Alternative funds “outstanding opportunity”
Outlook: Daniela Klasén-Martin on the opportunities and challenges for the Luxembourg fund industry in 2015.
Growth predictions for 2015 can be extrapolated from 2014, which was itself a successful year for the Luxembourg fund industry. With over €3 trillion of assets under management (AUM), Luxembourg remains the most prominent international distribution platform in the world attracting some 100 new fund promoters every year choosing Luxembourg as the platform to distribute their funds in over 70 countries. Between 2010 and 2013, AUM grew by 11%; 30-35% of this growth came from the private equity and real estate space.
What explains the success of Luxembourg as the largest fund centre in Europe, and second in the world?
Firstly, Luxembourg has developed a strong expertise in cross-border distribution, which is unique; secondly Luxembourg offers a wide choice of investment vehicles and legal structures that can cover different projects, from the plain vanilla UCITS fund to alternative UCITS or alternative investment funds; and thirdly, a quick transposition of EU regulations into national frameworks enabling asset managers to benefit from regulatory changes.
But 2014 was first and foremost a year of profound change, paving the way for 2015.
It was a year of regulatory changes with the introduction of additional regulatory constraints with amongst others FATCA, EMIR and in particular the Alternative Investment Fund Managers Directive (AIFMD). Some may consider such developments as a necessary evil or an unnecessary burden; I see them as an opportunity to continue improving reputation as a high quality financial centre.
The most crucial change in my view was the implementation of the AIFMD. With the AIFMD, Luxembourg has an outstanding opportunity to repeat the success experienced with UCITS, being recognised as a quality brand internationally.
The introduction of a new form of corporate limited partnership structure, combined with the already existing specialised investment funds structure will certainly contribute to continue the trend in 2015, attracting even more alternative funds to be domiciled in Luxembourg.
Another important development is the investment that has been made in attracting in Luxembourg the European headquarters of the main Chinese banks (ICBC, CCB and Bank of China), making Luxembourg one of the predominant renminbi centres.
In December 2014, the CSSF authorised the first Luxembourg UCITS to use the Shanghai-Hong Kong Stock Connect programme. A number of other UCITS have sought authorisation, seeing the opportunity through the programme to access the mainland China market and investors.
Challenges within Europe
There are a number of challenges that the sector may have to address in 2015. Macro-economically the euro zone may have to reform following an exit by Greece or a “Yes” vote in a UK referendum to leave.
Non-EU fund managers who may already be hesitant to bring Cayman registered funds on-shore into a regulated environment will have their confidence tested in such scenarios.
Secondly, for a number of years Luxembourg has been recognised as a quality, reliable back-office centre, however labour costs must be kept under control as the competition from other low cost centres such as Poland and India grow. Thirdly, our current “unique selling point” as a cross-border hub may be eroded as other international centres implement similar regulations. This threat is less likely from Germany, which has gold-plated AIFMD regulations, or France, but the UK regime could present a threat.
Many questions remain unanswered, especially the mind-set of US asset managers of large hedge funds as to what more could the Luxembourg jurisdiction do to highlight its benefits? The Irish and the UK fund industries are probably reflecting on the same point!