Luxembourg: Success in fund distribution, product innovation, and the democratisation of private assets

At the recent ICI Investment Management Conference, HSBC, PwC, Arendt & Medernach, and ONE Group Solutions held a series of panels on Luxembourg’s status as a major centre for alternative asset classes; the expected positive impact of European Long-Term Investment Funds 2.0 (ELTIF 2.0); the growth in ESG funds; as well as its sustained position as the leading cross-border distribution for Undertakings for Collective Investment in Transferable Securities (UCITS).

The private markets space in Luxembourg has already grown at a remarkable pace over the past five years, with assets under management (AuM) increasing at a compound annual growth rate (CAGR) of 32.0% between 2018 and 2023 H1.¹ Infrastructure and private debt have seen the fastest growth, 39.1% and 38.3% CAGR respectively.

Meanwhile, the number of private markets funds has continually increased over the past five years, nearly doubling since 2018. Infrastructure and private debt funds are driving the trend, growing at 19.7% CAGR and 18.7% CAGR respectively.² These trends are supported by the innovative Reserved Alternative Investment Fund (RAIF) regime that allows for global fund managers to efficiently bring their strategies to market.

Daniel Da Cruz, Consul General of Luxembourg in San Francisco, shared with Rafael Perez, Business Development Leader Americas for ONE group solutions, the confluence of factors contributing to Luxembourg’s success as a global fund centre: economic stability, its investor-friendly ecosystem, and a diverse talent pool with deep expertise spanning the entire financial services value chain.

The UCITS market was hit hard in 2022 after the highs of 2021, but last year activity started to bounce back. For Luxembourg, this reinforced its dominance in the cross-border distribution market, with a 6.3% growth rate in terms of cross-border registrations over the last 10 years, which is around 55% of the European cross-border market. Ireland, Luxembourg’s nearest competitor in this market, is sitting at about 35%.³

“These are the two domiciles for cross-border distribution funds,” said Steven Libby, PwC Partner and EMEA AWM Leader. “And the hotspots for distribution in Europe were Spain, Italy and Austria; while in Asia, Singapore continued to be highly attractive to the detriment of Hong Kong, and that’s due to its regulatory challenges.”

In contrast, Luxembourg has established itself as a leading international hub for cross-border fund distribution by providing a variety of fund structuring solutions to support investors. Investors can choose from RAIFs, Specialised Investment Funds (SIFs), Undertakings for Collective Investments (UCI) Part II funds and more, available under the Alternative Investment Fund Managers Directive (AIFMD) marketing passport and ELTIF labels, as well as UCITS.

Ross Stoeterau and Alexander Soto, both Managing Directors and Associate General Counsel at Nuveen, discussed Luxembourg’s appeal with Anastasia Aurol, Securities Services Director at HSBC.

“All of our product teams across our multi-affiliate organisation are quite familiar with Luxembourg.”

Alexander Soto adds: “There's a few key reasons that Luxembourg ends up at or near the top of the list in all cases.

“They have an advanced regulatory regime, and so, for us being a multi-affiliate-style shop, we have all kinds of asset classes, everything from farmland to timber to real estate debt. When you want to put a product out in market, you want to make sure that the regulator is aware, flexible, and they understand the different products investors are looking to get. That advanced regulatory regime is therefore helpful.

“From a distribution standpoint, when you're running European domiciled funds, you get broad-based European access (via marketing passport).” And, says Soto, “It’s really, really well-known and used from a comfort standpoint for investors around the world. In APAC in particular, where there is a boom, they are quite comfortable with Luxembourg structures and regulatory regimes.”

There has also been a tremendous growth rate in ESG funds overall, according to Mike Delano, PwC Partner and Luxembourg Asset & Wealth Management Leader, reaching 28% since 2018, mainly driven out of Europe.

Around 70% of the AuM in Luxembourg UCITS is a sustainability-type fund, which is very different to the state of play in the US. There’s a whole different mindset in the European market, Libby pointed out, that makes Luxembourg a strong player for big institutional investors and pension funds looking for ESG funds.

UCITS was one of the first steps in creating innovative solutions for global asset managers; now ELTIF 2.0 is the hyped new wave of opportunity. Luxembourg is currently the largest domicile for ELTIFs. The number of Luxembourg-domiciled ELTIFs has increased more than eight-fold since 2020, with further increases expected ahead.

ELTIFs have been gaining in popularity over the past couple of years; the total jumped from 25 to 93 between 2020 and 2023 alone. Luxembourg is home to 61% of these funds in Europe.

The new rules for ELTIF 2.0, approved by the European Commission in October 2022, should drive even more growth. By providing clarifications and removing some of the previous obstacles present in ELTIF’s 2015 iteration, the Alternative Investment Management Association (AIMA) expects this updated framework to result in an additional EUR100 billion in alternative assets funding over the coming five years.⁴

Although the growth has been significant, the first ELTIF framework had shortcomings as it was perceived as a closed-ended product. ELTIF 2.0, by comparison, is flexible and more simplified.

“In a nutshell, you can use it for all private asset strategies. You can use it for real estate, infrastructure, private debt, private equity and also for fund-of-fund strategies,” explained Stefan Staedter, Arendt & Medernach Partner.

Libby added that Luxembourg is a key actor that will benefit from projected growth in ELTIFs under the new framework.

“Luxembourg was the first mover. It was fast. It's been the one that's captured the ELTIFs and launched many of these products, so it’s already been tested in the market,” said Staedter.