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Supplements » Luxembourg 2022

Luxembourg jurisdiction roundtable: Alternatives in the Grand Duchy

With the growing maturity of the AIF sector and the implementation of the Capital Markets Union, Luxembourg faces a changing landscape. our expert panel discusses these developments, and the growth of climate investing.

Luxembourg_Jurisdiction_roundtable_Feb_2022

Micaela Forelli (Managing director Europe, M&G Investments)
Ian Harcourt (Board member, country head Luxembourg and head of institutional banking, Luxembourg, RBS International)
Philippe Renard (Chief executive, RBC Investor Services Bank S.A.)
Mattia Scabeni (Chief executive, Generali Investments Luxembourg)

Funds Europe – Will 2022 be the year when alternative investment funds (AIFs) truly emerge as a widely adopted part of an institutional investor’s toolkit?

Mattia Scabeni, Generali – I see a very rosy future. The appeal of alternative asset classes has been driven by a combination of changes in both the investment and regulatory environments.

As far as the investment environment is concerned, investing in alternative assets such as real estate, private equity, private debt and infrastructure may represent an additional tool to meet investors’ needs, particularly when they are looking for alpha, a source of income, and diversification.

Therefore, a strong private asset framework is essential to build a resilient portfolio and address the specific requirements of institutional investors, such as insurers. Insurers’ needs are driven mostly by asset-liability management. For such reasons, I see more and more investors willing to pay the liquidity premium and commit their capital for longer.

As far as the regulatory environment is concerned, there have been huge improvements, especially here in Luxembourg. This is a leading jurisdiction in that respect, and Luxembourg should keep aiming at becoming the funds hub for alternative assets and position itself as one of the most trusted and worldwide recognised jurisdictions for structuring and operating AIFs.

Philippe Renard, RBC – Since the establishment of the AIFMD [Alternative Investment Fund Managers Directive], we’ve seen a massive appetite from investors to invest here in Luxembourg. Statistics from Alfi [Association of the Luxembourg Fund Industry] show double-digit growth in these assets. The market is realising that alpha and risk-reward is in alternative assets.

The limitation of the AIF for now is that because it is illiquid, it cannot be cross-distributed in Europe to retail investors. That may change as we see that the regulatory appetite is there to favour distribution to investors who are more retail in type. I think it would be a big boost to the industry if we can get to that point.

Ian Harcourt, RBS International – The alternative sector is already well established: in that sense, I don’t see it as emerging. The predictions are for double-digit growth across the sub-sectors of alternatives. There are a number of factors driving that, which have all of a sudden coincided, and which make this a very interesting industry and sector to be involved with.

The first thing that’s clearly happened is the pandemic, which has hit a number of industries and sectors quite hard. To recover properly from the pandemic is going to require a public/private partnership. The alternative sector has always been focused on partnerships, whether it’s infrastructure, real estate or other types of joint ventures, so I think private capital has a very big role to play in that transition.

The other coinciding factor is, of course, ESG. Climate and sustainability form a big macro trend. To change our business to become more purpose-led is something we’re very keen on focusing on and it’s also become a focus for investors. There’s a lot of innovation going on both in regard to digital but also how we measure and understand if something is green or not green.

Most recently, the correction we’re seeing in equities, the rise of inflation and supply-and-demand issues, mean that some alternative assets can be perceived as an inflation hedge, especially commercial real estate. All these things underpin a wider change in society and the global economy where the alternatives sector is well placed.

Luxembourg’s reached a tipping point where there are now complete structures available in one jurisdiction for a global and not just European reach. People are realising that Luxembourg is a much more practical place to go to. If you were to do this in the US, you would need a Delaware structure and very often a Cayman structure. The fact that a firm could come to Luxembourg and get everything under one roof with one or several service providers with the transparency and stability that European regulation gives via Luxembourg, makes Luxembourg an attractive global domicile for funds in the alternative sector, and generally there are those macro trends attracting capital to the sector.

Micaela Forelli, M&G – AIFs have already emerged as a very widely adopted part of the institutional investment toolkit.

Yields remaining so low means that institutional investors continue to have a need for returns that cannot come from the traditional bond space. As interest fades in traditional bonds, and as inflation grows, floating rate characteristics are quite important in many of these alternatives to protect returns.

AIFs can span a very broad liquidity and return span from products offering cash + 2-5% with monthly liquidity, right up to double-digit returns in completely illiquid fund structures.

It’s difficult to generalise about institutional investors’ needs because they may have different requirements across the spectrum, but generally speaking, the AIFs’ success is not going to end and a trusted alternative investment fund manager who can advise on multiple different subsectors of the large and varied alternative universe is set to be in a strong position.