Luxembourg’s growing role as a hub for alternative investment funds sees service providers such as TMF Group and Selectra partnering to offer a wider range of capabilities.
Luxembourg is the largest fund centre in Europe, with over €4.5 trillion in assets under management (AUM). Much of these assets, and much of the Grand Duchy’s history as a fund services hub, have historically been centred on UCITS funds. But that is changing.
At the same time as the EU’s Alternative Investment Fund Managers Directive (AIFMD) was transposed into Luxembourg law in 2013, Luxembourg also introduced the Special Limited Partnership (SLP), followed by the creation of the Reserved Alternative Investment Fund (RAIF) in 2016. This has accelerated the Grand Duchy’s growth into the pre-eminent hub for alternatives such as private equity, private debt, real estate and infrastructure.
Inflows into these types of ‘private market’ strategies are expected to be durable for a while longer yet: Preqin, a fund-industry focused data provider, predicts that global AUM in alternatives will have surged by 59% (from the 2017 figure) to $14 trillion by 2023. This is partly because asset managers have to broaden their horizons to generate alpha in the current stubbornly low-yield environment.
“It is safe to assume that we are not going to see a fundamental change in the interest rate environment in the short to medium term,” says Anja Grenner, market business development lead of fund services at TMF Group, a provider of administrative services to asset managers in 80+ jurisdictions, including Luxembourg. “This will lead to more money being directed to alternatives and Luxembourg is well placed because of the stability of the country, its offering of multiple fund structures, as well as the workforce’s experience and knowledge built up over many years.
“Luxembourg has grown significantly in the alternative space, asset managers and fund initiators are comfortable doing business here, so to a certain extent this becomes a self-fulfilling prophecy in terms of attracting business.”
The missing link
Driven by the need to use an AIFM to distribute and market alternative funds to investors located in the EU, soon after the introduction of the AIFMD, Luxembourg replicated the concept of using Luxembourg Management Companies (ManCos) for UCITS funds and alternative funds. As the expertise of managing UCITS could to a good extent be applied to managing alternative funds, Luxembourg saw numerous ManCos expand to offer their services to both UCITS and alternative funds. It was the birth of “Super-ManCos”.
Over the course of the past years, numerous central administrators acquired or founded an outsourced AIFM model to complement their service offering. “The AIFM was the missing link for us too,” says Grenner. “The acquisition of Selectra enables us to offer an integrated and interconnected one-stop shop for asset managers who want to set up funds in Europe. They can benefit from greater efficiencies and economies of scale, as well as a high quality of service.”
Selectra, which was founded in 2013, provides a wide range of services that support creation, management and distribution of AIF and UCITS funds for European and non-European initiators.
Once regulatory approval is granted, the combined firm will have €125 billion ($148 billion) in assets under administration.
Marco Cipolla, founding partner and managing director at Selectra, says “Fund managers and distributors benefit from a single integrated partner across all jurisdictions to provide solutions in data management, automation and proximity.” Outsourced AIFMs provide the legal and regulatory structure that asset managers would otherwise have to invest in themselves and constantly adapt as regulation changes. This would involve the onerous tasks of, for example, compliance, regulatory reporting and fund valuations, to name just a few.
Cipolla believes outsourcing to third-party providers for middle and back-office operations will continue to be a major advantage and trend among asset managers, as this allows them to sharpen their focus on core competencies, rather than spend time on administrative tasks.
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