In Luxembourg’s financial sector, ‘the new Ucits’ is an informal but widely recognised label that stands for innovation and promising change. It refers to the success of its 1980s investment legislation that offered European passports to Ucits investments funds, sparking a multi-decade boom in the financial sector, turning Luxembourg into Europe’s leading hub for investment funds and replacing the steel industry as the country’s main economic driver.
Encouraged by this success, Luxembourg’s financial industry, open to innovation and keen to embrace new opportunities, now is always looking to identify the ‘new Ucits’. Every few months such potential new greenfields are informally identified and considered worthy of the label. And so far, no surprise, all of them are in finance.
This year, Luxembourg’s new legal regime for securitisation, adopted by the parliament in February, clearly is a top candidate. Other parts of the finance ecosystem also have been labelled as such, for example the Reserved Alternative Investment Funds that continue to attract investors from across the world after the new regime was launched in 2016. And Luxembourg’s fintech community is actively implementing new ideas for investment services, tokenisation being seen as promising also for investment funds.
Revolutionary change
But are these really the ‘new Ucits’?
The one thing that will determine economic success - for Luxembourg as well as other countries - in the coming decades will need to trigger a major transformation of a revolutionary nature. Finance undoubtedly will continue to change and transform, but likely more in an evolutionary way. For a potential revolution we need to look further as finance has not always been Luxembourg’s greatest economic power.
The Grand Duchy clearly is no stranger to industry. It has its economic roots in steel and iron. In the first half of the 19th century it developed as a leading global steel producer, processing cokes and iron ore from Germany and France and returning steel by train. That heritage now is present in ArcelorMittal, the world’s second-largest steel producer whose headquarters are based in the Grand Duchy.
Post-Brexit boom in finance is over
So Luxembourg’s attractiveness to foreign investors is not exclusively because of its financial sector. Consultancy firm EY has studied the attractiveness for foreign investors and concluded that finance is no longer where the real growth is. Post-Brexit Luxembourg did see a surge in relocation investments as some firms moved their European headquarters into the Grand Duchy. But last year, “there was no relocation effect,” said EY managing partner Olivier Coekelbergs. It’s clear that the post-Brexit boom is over.
The relative weight of finance and business services on total foreign direct investment in Luxembourg last year fell to 28 percent from 68 percent in 2020. Manufacturing last year accounted for more than two-thirds of foreign investment.
‘Industry 4.0’ era has arrived
So foreign investors these days are more interested in manufacturing. The fourth industrial revolution, also known as ‘Industry 4.0’, is at work, and EY sees that Luxembourg clearly has a lot to offer. Businesses looking to re-shoring or near-shoring their production and investors looking to assign funds to innovative projects that offer growth want countries where the adoption of technology is high, where talent is available and affordable, and where the infrastructure is good. At the heart of Europe, home to a major international cargo airport, with 5G networks rolled out, Luxembourg clearly is a candidate.
In the era of Industry 4.0, logistics matter more than ever before. It’s not about mass production, a physical sales network and long, global delivery lines, but about online orders, 3D printing and same-day delivery to clients. An Industry 4.0 factory is small and lean and digitally connected to a global network. EY named tyre production as an example. Continental has had a major production plant in Luxembourg for decades, but its future is in lean “smart factories” that can produce tailor-made tyres on the day they are ordered.
New opportunities in transition finance
So should we forget about the financial sector when considering foreign investment in Luxembourg? Absolutely not of course. Luxembourg has clearly established itself among asset managers from Europe and elsewhere in the world as a valuable hub. Of course Luxembourg needs to make sure it will remain attractive, but generally speaking this business will continue to grow in line with the global market.
Industry 4.0 presents new opportunities for investors, long-term opportunities. Industry 4.0 also is a material factor to the economic transitions that our economy is experiencing. Financing these transitions requires financial vehicles that can carry financial risks - Raifs, Eltifs - and a connected international financial ecosystem such as is readily available in Luxembourg. Against that backdrop, recognising Industry 4.0 as the ‘new Ucits’ would not be a bad idea.
In Flux is a regular column on Investment Officer Luxembourg shedding light on the Luxembourg financial ecosystem. Financial journalist Raymond Frenken is Editorial Manager of InvestmentOfficer.lu. He has followed financial markets and EU regulation for more than two decades. Earlier in his career he was Amsterdam bureau chief for Bloomberg News, Benelux correspondent for FT/MarketWatch, EU correspondent for CNBC in Brussels, and until 2021 director of communications at the European Banking Federation in Brussels.