Alternatives in Luxembourg
AuM in alternative investment funds continue to grow, as investors look for new avenues to identify yields in the current low interest rate environment. “As a fund centre, Luxembourg is second only to the US. Luxembourg continues to lead Europe with a 36% share of AUM by UCITS funds. In the alternative sphere, Luxembourg represents 10.5% of the European market, or 568 billion euro. 235 AIF Managers have been authorised by the country’s regulator – the Commission de Surveillance du Secteur Financier (CSSF) and 605 AIFM’s have registered with the CSSF. Luxembourg is also more and more a centre of fund administration for non-Luxembourg funds, including alternative funds established in other European and non-European countries, especially for real estate and private equity.
The pan-EU marketing passport provided under AIFMD has been taken up with interest by fund managers and this is something that will benefit Luxembourg’s many thriving third party AIF and UCITS management companies,” said Denise Voss, Chairman of ALFI.
Denise Voss, Chairman of ALFI
Brexit presents huge challenges for UK-based UCITS or AIFMs, who risk being unable to market to EU investors post-Brexit. Potentially devoid of single market access and passporting rights, UK managers of UCITS or AIFs selling to EU investors need to consider how their businesses are structured going forward. The most logical immediate response – given all of the vagueness and ambiguity surrounding any Brexit outcome – would be for fund managers to ensure they retain market access whatever the result. This can be achieved by working with a third party management company, an entity which can legally manage the fund but will delegate portfolio management back to the manager itself. Such ‘Mancos’ are in abundance in Luxembourg, having successfully serviced the UCITS industry for many years, so they are well positioned to help AIFs.
“On Brexit, Luxembourg considers London to be an important partner. When I visited the UK in July, my message was that I did not want to take business away from London, but rather ensure that it continued. I believe Luxembourg will provide a platform that will be necessary for UK managers to access the single market,” said Pierre Gramegna, Minister of Finance for Luxembourg. Despite the post-Brexit market upheaval, Luxembourg is on sound footing to deal with any fall-out.
Pierre Gramegna, Minister of Finance for Luxembourg
The Alternative Investment Fund Managers Directive (AIFMD) is widely credited with creating an industry-leading regulatory framework for non-UCITS. It is believed AIFMD can create a brand on a par with UCITS, a point made by Camille Thommes, Director General at ALFI. Brexit, however, has had a ripple effect throughout the EU policymaking apparatus and AIFMD is not exempt. The European Securities and Markets Authority (ESMA) has evaluated the regulatory regimes of 12 third countries and given a positive advice on five of them. Some of these markets were told that their regimes were equivalent to AIFMD but passporting will only be realised once approved by the European Commission, the European Council and MEPs.
Regulators across Europe, speaking at ALFI, said Brexit was probably going to result in the European Commission demanding greater reciprocity from third countries. At a very minimum, it will lead to delays in AIFMD passport extensions. Matthieu Lucchesi, Head of Asset Management Regulation at the Autorité des Marchés Financiers (AMF) in Paris, said it was likely that AIFMD equivalence discussions will be reopened with third countries and reciprocity would be on the agenda. Some doubt passporting rights will be granted at all.
Matthieu Lucchesi, Head of Asset Management Regulation at the Autorité des Marchés Financiers (AMF)
The European Commission will evaluate the status of AIFMD in 2017, but should we expect major changes from this review? This answer is probably no. Having enacted huge swathes of regulation post-financial crisis, many feel the authorities are at a saturation point. There is a general recognition that AIFMD is working well, and substantive changes are not necessary. Fund managers will be disappointed to learn that remuneration rules are unlikely to be tweaked in this review. IOSCO and FSB provisions around liquidity risk management and leverage will probably be on-boarded by the European Commission in any future iterations of AIFMD, added Lucchesi.
