Delano Alternativ Investments 2022

ET GËTT MAGIE AN ALL UFANK*

*There is magic in every beginning. This well-known quote by Hermann Hesse nicely describes our current situation. With PANDOO, we are about to start something new – while remaining committed to continuity and strong performance.

In the context of alternative investment vehicles under Luxembourg law, you have known us as Pandomus and Pancura – reliable service providers in the fields of administration and fund manage ment. It is time for us to reach the next level in our group development.

We are now bundling our forces and jointly pre senting ourselves as PANDOO. By pooling our competencies, we will further align our integrated service solution in the best interest of our clientsYOU.

As independent administrator and management company, we look forward to keep serving you as PANDOO in the future, covering all topics that involve Luxembourg investment vehicles. While magic had nothing to do with it, there is certainly charm in a new start with you.

PANDOO.LU/STORY

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Editorial

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editor in chief, delano magazine Natalie Gerhardstein (-154)

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director brand studio Youcef Damardji strategic business development advisor Francis Gasparotto commercial assistant Céline Bayle creative director Jeremy Leslie studio manager Sandrine Papadopoulos art director José Carsí layout

Louna Mayer (coordination), Sophie Melai illustrations Salomé Jottreau

The gateway to Europe

It’s no secret that Luxembourg is a jurisdiction of choice for alternative investments in Europe. Innovative structures have attracted the interest of private equity funds as far as the US, Korea and India, all looking to form a European investor base via Luxembourg.

But market volatility of the past two years has hit fundraising. While whole-year fundraising volumes remain strong, investors appear to be holding off investments in the first half of the year in both 2021 and 2022, only bouncing back in H2. Both covid (H1 2021) and the invasion of Ukraine (H1 2022) will have played their part in investor uncertainty, particularly as the core alternative asset investor is a large-ticket institutional player with a great deal of capital tied into a long lockup at stake.

Luxembourg has therefore been quick to help alternative investment fund managers woo the retail investor market which may be small in individual size but big in volume. Consultancy KPMG estimates retail investor savings at €2.3trn in 2020 alone.

Luxembourg has done this mostly through creating certainty. When the original version of the Eltif dragged its feet, the regulator CSSF and fund industry body Alfi created a Q&A to give lawyers and other financial services the certainty necessary to structure Eltifs--the result being that just under half of all Eltifs in Europe are in Luxembourg.

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And now that the European Council has provisionally agreed to the necessary changes to an enhanced “Eltif 2.0”, sources claim the CSSF intends to apply the new Eltif rules when they are finalised rather than waiting until they are published, thereby securing Luxembourg’s position as a jurisdiction of choice for retail investor-friendly alternative investment vehicles. The CSSF has not confirmed this.

The next challenge will be making it easier to onboard a vast and granular retail investor base. However, as pointed out in our Dossier on private debt (page 18), Luxembourg is already looking at this.

Senior financial journalist JOSEPHINE SHILLITO

Make the most of your investment fund

Photo

Private market fund snapshot

Fundraising

Source Preqin*

AUM growth outlook

Alternative fund flows

Luxembourg has outperformed Europe as a whole in attracting cash into alternative investment funds since the fourth quarter of 2021.

Source European Fund and Asset Management Association

Growth in Luxembourg alternative funds has remained solid, despite rocky conditions elsewhere. That growth is expected to continue apace. Meanwhile, environmental, social and governance (ESG) criteria are increasingly important for private market investors.

Net sales, Luxembourg

Net sales, Europe

Total net assets, Luxembourg

Total net assets, Europe

EXPLAINER

What are alternative funds?

Alternative funds are private market funds that serve as an ‘alternative’ to public market funds. To oversimplify, alternative funds are designed for professional and affluent investors, while public market funds are designed for retail investors.

Public market funds invest in equities, bonds and commodities that are traded on stock markets. They are meant for pretty much anyone, and they are easily bought and sold. In contrast, it is harder for investors to get into and out of alternative funds, and typically larger amounts of cash are required.

Private market funds mostly invest in privately held companies and projects that are not listed on a stock market. Returns have historically been higher, but these funds face higher risk and lower liquidity.

GLOSSARY

Private equity funds invest in mature companies aiming to increase their value.

Real estate funds finance new property construction and renovation projects.

Private debt funds issue loans to companies and buy company loans off lenders.

Infrastructure funds finance long-term, big-ticket investments.

Venture capital funds invest in startups and young companies with growth potential.

Hedge funds use risky investment strategies in both private and public markets.

General partners manage private market funds.

