Amid a surge in global wealth, Luxembourg is bolstering its efforts to retain its edge over Ireland as the premier European hub for American asset distribution. The country’s recent strategic push, highlighted by high-profile events in Boston and New York, aims to capitalise on the surge in alternative financing strategies.
By the end of 2023, American promoters managed 1,085 billion euro in Luxembourgish funds, making up nearly 20 percent of the market. Luxembourg’s initiatives, showcased at the 2024 Alfi roadshow on the east coast, aim to attract even more American private equity managers and institutional investors eager to distribute their capital across Europe.
Jean-Marc Goy, chairman of the Association of the Luxembourg Fund Industry, Alfi, pinpointed key growth areas for Luxembourg. “We see potential for growth and development in all the different segments of the market, with a particular emphasis on alternatives/non-Ucits, sustainable finance products, and European Long-Term Investment Funds (Eltifs),” he told Investment Officer when answering emailed questions.
NY Athletic Club
Industry leaders at Alfi’s New York event last month at the Athletic Club, with its views over Central Park, echoed this sentiment. Steven Greenspan, global director of alternatives product development at JPMorgan Asset Management, highlighted the growing opportunities for individual investors in private markets. He noted that American investors are recognising Luxembourg’s potential as a prime destination for their investments.
“Currently, individuals hold a minor share of alternatives - around four percent - compared to the vast portion of global wealth they control, estimated to be at least 50 percent. This discrepancy highlights a significant growth opportunity for individual access to private market benefits,” Greenspan noted.
“Luxembourg represents a very well respected jurisdiction to serve as the domicile for funds. Working with the regulators there has been a very productive experience,” he told the audience at the conference.
Competitive edge over Ireland
When asked about how Luxembourg competes with Ireland’s proximity to New York, native English-speaking population, and common law system, Goy underscored the broader regulatory landscape.
Goy: “In the EU, the majority of investment fund regulations stem from directives and rules adopted by the European Supervisory Authorities, particularly the European Securities and Markets Authority (Esma). In this context, it is generally not considered that a decisive factor is a common law system rather than a civil law system or the other way around,” he said.
“There are similarities, but also differences between the legal and regulatory framework for investment funds in the USA on the one hand and in Europe and the EU on the other hand, regardless of common law or civil law.”
Irish-domiciled funds reached some 4,100 billion euro in assets under management by the end of March 2024, marking a 15 per cent year-on-year increase. This positions Ireland as the fastest-growing fund domicile in Europe. A specific geographical breakdown on the origins of these assets was not immediately available. What is clear is that Ireland is a major destination of US foreign direct investment. US assets in Ireland were worth up to 2,000 billion dollars in value in 2020, over four times the value of US assets in China.
Projected growth
Jarrett Mellman, senior vice president of fund management & research at iCapital Network, projected a 31 percent surge in global wealth and assets over the next few years, with Europe alone expected to see nearly 30,000 billion during this period.
Mellman emphasised the disparity in alternative asset allocation between individual and institutional investors, predicting that individual allocations could potentially increase three to fivefold as they move closer to the over 10 percent allocation typical of institutions.
Greenspan highlighted the European Union’s push to integrate non-bank financing into the real economy, particularly for large infrastructure and real estate projects. “With major banks retracting their lending activities and institutional commitments waning, this shift opens a lucrative avenue for asset managers to attract and deploy capital within the retail market,” Greenspan explained.
Goy highlighted Luxembourg’s unique advantages over Ireland. “The success of Luxembourg in the global investment fund industry is built on three concepts: international orientation, excellence, and stability,” he said, adding that Luxembourg offers a globally recognised, competitive, state-of-the-art legal and regulatory framework for investment funds (Ucits and non-Ucits) and provides a broad toolbox for different categories and structures of investment funds.
“Luxembourg has long been a leader in the cross-border distribution of funds, with its funds being distributed in some 80 jurisdictions around the globe,” Goy added. As of April 2024, Luxembourg holds a market share of 54.6% in global fund distribution according to PWC. With 5,485 billion euro in assets under management, Luxembourg is the largest European fund domicile and second globally after the US.
New legislation aimed at remaining competitive
Luxembourg’s minister of finance, Gilles Roth, has announced upcoming legislation to make Luxembourg a competitive jurisdiction for the use of blockchain technologies in the financial sector, Goy added. This legislation will address the rules around the digitalisation of assets and tokenisation. Additionally, Luxembourg will lower corporate tax by one percentage point starting next year.
“Alfi is committed to supporting these initiatives and ensuring Luxembourg remains attractive and competitive for the establishment of investment funds, including new categories such as active exchange-traded funds (ETFs), blockchain, FinTech, and artificial intelligence,” Goy added.
The fact that US promoters and initiators are established in Luxembourg in large numbers and with a solid presence, substance, and headcount is a vote of confidence according to Goy.
“The political, social, and financial stability of Luxembourg, along with its strong AAA-rated economy, significantly contribute to creating an attractive environment for fund promoters, initiators, and investors.”