A Guest Blog by Sanne-LIS, Luxembourg | ALFI Member
Pierre Weimerskirch, Managing Director, Sanne-LIS, Luxembourg
Over the last 10 years alternative investments have grown tremendously, with 2021 breaking records. Luxembourg, as a leading international hub for the distribution of alternative funds, has benefited greatly from this trend. Today, more than 6,000 alternative investments funds with more than USD 1.3 trillion of AuM are domiciled in Luxembourg[1]. The US is strongly represented. Among the top 10 US private equity (PE) managers, nine are present in Luxembourg. The central location of Luxembourg in Europe and its outstanding “ecosystem” around alternative investments have contributed significantly to the success of Luxembourg as a global hub for the distribution of alternative funds.
The strong growth in alternative assets was driven by a decade of negative interests, groundbreaking innovations and a greater global integration of the economy and capital markets. Currently the world is experiencing several major shifts: increasing interest rates, higher geopolitical risks and interruption of the global supply chain – the waters, so to speak, have become rougher.
Will the recent developments cause the Alts wave to break? If one looks more closely, one sees that there's still plenty of “swell” out there to support the alternative market.
First of all, there is a record amount of dry powder sitting currently with alternative asset managers. For PE alone, this capital is estimated at USD 3.4 trillion[2]. Although managers may be more cautious with capital deployment in the short term, the changing environment will present new investment opportunities in the medium term. Markets experienced a similar situation at the beginning of the Covid pandemic in 2020 with a slowdown of deals at first which picked up strongly 6 or 9 months later.
Moreover, managers are continuing to launch new funds. In Q1 2022 global PE funds secured more than USD 175 billion of new capital[3]. In this context responsible investment topics play a more and more important role, and we see an increased number of alternative funds in Luxembourg following an ESG compliant investment strategy.
Furthermore, institutional investors such as pension funds or insurance companies have increased their long-term commitment to alternative investments over the years[4]. In the US, pension funds have allocated as much as 25% of their funds to Alternatives. Continental European institutional investors are in urgent need of catching up in this context, with the current exposure being 5-7%. In the medium-term the target allocation ratio is 12-15%.
The current efforts undertaken by the market to make private equity also accessible to retail investors will help support the alternatives market. Only 7% of the PE capital raised in 2021 in Europe came from private individuals[5]. A recent survey among fund managers shows indeed that they expect the share of retail investors in their AuM to increase over the next five years[6]. We are currently seeing several initiatives in this respect.
- Set-up of alternative assets feeder fund platforms:
These feeder funds are open to wealthy private individuals, family offices and private banks through which they can access the flagship private equity and real estate funds of well-known and reputable alternative managers. Due to Luxembourg’s attractive environment, many of these feeder platforms who intend to collect the money from a broader range of investors are set up here.
- Set-up of an ELTIF (European Long-Term Investment Fund) which allows to raise capital from retail investors throughout the EU:
The ELTIF must pursue an investment strategy into long-term assets such as PE, real estate or infrastructure. With the review of the ELTIF Regulation in 2021 we have recently seen a stronger interest in the ELTIF. Some managers use the ELTIF as a parallel structure to their main fund, which is aimed exclusively at institutional investors, to raise capital from retail investors as well. The strategy of the two funds is very similar.
The increasingly difficult market circumstances will inevitably lead to certain adjustments in the alternative investments market. Most likely, the number of managers will be whittled down. The more challenging environment will favor high-quality managers with a proven track record and deep expertise in their respective fields. In addition, investors will amend their risk-adjusted return expectations. If positive interest rates can be expected again in the future, then hurdle rates of 5% will no longer be sufficient for alternative investments, however, the underlying trend for alternative investments should remain positive.
This is of course good news for Luxembourg as a global distribution hub for alternative funds. Luxembourg remains at the forefront and continues to adapt its so-called “toolbox” for alternative investment funds in order to make it attractive for alternative managers to domicile their funds in Luxembourg. A specialist, expert jurisdiction who help firms navigate their way quickly and safely from the depths of the ocean.
[1] https://www.cssf.lu/en/2022/05/investment-fund-managers/
[2] https://www.bain.com/insights/topics/global-private-equity-report/
[3] Preqin Pro, Historic Fundraising, 2022
[4] https://www.privateequitywire.co.uk/special/future-flows-next-generation-private-equity-lps
[5] https://www.investeurope.eu/research/activity-data/
[6] https://www.preqin.com/insights/research/blogs/future-of-alternatives-2025-the-retailization-of-private-markets
May contain forward-looking statements subject to various uncertainties. Personal views and observations of individuals contained herein are as of the date of the live event or written material and do not necessarily reflect the views of Nicsa or its member organizations. Nothing herein is intended to be or should be construed as legal advice. Contact your own counsel in order to obtain legal advice regarding these or any other matters. The information contained herein is for informational purposes only and does not constitute a recommendation of best practices.
#ProductandMarketing
#DistributionandSales