Limited partners are investors in private market funds, traditionally the likes of pension funds, insurers, endowments and wealthy families.

Investors’ fund managers with sustainable investment approach, %

Two in five limited partners said that more than half of their current fund managers “incorporate ESG factors and/ or measurable environmental or social impact”. One in five said that none did.

Source Pitchbook*

Age of sustainable investing initiatives, %

In a global poll of private market investment fund professionals, a third of North American respondents had implemented sustainable investment principles more than five years ago, compared with a fifth in Europe.

Source Pitchbook*

Sustainable investment progress, %

Two-thirds of European private market investors and fund managers have partially or completely adopted sustainability methodologies.

Source Pitchbook*

“Retention is key, but recruitment has to continue”

Staff, technology and margin concerns will weigh on alternative fund service providers in 2023, says Kai Braun, consulting partner at PwC Luxembourg.

that service providers in the alternatives space will be facing in the next year?

What

Probably, had you asked me a few months ago, I would have said the sheer growth that they have to continuously deal with, like over the last two years. I’m not saying that’s not the point, it will remain a growth year, because a lot of funds have been raised and they need to be deployed. There will also be new opportunities. But obviously, the world has changed a little bit. There’s a slowdown in transactions. Due to that, we probably will come into a crisis mode in the next few months, and then we need to see how long that will take. That means that asset servicers have to take stock of where they stand, take good care of their clients and really focus on quality delivery of their services.

The past couple of years, margin pressure has been one of the main challenges facing service providers. The economic slowdown and inflationary environment probably won’t help margins very much, will it?

Spot on there. I think margin pressure has already happened, fees have drastically gone down, both on the depositary side and the administration side. When speaking to some providers, I hear that in RFPs, work really is being given away nearly for free, which is an issue in itself because it means that some providers are, maybe, trying to buy market share. And those prices are going to stick.

You mentioned inflation. Obviously that’s going to be difficult in Luxembourg, where people to deliver the services are still difficult to find, are expensive. In Luxembourg, we’re still in an environment where salaries are rising. So that needs to be coupled with the delivery of good quality. I think the main focus that asset servicers should put on right now is everything around technology and data. I’ve been blowing that horn for a long time. But it’s really the time now.

I think it’s time to not continuously throw bodies at problems, but really have systematic

solutions. Because I think that, in general, the industry has to grow up. If I compare the alternatives industry to the banking industry, for example, banking is much more advanced when it comes to processes, organisation, rigour, and therefore also technology and data. And then in alternatives, we always have got the excuse, ‘but it doesn’t quite work like this in alternatives, because we’re all different, every transaction is different, etc.’ And yes, that’s true to a certain extent. But especially the asset servicers can find solutions and can build out additional solutions to make things more automated. And there are really good examples out there, which are being used by some administrators. But not across the board. And especially not across all client segments and clients.

Could that translate into a slowdown in hiring? Maybe the focus will have to be more on retention and less on recruitment?

Definitely the focus needs to be retention. The people that the admins and depositories have in their teams already today know that firm, know those clients, know how to work with them. It’s always easier to work with those people. So retention is key, for sure. But, nevertheless, recruitment has to continue as well, because I know for a fact that a lot of those actors currently use temps, third-party providers, etc. That’s not sustainable either. It’s very costly. Ultimately, you want to have your own people. Therefore, recruitment is still very, very high on the agenda.

are the main challenges

Interview AARON GRUNWALD Photo MATIC ZORMAN

Kai Braun is PwC’s alternatives advisory leader in Luxembourg

1

RECRUITMENT AND RETENTION

Caroline Kragerud, head of investor relations at Cube Infrastructure Managers.

2 PRIVATE CLIENTS

Simon Gorbutt, director and head of wealth planning at Lombard International Assurance and chair of Step Benelux, on why private clients have been shifting more cash into sustainably aligned products.

3 ESG PRODUCTS

Frédéric Vonner, partner at PWC, sharing a recent survey. Globally, the average premium they are willing to pay asset managers was 35.2 basis points, while in Europe the average was a bit higher, 37.3bps.

4 THE BOTTOM LINE

Jennifer Wu, global head of sustainable investing at JP Morgan AM, reckons: “If a company is able to produce the same level of goods at lower costs because it manages natural resources better, we expect it to generate better value.”

5 ESG DATA

Jane Wilkinson, independent director and founder of Ripple Effect, on why it can be challenging to collect consistent data across the board.

Photos Nader Ghavami, Step Benelux, Romain Gamba, JP Morgan AM, Maison Moderne

Selected by Aaron Grunwald

“Depending on the jurisdiction of the investors, companies may have completely different questions.”

