Trend towards simplification of Real Estate Fund structures and strategies. Luxembourg’s fund structuring toolbox attracts large international Private Equity houses. Loan funds fill the financing gaps by investing in real asset classes.
The quest for return in an environment of persistently low or even negative interest rates is driving demand for alternative asset classes, in particular real estate, infrastructure, private equity and private debt. Three surveys issued by the Association of the Luxembourg Fund Industry (ALFI) at the occasion of its Private Equity and Real Estate Investment Funds Conference confirm the upward trend in specific alternative investment markets.
Real Estate Funds: Trend towards simplification of structures and strategies
ALFI’s Real Estate Investment Funds (REIFs) Survey 2017 shows that in 2016 and during the first two quarters of 2017, the population of Luxembourg domiciled REIFs continued to expand by 43 Direct Funds of which 16 are manager-regulated alternative investment funds (AIFs), and 15 reserved alternative investment funds (RAIFs) dedicated to real estate. This brought the total number of REIFs surveyed to 259 vehicles, including 10 investment companies in risk capital (SICAR).
Regarding the fund structures, the Specialised Investment Fund (SIF) regime can be said to be firmly established as the favored legal regime for regulated REIFs in Luxembourg. The legal forms of the limited partnerships SCS & SCSp continue to increase in popularity since their introduction in the Luxembourg law in 2013. For the first time the RAIF regime, introduced in 2016, is firmly represented with 15 funds in this survey, compared with only one RAIF in 2016.
In 2016, new fund launches were triggered overwhelmingly by initiators/AIFMs from Europe, (mainly Benelux, Germany and UK) and from the USA.
The most common investment strategy still remains the ‘multi-sector’ strategy accounting for 40%, despite a decrease of this strategy compared with 2016 (53%). Among the strategies, “retail” and “residential” compared equally this year with 16% and 15% respectively. “Office” investments represent 10% of the funds surveyed. 79% of the surveyed Direct Funds invest in Europe, whereas 6% of funds invest globally and 5% in the Asia Pacific region.
Though umbrella funds remain popular due to various practical and cost considerations, the trend over the last few years has been towards simplification of structures and strategies, a trend that is again evidenced in this survey.
76% of the Direct Funds have a single compartment structure, compared with 68% in 2015 and 73% reported in the 2016 ALFI survey.
81% of the investors come from Europe, the remaining share comes from the Americas and Asia/Pacific. 6% are highly diversified, which con-firms the global appeal of the Luxembourg fund regimes. Luxembourg domiciled funds are mainly used for small groups of institutional investors, with 83% having less or 25 investors.
Private Equity: Luxembourg’s fund structuring toolbox attracts large international PE houses
The Luxembourg Private Equity and Venture Capital Investment Fund Survey conducted by Deloitte on behalf of ALFI confirms the good health of the Private Equity industry globally.
The sector raised 338 billion USD over the first three quarters of 2017, which is an increase of 18 percent compared to the same period in 2016. In 2016, capital distribution reached an all-time high of USD 488 bn, with nearly USD 1.5 trillion returned to investors since 2013. Those distributions, combined with the poor performance and volatility linked to traditional asset classes, have driven a number of new investors to enter the Private Equity world. The other sign of the coin is that PE firms experience increasing difficulties to deploy capital efficiently.
Despite the fact that Luxembourg has been active in the Private Equity field for more than two decades, local presence was historically limited mostly to smaller and / or emerging General Partners. The opportunities offered by the Luxembourg fund structuring toolbox have now motivated many large international houses to set up and conduct business out of Luxembourg.
A clear majority (62%) of PE vehicles are structured as Specialised Investment Funds. The interviews conducted with large PE fund managers revealed that the vehicles of choice for future fund structuring will either be unregulated Luxembourg Limited Partnerships or Reserved Alternative Investment Funds (RAIFs). In both cases, time-to-market and investor negotiation flexibility are the main drivers for such preferences.
Over 90 percent of initiators of Luxembourg PE funds are based in Europe. As expected in a PE environment, most asset managers raise funds from institutional investors.
Loan funds: filling the financing gaps by investing in real asset classes
Since bank lending in Europe has been significantly reduced in the aftermath of the 2007-2008 financial crisis due to the tightening of banking regulations and higher capital ratios imposed on banks, regulators and policymakers are increasingly becoming aware of the benefits of non-bank intermediation and especially loan funds which provide an alternative to the banking industry as a source of financing the real economy. Encouraging greater diversity in funding is thus one of building blocks of the EU’s Capital Markets Union initiative.
The development of non-banking credit intermediation has led loan funds to expand significantly in the Grand-Duchy. The authors of the Loan Fund Survey commissioned by ALFI and carried out by KPMG Luxembourg expect this trend to continue.
A snapshot of the market shows that the aggregate amount of capital invested in regulated loan funds mid-2017 amounted to EUR 40 bn and that the number of loan funds increased by 160 percent in 2017 compared to 2016 and by 280 percent compared to 2015.
70 percent of major asset managers use Luxembourg vehicles for their loan fund investments. 78 percent of loan funds are SIFs, while 60 percent of the top ten players are using or plan to use RAIFs.
Last but not least, 55 percent of the investors in loan funds are European.
Looking forward, the rapidly evolving international tax law in answer to the OECD Base Erosion and Profit Shifting project (BEPS) is increasing complexity. However, although managers are concerned, the survey shows that they do not intend to leave Luxembourg but would rather stay and reinforce their presence.
The more than 600 participants a the Private Equity and Real Estate Investment Funds Conference organised on 21 and 22 November by the Association of the Luxembourg Fund Industry (ALFI) clearly indicate that the alternative investments sector has the wind in its sails.
Download ALFI’s Real Estate Investment Funds (REIFs) Survey 2017 here.
Download Luxembourg Private Equity and Venture Capital Investment Fund Survey here .
Download the Loan Fund Survey here.