But AIFMD is only one component of the regulation that has impacted fund management. One of the biggest challenges faced by fund managers is dealing with conflicting regulatory initiatives or reporting requirements. “We have reporting requirements under AIFMD’s Annex IV, but also Form PF with the Securities and Exchange Commission (SEC). There is a degree of overlap and similarities but there are also divergences. It is particularly challenging for firms when they have to report similar information on their funds at different times to different regulatory bodies. The information is constantly changing and we have to regularly adjust our data sets,” said Martin Parkes, Director at Blackrock. However, it is clear that the regulatory reporting is having a disproportionately harsh impact on small to mid-sized firms, adding to their barriers to entry, a point made by Paul Carr, Chief Executive Officer at East Capital Asset Management.
Martin Parkes, Director at Blackrock
Fund Structures and Innovations
The introduction of the Reserved Alternative Investment Fund (RAIF) is another complement to Luxembourg’s range of fund structures. The RAIF must be managed by an authorised AIFM that can be located in Luxembourg or in another EU country. The fund itself is not subject to regulatory approval and is indirectly supervised via its manager.
“The RAIF will enable fund managers to launch their products and get to market in a shorter time-frame,” said Jérôme Wittamer, Chairman of the Luxembourg Private Equity & Venture Capital Association (LPEA) and Managing Partner at Expon Capital. Dr Angelina Pramova, Head of Business Development at GAM in Luxembourg, agreed. “The RAIF’s main advantages are its flexibility and its brief time-to-market,” she confirmed.
Jérôme Wittamer, Chairman of the Luxembourg Private Equity & Venture Capital Association (LPEA) and Managing Partner at Expon Capital
In addition to its flagship UCITS, the EU has created a number of fund products including the European Long Term Investment Fund (ELTIF), the European Venture Capital Fund (EuVECA) and the European Social Entrepreneurship Fund (EuSEF). Their success has not yet rivalled UCITS, said Silke Bernard, Partner at Linklaters in Luxembourg. “Only 28 EuVECAs and four EuSEFs have been launched. There is no publicly available information on ELTIFs, but we estimate there to be four in operation,” she said. The objective of these funds is to enable the transfer of non-bank capital into the real economy. ELTIFs, for example, are heavily focused on investing in infrastructure. But this has not yet translated into investor appetite.
Silke Bernard, Partner at Linklaters
Part of this inertia is due to their structure and investment criteria. Dr Marc Wicki, Managing Director and Co-Head of Structuring Services at Partners Group in Zug, acknowledged the high investment thresholds and ELTIF aggregate exposure limits discouraged retail investors from putting their money into these funds. Others said it was too premature to write off ELTIFs. “We certainly have not written off ELTIFs and we are looking at them closely,” said Parkes of Blackrock.
Fintech comes in many guises and its impact will be thoroughly felt in asset management. Automation is being embraced by alternative asset managers as a means by which to streamline regulatory reporting and tired operational processes. “The real estate industry continues to rely on operational processes that are customised and hands-on. It would be good if the industry could automate some of these processes, such as expense authorisation instead of sourcing data from spreadsheets. This would help us make decisions more quickly,” said Michael Fitsum, Director – Head of Operations – at M&G Real Estate in Luxembourg.
Digitisation and automation could also make regulatory reporting more palatable, a process which is renowned for being data heavy. “Digitisation should make it easier for firms to report to regulators, and provide more accurate data,” said Jean-Marc Goy, Counsel for International Affairs at the CSSF.
Blockchain was also a prominent topic of discussion. The implications this technology could have on reconciliations and regulatory reporting are huge, and if adopted by service providers and fund managers, could incur cost savings. However, enabling blockchain technology is not entirely plain sailing, and this is recognised by the industry.
“There are no business standards around Blockchain. The lack of standards is a hurdle for Blockchain and smart contracts. Furthermore, firms need to recognise that replacing technology with Blockchain could add to costs in some cases, and this is obviously not welcome. Identifying standards and the correct business uses for Blockchain is critical,” said Olivier Roucloux, Head of Product Marketing at Finoryx.
The times are critical for the funds industry. It faces challenges, but also opportunities. Dealing with Brexit will keep the industry busy for a while. While regulation has challenged the industry, rules such as AIFMD have clearly presented opportunities and fund managers are leveraging this. Digital innovation, new product and other developments - the asset management industry is proving once again its ability to embrace change and adapt.