Amid the sustained growth of Luxembourg’s private markets, propelled by ongoing onshoring and the growing acknowledgment of its robust legal frameworks, Investment Officer sat down for a conversation with Claus Mansfeldt, president of the Luxembourg Private Equity & Venture Capital Association (LPEA). The discussion sheds light on Luxembourg’s evolving role in Europe’s private equity landscape.
“With private equity you actually take responsibility for the company,” said Mansfeldt, who in his day job serves as chairman at private equity firm SwanCap. “You’re not just buying one share of IBM or Apple stocks, with no further responsibility, as it is if you’re for example a hedge fund or a mutual fund.”
“In private equity, there is a whole team of people that have to run that company, that shape its governance. You have to roll up your sleeves and work it. It’s a completely different thing than sitting in an office being a stock trader with a wall of Bloomberg screens and pushing buttons, trying to be smarter than everyone else.”
IO: What do you make of the latest CSSF AIFM Reporting Factbook on alternative investment funds?
CM: “I think this shows that Luxembourg is winning in the private equity fund domiciliation game, and with that, you know, there is the growth of AIFM-regulated activity as well. This is all evidence of the continued competitiveness of Luxembourg in this space.”
IO: Does this reflect a shift we’re seeing in Europe? Or is this a new, growing type of investment business?
CM: “It’s a little bit of both. There is some consolidation of fund domiciliation and fund management activities in Luxembourg, coming from other countries in the EU and outside the EU, including offshore locations. That is a process that has been going on for a number of years. And this just continues.”
“On top of that market leading position people are also adding their new funds. It’s an amalgamation of both trends, consolidation and the net addition of new funds being increasingly set up where everybody else is. It increasingly makes sense. It’s kind of the Facebook Effect. The stronger you are, the bigger your community is, the more the skills and relevance builds, the more reasons you have to be there.”
IO: Someone commented on the 2022 numbers, “just wait until 2023 comes out.” Is that growth continuing this year?
“I see no signs why it should not. The only thing perhaps that is not growing as fast is the formation of new funds. It slowed down in some segments. On the other hand we see that it is growing extremely fast, albeit from a low base in areas such as infrastructure and private debt while classic buyout and venture growth is slowing a little bit.”
IO: The market this year has been quite challenging. There’s also increased pressure on valuations. New registrations for Raifs for example are at a lower level than last year. Is that a reflection of the decline in public markets we have seen?
CM: “The decline in public markets is not so pronounced actually. There is a lot of noise. It’s not an unequivocal disaster in public markets, let alone in private markets. There have been some areas that are perhaps a little bit more exposed to the valuation challenge. Particularly real estate, maybe venture capital, have had a bit of a cooldown, but otherwise, no, we don’t see that the advantages of the private market in a classical sense is in any way diminished versus the public market.
“The idea of concentrated ownership, decisiveness, deep pockets, buying market leading companies… most often you find that private equity buyouts tend to be in profitable companies with some elements of market leadership, either geographically or sectorally, that can come out of these downturns stronger because some of the weaker players fall away, and they grab market share, have pricing power, and can maintain margins. So the only issue they have to grapple with really is higher interest rates and higher costs of debt. So a bit more cash flow is being absorbed to service that debt, But otherwise, the margins remain very strong.”
IO: Are we seeing a broader, wider shift in the overall equity investment market in general, in the sense that there is relatively speaking less interest in public, listed companies - more and more companies are delisting - while at the same time we see an increasing role for private assets? Is that a trend?
CM: “It’s been going on for decades, really. If America is anything to go by, I think the number of listed companies has halved in the last decade or so, from some 7000 listed companies to roughly 3800 or so. It’s possible now to keep companies private for longer, and you can still finance growth of all these companies through the private channels, whether that is private equity, venture capital growth, equity, whatever. This is making the number of publicly listed companies shrink in total and relative numbers, and this is perhaps a trend that is going to prevail for a time.”
IO: So what is it concretely that makes Luxembourg so attractive to benefit from that global trend?
CM: “We benefit from the fact that we are the most, let’s say, efficient domicile in which to place your fund. When I say efficient, it means both in terms of structuring flexibility, as well as fiscal efficiency. For example, the funds don’t typically pay any withholding tax. At source, unlike some other countries, where you have to pay some withholding tax at the fund level, and then the investors have to already throw out distributions from those funds. In other countries, those investors have to reclaim it. Luxembourg has a very clean distribution of effectively tax free income. And then of course, it’s up to the investor receiving that to declare and pay their tax in whichever jurisdiction he or she finds themselves in when he receives that from Luxembourg. It makes it attractive and simple.”
IO: A big development being discussed is the retailisation of private equity, especially with the new Eltif regime private assets are opened up for retail investors. Is the industry ready for that? After all, GP fund managers that used to work with a relatively small number of LP investors now will have to work with thousands of investors instead of a few dozen.
CM: “I would have thought so, but I think there is still going to be a big space for intermediaries, where the private equity players will still focus mainly on what they do best, which is investment activity, sourcing, owning and exiting wholly owned companies. They will however make their funds compatible with the new legislation so that it allows further distribution to retail, for example via third parties. Then those intermediaries, whether they’re private banks, wealth managers, platforms, internet platforms - whatever it’s going to be - they will perhaps fulfil that last-mile relationship to the end retail investors. The key is that the original fund is compatible with what they are using as a feeder.
There will be some of the very largest private equity houses like for example EQT that are creating their own kind of retail product, and there will be those that will perhaps go direct or through intermediaries. One way or another, the industry is getting ready. I am not sure they are ready but they are getting ready.”
IO: How do you see investor interest?
CM: “I have anecdotal experience where I see that private banking clients - not the broader retail - are very interested in it. And in my day job, I work with SwanCap, which is a private equity fund of funds and co-investments business, we have opened our funds via partnerships with private banks and feeder structures in Luxembourg. The latter is called Antwort Capital - German for answer - and is a Raif feeder here. We have now two of our funds effectively distributed via them. Over a hundred investors in the Luxembourg area have signed, mostly private banking clients, including some of the mass affluent. They are very enthusiastic about this space.”
“You know, it’s fair to say that, amongst broader retail, those that invest relatively actively either their own pension funds or their own stock portfolios, they would be, I think, the early adopter community if they are served the opportunity to participate in a blue chip package of private equity funds like an ETF almost.”
IO: Profit margins in private equity, from a business perspective, are said to be very attractive, with fees up to two percent. I understand that it’s a rather good business to be in. Are costs an issue for firms like yours?
CM: “Not as long as your gross returns are in the high teens. Then this remains part of the business model. Of course, with competition, there is pressure on prices. And with tougher fundraising conditions, there’s also a need to become slightly more investor friendly. It’s more capitalism than regulation that’s putting pressure on moderating the fees.
“Against this you have the administrative costs of running a fund, administering it. Of course, we are subject here to a very high cost country. There’s a high cost of personnel, there’s even cost indexation and all that. This is where that part of the industry has to continue to invest in efficiency. That drives it towards technologies, automation, all the things that can expedite the more back-office related activities. Hopefully we’ll maintain competitiveness on that.”