The exponential growth of Luxembourg-domiciled alternative investment funds remains on an upward trajectory as they become increasingly attractive outside of the EU. This is the conclusion from surveys recently commissioned by the Association of the Luxembourg Fund Industry (ALFI), and was the resounding message from the ALFI PE & RE Conference 2019. The headline results show that the average size of a private equity fund domiciled in Luxembourg has increased by 50% since 2018, with the number of €1bn+ private equity funds doubling1. Private debt funds’ assets under management (AUM) have grown by 40% in the past two years2, and real estate investment funds are enjoying increased interest from non-EU countries, in particular from the US3.
With negative-yielding debt passing the $17tn mark4, investors are seeking increasingly more sophisticated alternatives in the hunt for better returns and greater diversification. From a global perspective, the next few years should represent an era of significant continued growth for alternative investment funds, having witnessed global AUM tripling to near $9tn in the 10 years to 20185. Furthermore, a record near $2.6tn was raised by private equity firms in June, as the reserves of pension and sovereign wealth funds poured in.6
With alternative investment funds’ (AIFs’) growth outpacing that of UCITS’ and set to double in size by 20237, tectonic plates will continue to shift across the world’s financial centers. A bedrock of appropriate and reliable structuring options will be essential to facilitate this growth. Luxembourg-domiciled AIFs are in a strong position to capitalize on this growth in interest and investment.
In a fast-changing environment, BEPS, the AIFMD, and Brexit have forced managers to seek new long-term stable operating solutions and Luxembourg has often been the solution of choice. Appetite for the Luxembourg fund structuring toolbox has increased beyond expectation over the past few years. The diverse range of vehicles together with the asset class expertise developed over the years within the professional community and the strong regulatory framework are key factors behind this collective success.
Over the last decade, many international houses with considerable and growing local presence have set up shop and conducted business out of Luxembourg, as the AIFMD introduced new organizational requirements and specific disclosure rules regarding AIFMs managing AIFs. The alternative investment industry has accepted the challenge, and is today governed by a framework that has the potential to develop into a brand, just like the UCITS Directive.
Statistics prove that this aim is becoming a reality. Over 265 AIFMs have been authorized by Luxembourg’s regulator, the CSSF.8 The number of funds domiciled in Luxembourg now approaches a total of 15,000 – making the Grand Duchy the largest fund hub east of the Atlantic. In addition, net AUM of AIFs domiciled in Luxembourg has increased by more than one-fifth in the past three years, and hit a record €4.5tn in August9. These products are becoming more popular year on year.
Managers all over the world are familiar with the Luxembourg toolbox. Structures like the Specialised Investment Fund (SIF) or the investment company in risk capital (SICAR) were set up many years ago by initiators targeting well-informed investors. Furthermore, the Reserved Alternative Investment Fund (RAIF) and the Special Limited Partnership (SLP) have fuelled the rise of Luxembourg as the pre-eminent destination for the private equity and real estate industry, including infrastructure and private debt.
The RAIF is a unique multipurpose alternative fund which can be marketed quickly as a diversification option. Indeed, 843 RAIFs have been established in Luxembourg since its launch in mid-2016 – a notable vote of confidence from investors.10 The number of launches of RAIFs focused on property alone grew from 27 in 2018 to 63 in 2019.11 The RAIF, in addition to the SLP, has added considerable weight to Luxembourg’s fund structuring toolbox. Coupled with strong regulatory supervision at fund manager level to ensure robust levels of investor protection, they form part of a grand arsenal of investment vehicles available in Luxembourg.
Fund managers need the right tools at their disposal from administration to distribution. That means having access to the right expertise; specialist knowledge in product and tax structuring; and administration, reporting, and distribution support. We are fortunate to benefit from a thriving ecosystem of firms here in Europe’s premier fund domicile jurisdiction. A state-of-the-art toolbox is on hand to facilitate fund managers’ needs.
Luxembourg’s AAA rating, emblematic of political and fiscal stability, allows for legal and regulatory certainty. Following the UK’s vote to leave the EU, and increasing concern over offshore structures, Luxembourg’s regulated status offers investors stability in an otherwise uncertain world – evidenced by the number of UK funds re-domiciling to the country.
ALFI represents the face and voice of the Luxembourg asset management and investment fund community and is committed to the development of the Luxembourg fund industry. Created in 1988, the Association represents over 1,500 Luxembourg-domiciled investment funds, asset management companies, and a wide range of businesses that serve the sector. ALFI has been at the forefront of regulatory developments in the alternative space and assisting alternative asset managers including private equity, infrastructure, and debt fund houses. For more information about joining ALFI’s growing community as a member please go to www.alfi.lu.
- Deloitte/ALFI survey, Is sky the limit? Luxembourg Private Equity & Venture Capital Investment Fund Survey, November 2019
- KPMG/ALFI Private Debt Fund Survey, November 2019
- ALFI Luxembourg Real Estate Investment Funds 2019
- Bloomberg, https://www.bloomberg.com/graphics/negative-yield-bonds/
- ALFI, https://www.alfi.lu/en-gb/article/2019-alternatives-surveys
- FT, https://www.ft.com/content/2f777656-9854-11e9-9573-ee5cbb98ed36
- Preqin, https://docs.preqin.com/reports/Preqin-Future-of-Alternatives-Report-October-2018.pdf
- Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg regulator
- Registre du Commerce et des Sociétés (RCS) Luxembourg
- ALFI Luxembourg Real Estate Investment Funds 2019