Insights / 17 June 2021
Crestbridge Luxembourg Anniversary Insight Series - The Brexit Opportunity
In this third instalment in a series reflecting on Crestbridge’s tenth anniversary of being in Luxembourg and looking at key issues pertinent to the international fund community, Luxembourg Managing Director Daniela Klasen-Martin looks at the impact of Brexit and how Luxembourg is looking to secure opportunities stemming from it…
Much has been said about who the winners and losers might be over Brexit.
From an investment funds perspective, for some, London will maintain its powerhouse status, and Brexit will not diminish its position as a major global hub for international capital.
For others, Brexit will result in a UK that is increasingly isolated, that other centres, including those in the EU, could look to make the most of.
The reality is likely to be a far more mundane picture, somewhere in the middle of these two extremes. The truth is that the UK, and London specifically, have long been a partner with Luxembourg, and really both the UK and Luxembourg will likely continue to work closely together with the UK post-Brexit.
There is much that the UK can continue to offer Luxembourg – the UK will undoubtedly continue to be a massive financial centre with access to large pools of international capital and specific expertise, for instance.
By the same token, Luxembourg can offer London a highly specialist and experienced infrastructure for accessing a European market that will be hungry for investment from institutional and private markets.
Luxembourg has a history of providing solutions to the UK, and it seems certain that the two will continue to work together in this new post-Brexit environment.
Indeed, the industry has had a long time to prepare for this, and the experience on the ground amongst companies, managers and investors is that they are ready for this new environment and willing to work together to maintain business as usual with minimal disruption - and whilst we’ve seen the proportion of European-focused private capital funds structured through Luxembourg rise from 9% to 28% between 2015 and 2018, there is a strong argument that actually what the industry wants is as little fundamental change as possible.
The delegation model in terms of portfolio management, for example, will continue to be an important one for regulated asset managers in Luxembourg.
Nevertheless, as a jurisdiction and as an industry, we need to be ready to adapt to the environment – an environment that continues to be very changeable, beyond just Brexit.
One key question, for instance, revolves around whether the UK will develop its own funds industry – we are already seeing moves for the UK to establish certain structuring opportunities that would support the development of an alternative fund servicing industry. Luxembourg will need to be ready to both compete with and complement such a development.
We’ve also seen moves to try to mitigate passporting difficulties triggered by Brexit, with many large funds adopting a multijurisdictional approach. Whilst this has added weight to third-party management company solutions – an area where Luxembourg has become so successful - it also underlines the significance of the emergence of jurisdictional agnosticism, whether in-house or outsourced.
The fact is that there is such an array of factors now driving domiciliation decisions, and Brexit, which firms have had a long time to prepare for, is really only one.
Elsewhere, cost is still relevant, while approaches to transparency, regulatory standards and ESG frameworks are all now vital factors in the decision-making process…and as investors become more involved so do considerations around transparency, robust regulation and ESG.
We are already, for example, seeing a shift towards better regulated jurisdictions that were previously price prohibitive whilst, accelerated by Covid-19, the momentum around sustainable finance will remain a pivotal issue for years to come.
Looking back to 2016, it was easy to see Brexit as the single biggest challenge influencing cross-border fund structuring for the coming decade. In the context of today, however, the obstacles – and opportunities – posed by Brexit need to be seen in a much broader picture; a domiciliation landscape that is increasingly complex and shaped by multiple factors.
For that reason, jurisdictional agnosticism will continue to be essential in the wake of Brexit, for both larger funds with in-house and outsourced models, and smaller funds that might need outsourced support to make agnosticism economically viable.
Looking ahead, it’s vital that Luxembourg continues to innovate to ensure it stays ahead of the game so that it maintains pole position in the minds of investors and managers taking an agnostic approach. Luxembourg has a good track record in adapting, and we’ve certainly put the right building blocks in place over the past decade; by being constructive, working together with the UK post-Brexit and finding solutions to a complex landscape, we should be well placed to seize opportunities in the post-Brexit world too.
10 May 2021 / Insights
02 June 2021 / Insights