Valuation adjustments lead to a lacklustre Raif market 

Fewer new reserved alternative investment funds are being registered in Luxembourg this year as investment managers are more cautious and VC fundraising has declined. Investor appetite appears reduced but has not disappeared. Dry powder is said to remain available among institutional investors in the alternatives market. 

Data analysis by Investment Officer shows that a total of 23 new reserved alternative investment funds were registered to the Luxembourg Business Registers last month, compared to 26 funds a month earlier. During the first five months of this year, 148 new Raif funds were registered, compared to 200 during the January-May period last year.

Asked about reasons behind the lacklustre market, one senior Raif specialist dismissed talk about the impact of rising interest rates, persistent inflation and declining stock markets as “easy comfort blankets.” Nevertheless, Raif specialists generally acknowledge that valuations levels peaked in 2022 and that market conditions now are different. 

“We are seeing the general trend of institutional LPs no longer allocating commitments to private markets which is directly impacting the launch of new products in 2023,” said Dominik Becker, regional head central & northern Europe, business development for Apex Group and FundRock.

Valuation adjustments

“The backdrop of persistent high valuation levels on the private market side vs losses on the financial asset side, especially fixed income based on interest rate changes, have had a very negative impact on their balance sheets from a weighted allocation perspective.”

Luxembourg alternative investment fund managers have now registered a total of 2,313 Raifs. That number underlines Luxembourg’s status as a European hub for alternative investments, a market that includes both Raifs and other types of alternative funds. CSSF data shows that the grand duchy is home to more than 14,000 alternative funds, many of whom are created as sub-funds of LBR-registered Raifs. 

In 2022, The Luxembourg Business Registers recorded 482 new Raifs, a peak achieved thanks to an average of over 40 new Raif registrations every month.

An in-depth look at the Raif activity last month suggests that challengers are more active than firms that topped the issuer charts last year. Waystone, the most active issuer for 2022, did not register any new Raifs last month. Switzerland-headquartered Carne Global, the world’s largest third-party fund management company, registered one single Luxembourg Raif in May, as did Frankfurt-headquartered Hauck Aufhauser.

Wait-and-see modus

Carne Group Luxembourg has registered a total of 97 Raifs since 2016. Two of these were registered this year. Head of business development Richard Marshall nevertheless is upbeat on prospects for new funds set to be launched in the coming months.

“We continue to see a strong pipeline for new AIFs with a number expected to launch over the coming months,” Marshall told Investment Officer. “The continued demand for RAIFs is supplemented by firms using UCI Part II and ELTIF structures to attract flows from a broader base of investors.”

“We are currently seeing a calmer market phase,” said Marc Kriegsmann, head of business development asset servicing at Hauck Aufhäuser Lampe.  “One of the reasons for this is the recent and current interest rate environment, which has severely limited both the number of fund launches in general, not only in relation to Raif, and the transaction side in 2023. Many market participants are currently in a wait-and-see position and have already postponed planned projects to 2024. The focus of new Raif fund vehicles is currently more on other areas, such as infrastructure, venture capital and fund-of-fund strategies.”

Milan-stock exchange listed Azimut Asset Management’s head of alternative investments Salvatore Sberna explained he sees the Raif industry as strong and new Raif registrations are a matter of time.

“I do not see that there is a downward trend in RAIF creation and all management companies are just waiting for the right market momentum to launch new funds” said Sberna.

Secondaries in play

Apex Group’s Becker sees a few bright spots. “There are megatrends like infrastructure/renewable energy where we are still seeing a lot of traction. The same goes for special situation funds as well as secondary funds,” he said.

Becker noted that secondaries are in play as institutional LPs face pressure to reduce their private market allocations. Secondary funds, commonly referred to as secondaries or continuation transactions, purchase existing interests or assets from primary private equity fund investors such as these institutional LPs.

In recent years, Luxembourg Raifs have become highly popular as alternative investment vehicles that target professional investors such as pension funds and insurance companies. A Raif can be created relatively swiftly and does not involve direct interaction with financial supervisors. Its management companies are nevertheless subject to supervision by Luxembourg’s CSSF.

“Asset managers continue to see Luxembourg as the location of choice for institutional private assets product as well as the European hub in the global trend towards the democratisation of private assets,” said Carne’s Marshall.

One Fund Management top issuer in May

One Fund Management was the most active issuer in May with three funds, bringing its total of new funds issued this year to nine. In May, it added three new real estate funds: Arrow Global SMA REO I SCSp, SICAV-RAIF, Arrow Real Estate Opportunities I SCSp, SICAV-RAIF and Arrow Real Estate Opportunities I Aggregator SCSp, SICAVRAIF. The firm has issued a total of 39 Raifs since it started in the business in 2017.

Azimut, which registered a total of 10 Raifs via its Luxembourg subsidiary since 2019, issued two new funds last month, the IPO CLUB SCA-SICAV-RAIF and the Azimut Global Private Debt Evergreen RAIF SCSp. 

Fuchs Asset Management SA registered two new funds: the KODO FUND S.C.S. SICAV-RAIF and STX Fund Asset Management SCA SICAV-RAIF. Fuchs manages a total of 48 Raifs in Luxembourg.

The following new Raifs were registered in May:

Source: Luxembourg Business Registers

Related articles on Investment Officer Luxembourg:

• Raif registrations down 20% for year to date vs 2022
• Alternative investments now take 1/3 of Luxembourg pie
• PwC: Luxembourg ManCos redesigning operating models
• Blackstone sets record with $22.2 billion secondary fund