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Magazine Issues » November 2022

Luxembourg Roundtable: In person in Luxembourg

Funds Europe – When a traditional investor makes its first allocation to private markets and selects a fund manager, what are their next steps and what common challenges are there along the way?

The first issue, according to Albrecht, is to face the fact that private assets funds contain comparatively less liquidity than that which many investors in mainstream asset classes would be used to.

Investment methods when entering private market funds are different from allocations to liquid funds. At the beginning, an investor in a private assets fund makes a commitment to place a certain amount of money into the fund. Subsequently, there are capital calls on that money when finance is needed to make direct investments.

“The understanding of the mechanism and constraints implied by such funds will be key to making it a good experience for investors,” said Albrecht, who went on to highlight the shift towards the ‘retailisation’ of private capital funds.

“Even though retail is not always pure retail, the minimum thresholds for investments are lowered. It therefore means there is a new type of investment available to a new type of investor, and there is therefore a new type of investor available to private-markets asset managers.

“It also means for the manager that instead of dealing with a pool of investors that could number 40, 80 or 100-plus, it could be 1,000-plus if this trend continues.”

“Institutional investors cannot afford to have low-single-digit-type returns. it doesn’t work. so, there is a shift towards alternative investments.”

Some 20 years ago, institutional investors were rather marginally invested in alternative assets, mentioned Niedner. They were primarily invested in listed equities, fixed income securities and money markets instruments. But institutional investors now have higher allocations to alternative investments as they chase higher returns and yields.

“They cannot afford to have low-single-digit-type returns. It doesn’t work. So, there is a shift by institutional investors towards alternative investments,” said Niedner.

He added: “There’s also an important link between asset managers and the retail side of banks, including the entire regulation which goes around it: the European Long-term Investment Fund (Eltif), which will now be Eltif II.”

The good news is that both liquid and illiquid investments are regulated in Europe under the Ucits regulation and the Alternative Investment Fund Managers Directive (AIFMD), respectively. Xanthopoulos noted that the Ucits regime is older than the regulatory regime around alternatives, but said that in the alternatives space, the ecosystem is well developed, albeit less mature and less automated than in the Ucits world.

“However, because of this regulatory framework, there shouldn’t be any massive loops or traps for the investor acting in the alternatives space.”

ESGA newer but common challenge since August this year relates to funds that have to consult clients about their sustainability preferences, said Alfi’s Gutton.

“We need to assess the match between the needs of investors and which investments are available. And as we all know, there are a lot of difficulties with data in the ESG and sustainable frameworks,” he said. A significant challenge, therefore, is for the correct sourcing of suitable investments to match client sustainability needs.

Dumitru said it is a challenge for investors to find the right asset managers who have the appropriate level of knowledge surrounding particular private assets, or who have the right level of access to markets and good access to information.

“Sometimes they invest a bit too much into some fund managers without even looking at the more extensive profile of the fund managers,” she explained.

Dumitru also highlighted difficulties with forecasting returns. Although academics were studying risk and return estimates from these asset class – which was helpful in developing the asset classes – there were still issues with putting theory into practice.