How has pandemic affected the Luxembourg alternative fund sector? What is the shake out from Brexit? Has regulatory reform in Ireland increased competition for Luxembourg? What about crypto-asset funds? These questions and more were addressed at the “Global View on Alternative Investments 2021” webinar hosted earlier this month by US trade association NICSA in partnership with ALFI.
This wide ranging discussion featured Chris Meader of Sudrania Fund Services, Renaud de Matharel CEO of the asset manager Cube, and a pair of specialist lawyers, Marcel Bartnik of GSK Stockmann and Mark Shaw of Wildgen. The discussions were conducted under Chatham House rules, so quotes cannot be attributed.
Pandemic speed-bumps
The pandemic represented “speed bumps” for the alternative sector, was a representative comment. Despite “a bit of a wobble” at the beginning, the fundamentals of the attractiveness of these asset classes has not changed: a low interest-rate world driving investors to seek returns. As well, fiscal and monetary policy easing has had an effect, with “most investment flowing through the fund management industry,” said one. “I think the industry, generally speaking, is quite happy with how it is how it is growing,” was a typical comment.
Brexit effect
Brexit continues to cause furrowed brows, and hope that the UK and EU can come to a stable deal on financial services appears to be almost gone. “The only prudent advice that one could give to a financial services client in recent years was to plan for no deal, which, of course, is what’s happened,” said one.
Luxembourg regulators are judged to be reasonably “pragmatic” on areas such as market advice, trading, and portfolio management being offered from the US and the UK into the EU. This can’t make up for the lack of “the key thing: there is no onward passport.” So there are two options: “set up your own fully regulated, fully capitalised and fully staffed subsidiary, or use a third part provider.”
While significant, the move to bring operations to Luxembourg appears not to have been dramatic since the no deal on financial services came into effect. Around half of job creation in the financial sector in 2020 was the result of Brexit, said a recent report by national statistics office Statec. This equated to about a 0.8% of the sector workforce, representing around 300 positions. Most of this growth has come in the funds and insurance sectors, with some increase for banking functions unrelated to funds.
Looking forward, “I am now seeing divergence on regulation, which probably renders any type of equivalence decision less and less likely,” said one. In particular they pointed to how the UK is talking of adopting its own ESG regulations rather than following the EU’s lead. That said, as the graph shows, the US, UK and Switzerland lead the market share of initiators of Luxembourg funds. EU regulators will need to be careful not to upset this win-win situation, the panel noted.
ILP competition with Dublin
Discussion turned to competition with Dublin following the introduction of the investment limited partnerships (ILP) regime in Ireland. This move is seen as seeking to replicate the success of Luxembourg’s SCSp vehicle which mimics the common law style limited partnerships popular in the US. However it was pointed out that since its launch last year, the ILP has yet to break through, mainly as this requires regulation.
So while this adds to the toolkit available to Dublin-based practitioners, there was scepticism it would fundamentally change the relative attractiveness of Luxembourg, which has become the go-to jurisdiction for these types of funds. “The point is, when it comes to asset raising, do you want your fund to be an outlier? When you have that conversation with your potential investors, do you want to be justifying a choice of the non- standard jurisdiction or talking about how your fund is an excellent investment proposition?” said one participant.
Crypto options
The panel touched on crypto, talking just days before Italian asset management firm Azimut Investments was granted authorisation to launch of its planned Luxembourg-domiciled fund, AZ RAIF Digital Asset. This is the first of its kind in Luxembourg and only the second in Europe, with the fund invested in crypto-currencies, digital assets, exchange-traded funds, other types of funds, and the equity of financial technology or blockchain-linked companies.
So while Luxembourg and European regulators have shown some reticence about direct crypto-investments, particularly around the depositary function, “I think, in time, we will certainly get around this by investing in companies that are active on these markets under the general rules of private equity funds,” said one panellist.