The Luxembourg Stock Exchange is exploring ways to create public listings of European Long-Term Investment Funds, private market vehicles that for now are the exclusive domain of high-net worth individuals. A senior official said the bourse, also known as LuxSE, sees a particular role for itself when it comes to enhancing the exit opportunities.
The idea is a relatively new policy approach for LuxSE. Adding a public listing for Eltif funds could support the development of this retail element of this market by boosting liquidity and transparency, aspects widely regarded as important for retail investors and for professional investors only allowed to invest in publicly listed companies and funds.
“Luxembourg is a prime location, with 1,500 bonds listed, and we’re exploring how we can extend this success to other asset classes, especially in the context of Eltifs,” said Carlo Oly, head of relationship management at LuxSE, at the Alfi private asset conference on Thursday.
‘Hot spot’
Lionel de Hemptinne, chief financial officer of Luxempart, a publicly listed private equity firm, supported the involvement of the stock exchange in the retailisation of private markets. “Luxembourg is a hot spot for private equity and for private assets in general. It can be a very powerful idea,” he said.
“Stock exchanges are kind of a safe place for investors to go into,” he said, “And valuation is less of an issue: it is market-driven, demand-driven. It depends on demand-vs-supply as opposed to other private funds where valuation depends on a model.”
While private market investment funds like Eltifs are generally targeting investors willing to commit to their holding for the long term, normally eight to 10 years, recent changes in EU regulations have created the possibility of exiting these funds earlier by opening up the possibility of so-called ‘semi liquid’ funds. Investors then can sell their holdings before the end of the fund’s lifetime.
Especially semi-liquid Eltifs are regarded as potentially attractive to retail investors, as opposed to closed-end funds that require a financial commitment for the full life of the fund. New EU rules have abandoned a required minimum investment threshold, opening up the market also to retail investors.
In Luxembourg’s private market community, hopes are high that Eltifs will grow in significance during the coming years, although critics argue that a lack of convergence in national tax policies for savings and retirement plans could be an obstacle to the general uptake of Eltifs in the fragmented EU markets.
Competition with Moonfare, Blackrock?
Several major private market specialist firms are also building proprietary platforms that make it possible for retail investors to exit these funds prematurely. Berlin-based Moonfare for example brings together supply and demand for such funds several times a year and offers a matching mechanism. Blackrock, which has made clear it sees a future for Eltifs, also is considering offering investors a similar mechanism.
By becoming a trading platform for Eltifs, the Luxembourg stock exchange would become a de facto competitor in this market.
“The Luxembourg Stock Exchange could provide an exit window for funds, which would make things easier for them,” said Oly. “We’re currently discussing the possibilities, although, of course, it comes with a price. We’re also working on increasing retail participation through stock exchange transactions.»
Oly also said that LuxSE is set to become a semi-public hub for documentation about private investment funds, most of which are only targeting institutional investors. They are about to launch a new section where LuxSE will offer the option to publish documentation for funds. “This new segment will focus, for example, on institutional investors only,” he said.
Liquidity, transparency and education
Furthermore, LuxSE, he said, is keen to contribute to a better understanding among investors worldwide about the thousands of funds available to investors via Luxembourg. With more than 14,000 funds under direct and indirect supervision of the Luxembourg supervisors, the Grand Duchy is the world’s biggest private assets hub outside the United States.
“We’re open to discussing how we can contribute to Luxembourg’s private asset ecosystem by improving liquidity, transparency, and education around funds. While Ucits are well known, Raifs are less familiar, and we believe this initiative could be valuable in raising awareness and understanding,” Oly told the Alfi conference.
Ucits are widely recognised as the structure for bread-and-butter investment funds that are held by millions of investors worldwide. Raifs are Reserved Alternative Investment Funds, a structure that in recent years has emerged as the most popular one for alternative investment funds.
A key focus for LuxSE is increasing retail participation in capital markets and in fund structures like Eltifs, Oly said. “While the Luxembourg Stock Exchange has been strong in the primary market, it is not as robust in the secondary market. It is important for us to provide a certain level of liquidity for our listed products.”
Oly said that LuxSE aims to encourage the Luxembourg ecosystem to broaden its scope to include international participants. “We’ve successfully drawn trading members from Belgium, the Netherlands, Germany, and France, especially in the bond sector,” he said.