Luxembourg’s alternative investment funds (AIFs) continued to show resilience and growth last year, even amid economic headwinds, navigating economic challenges with private equity funds at the forefront of market momentum, according to the latest annual market overview by the Grand Duchy’s financial supervisor.
Luxembourg boasted 8,172 such funds at the end of 2022, up from 6,932 a year earlier. Correspondingly, the Net Asset Value (NAV) reached a total of 1.869 billion euro, compared to 1.482 billion euro recorded in 2021. AIFs thus account for more than one third of the five trillion euro in assets at home in Luxembourg.
The data in CSSF’s AIFM Reporting Dashboard showed that the sector remains concentrated. Nearly half (48 percent) of the NAV in 2022 was held by the top 4 percent of the largest funds, a slight increase from the 45 percent concentration witnessed the previous year.
Market size overview
While many AIFs in Luxembourg may not tower in size, they don’t falter in growth. An impressive 64 percent showcase a NAV of less than 100 million euros, which suggests that these AIFs are typically smaller than mainstream investment funds.
Despite this, 2022 welcomed a robust 22 percent growth in terms of total NAV. Various investment strategies, encompassing private equity funds, hedge funds, real estate funds, funds of funds, and other diverse tactics, reported growth. Yet, CSSF noted that quarterly growth began to exhibit signs of moderation as the year rolled on.
Hedge funds remain niche
Private equity funds consistently remain the strategy of choice within the Luxembourg AIF market, constituting a solid 27 percent. Their influence is undeniable with the NAV peaking this year at an impressive 503 billion euros. While other tactics such as funds of funds, traditional equity and fixed income funds, or real estate funds may be trailing, they still command substantial market shares. Hedge funds remain a more niche strategy within the Luxembourg milieu, said the CSSF.
A dominant 94 percent of AIF investors are identified as professionals. This includes key players like collective investment undertakings, pension funds, and other financial institutions. One of the intriguing highlights from the study is the intensity of investment. The leading five investors have a stronghold over 86 percent of NAV. CSSF noted that this high concentration might be indicative of lack of clarity in reporting about the ultimate beneficial owner,
Geographical footprint
The trend of using borrowed money to enhance potential returns is largely restrained across AIF strategies, with hedge funds being the notable exception. Although the trend largely remained stable, hedge funds have exhibited a consistent reduction in their reliance on leverage since late 2020. The financial borrowing arena observed a spike from 2017, moving from 47 billion euros to 79 billion euros, yet it remains a minimal portion of NAV.
CSSF underscores need to report leverage
Speaking at the LPEA private equity conference on Thursday, the CSSF reminded industry parties that they need to respect the requirement to systematically report leverage, and also underscored the importance of properly assessing valuations in the context of high interest rates.
“Valuations should reflect market tensions,” said CSSF economist Simon Emeri when presenting the AIFM Dashboard at the event. “We are not saying that is a problem, but we want you to apply prudence in your valuations.”
Recent guidelines from the European Securities and Markets Authority are set to influence future leverage figures, particularly for real estate funds. The European Commission emphasises that real estate funds should account for exposures in specific structures which might amplify investment risks.
More closed-ended funds
More and more Luxembourg AIFs are closed-ended funds; only 34 percent were open-ended AIFs at the end of last year. This trend observed since 2019 is attributable to the rise of the private equity funds which are almost systematically closed-ended funds. Some 64 percent of open-ended funds’ NAV redeemable daily to monthly. Private equity and real estate funds have lower redemption frequencies.
Liquidity risks vary significantly across AIF types. The Luxembourg AIF market liquidity has increased in comparison with last year, the aggregated liquidity shortage is the lowest since 2019 at -3,4% of NAV, CSSF said.
A crucial contributing factor to this favourable liquidity development, especially within real estate and funds of funds, is attributed to a worldwide improvement in liquidity reporting methods, following the quality assessments initiated by the CSSF.
Portfolio breakdown
