass the test will join Guernsey, Jersey and Switzerland as approved passport jurisdictions.
Mr Stobo also announced that the decision whether to curtail private placement regimes can only take place after the passport assessments.
What's new in financial technology?
In a series of quick-fire presentations, selected FinTech companies showcased promising innovations in financial technology and shared their vision and ideas with the audience. Access summaries of presentations by clicking on the company logos below.