The grand duchy of Luxembourg was the obvious place to go when London-based LGIM was considering its options for launching its new international private markets strategy. “We looked at various options. We worked through these seriously. And Luxembourg came out as our clear choice. So far, so good,” said Nick Bamber, head of private credit at LGIM, the investment management arm of British insurer Legal & General, in an interview.
LGIM, one of Europe’s biggest asset managers with 1.3 billion euro in assets under management, last month launched its first Luxembourg-domiciled alternative fund, the Short-Term Alternative Finance Fund, loosely nicknamed as “Staff”. The private credit fund is structured as a sub-fund under the umbrella of a Luxembourg Reserved Alternative Investment Fund, or Raif, called Legal & General SCA Sicav-Raif. The umbrella fund was registered in January.
The ‘Staff’ fund is an open ended euro credit fund that seeks to raise between 250 and 500 million euros from qualified institutional investors, particularly in Europe and Asia. Using the Luxembourg Raif structure makes it easy for international investors to invest. LGIM’s use of this type of vehicle mirrors that of others that offer funds to international investors, such as several Swiss asset managers and for example Anthos, a Dutch multifamily office.
Single Luxembourg umbrella fund
LGIM’s use of sub-funds under a single umbrella fund registered in the Luxembourg Business Register also reflects an increasingly common practice here. Close to a thousand sub-funds have been created under Luxembourg Raifs since 2016, research by Investment Officer has shown. The use of sub-funds also is strongly advocated by a leading administrator of these Luxembourg funds, Dublin-headquartered Carne Global, who also serves as AIFM - the entity subject to supervision - for the new LGIM fund.
“There is a commonality of view as to how to get that going,” said Bamber, referring to Carne. “This platform is an important step for us in finding a platform from which we can launch a series of funds to make them available to a wide range of clients, particularly in the European landscape. It’s more versatile for Asia as well,” Bamber said.
Within that approach, LGIM over time intends to use this structure to issue more open ended and potentially closed-end funds, each with different “underlying sleeves,” he said. “Within what is one strategy, we may actually have a number of underlying funds going on. A euro strategy of Staff, a dollar strategy of Staff. There are various things that one might utilise it for.”
LGIM’s Staff, the new short-term alternative finance fund, offers institutional investors, especially insurance companies and pension funds, a short-dated alternative to holding cash, still around in abundance among investors. In that sense it is not a typical private credit product which leverages loans at relatively high rates with a duration of several years, Bamber explained.
“It is ‘private’ and it is ‘credit’”
“It is not correct to compare it to private credit. It is ‘private’ and it is ‘credit’. This is a product which has a duration of, you know, a month and a half, an average life of six months. It’s something for insurance clients or some pension funds, wealth funds to put a proportion of their cash into something that’s returning a 100, 150 (basis points, rf.) over. That is in our world clearly investment grade. They rotate and get a premium for something which they know will get their money back very quickly.”
LGIM assures these investors that 10 percent of the fund matures every month and that 50 percent can get out in under six months. “It all completely liquidates in total, so there is no tail issue. For people that sit on cash on a broadly permanent basis, it’s a good place to park a proportion of their cash. I never recommend people put a big portion. You know, people are putting 10 or 20 percent of their money into these slightly more liquid funds. They can cash them out when needed.”
Reducing illiquidity in portfolios
Especially in private markets, dealing with liquidity, the relative ease, or difficulty, with which investors can divest from their alternative holdings, has become an increasingly sensitive topic in recent years, with international financial supervisors in Basel, Paris and also in Luxembourg regularly expressing their concerns. The March 2020 liquidity squeeze in the global money market did not go unnoticed in Luxembourg, when bond funds here, as well as in the United Kingdom and Denmark, had to suspend redemptions. Against such a backdrop, short-term alternative credit funds can do well, Bamber explained.
“The whole issue of liquidity is a sensitive one for people,” Bamber said. “Quite a few pension funds have been seeking to increase their liquidity, or reduce their illiquidity-depending how you look at it. As you’re having a vehicle where people can get a good return, but get out quickly and then balance it with other illiquid assets, it’s very helpful.”
LGIM has lined up multiple new sub-funds under its Luxembourg umbrella for later this year. A second one is expected to materialise during the coming months. LGIM’s strategy also leaves room for more regular types of alternative funds, such as those that invest in real estate and infrastructure debt -Bamber prefers to use the label “structured finance”- as well as corporates.
Asked about Eltifs, the European Long-Term Investment Funds designed to open up alternative markets to retail investors, Bamber underlined the importance of liquidity. “Ensuring the right product for the right kind of strategy is important. And particularly ensuring that we can provide the right levels of liquidity into those products for the more retail end is important.”
Reflecting on future types of alternative funds that LGIM may issue, Bamber noted that these will likely be products with a longer-term duration when compared to the short-term focus of the Staff series. “You’d expect us to be moving into the more medium duration asset classes that we’d like to be in. So it wouldn’t be surprising to see something in the transition credit, infrastructure type area, the real estate debt area. Those are the kinds of areas where we have expertise to bring as a global asset manager.”