“There are some misunderstandings in the market which make some people think that we are [just] concerned about saving the world.”

“The vast majority of institutional investors say they are willing to pay a premium.”

“These have been turbulent times, and they remain so... this has led some clients to rethink where they wish to spend time and where their wealth should be kept.”

“Demonstrating a good ESG approach... is a good way of attracting younger people.”

The path forward for private equity

Inflation, rising interest rates, and high energy prices have led to economic uncertainty, and competition between private equity funds eyeing similar opportunities in the same markets is getting stronger. Laurent Capolaghi, Partner, Private Equity Leader at EY Luxembourg, explains how the industry must adapt.

What is the most important way private equity should adapt to the changing market?

Private equity houses need more than ever to focus on generating operational value. The era where leverage or standard buy-and-build strategies were sufficient to create financial value is likely over. Operational value creation also has strategic implica tions for the C-suite when

investing in the talent and technology of operating companies. In a context where many small and medium enterprises are lagging in this area, private equity houses are ideally placed to play a key role considering the broad range of expertise they can line-up to support this growth.

How can private equity reach out to new investors? Private equity has histori

Photo Marie Russillo

Sponsored content by EY

Private Equity

Laurent Capolaghi, Partner, Private Equity Leader at EY Luxembourg

cally been a space reserved for institutional investors. The upper-end segment of retail investors is now keen to also invest in the asset class and the European Union has committed to expand the investor outreach. This is underway with the current review of European Long-Term Investment Fund (ELTIF) and will open up private equity to retail investors in 2023. The industry is already prepar ing for this significant change as it will drastically expand the initial investor base. Enhancing the investor experience, such as by offering improved transparency and investor reporting will be critical to succeed in tackling this change. Once again, talent and technology will play a paramount role in transforming this opportu nity into success

How has the macroeconomic climate affected private equity funds?

A serious challenge that private equity now faces is stiff competition between funds both on the invest ment and fundraising side. The industry is more than ever looking at resilient companies that will be able to pass inflation back to their customers,

manage expenses, and hedge the rising cost of energy. From a fundraising perspective, a solid track record in creating opera tional value on the ground regardless of the macro conditions is critical to the value proposition offered to investors.

What is the situation for operating companies?

If you are a CEO or founder of a small- and medi um-sized business and are keen to have the support of a fund to expand your footprint either geographi cally or from a product perspective, you will go for the one that has the most expertise and experience in your field, one that can help you to extend to new markets, create new products, and improve how you operate. In most cases, the largest private equity houses and those active in specific niches have a competitive advantage and will likely have the strong est returns in the coming years.

How can Luxembourg strengthen its competitiveness in the field of private equity?

There are many steps that can be taken to ensure that Luxembourg strength ens its position as the largest fund domicile in Europe and the second largest in the world. First, we need to keep driving the innovation agenda, as we have been doing. This means listening to the market, stakeholders

and local players. Also, we need to anticipate and embrace retailization that will come with ELTIF, much as we did by pre-adopting some of the components of the AIFMD that was passed in 2011.

Also vital is to remain the most pragmatic and knowledgeable member state of the EU 27. Regulations are not always clear at the European level, so we have to clearly demonstrate “how and why” we set market practice in the interest of investors as well as fund sponsors. Investors don’t like uncertainty and opacity, neither does the industry.

To succeed on all these steps, we need to continue attracting talented and knowledgeable people. Without them, we cannot succeed in beefing up our local ecosystem, launching initiatives or innovating. The attractive ness of Luxembourg has to remain high. Ease of relocation, housing, quality healthcare, and education are all important factors. In this way, we should offer more opportunities for upskilling and move ment across sectors for instance between the traditional asset manage ment industry and alterna tives. Our potential as a country is tremendous, also considering what we have already achieved. We need to strengthen our efforts to make it happen.

Private Equity Leader

Laurent Capolaghi is leading the 400+ professionals Private Equity practice at EY Luxembourg and has been named Private Leader for the EMEA (Europe, Middle-East and Africa) region.

Experience in audit and advisory

He has 18 years of experience in the audit and advisory of private equity, private debt and infrastructure mandates across all Luxembourg regimes.

Board and executive committee

Laurent Capolaghi is a member of the executive committee of the Luxembourg Private Equity & Venture Capital Association and is sitting on the board of the Inclusive Finance Network Luxembourg, which promotes universal access to quality and affordable financial services.

“A serious challenge that private equity now faces is stiff competition between funds.”

“The attractiveness of Luxembourg has to remain high.”

Camille Bourke, partner at Luxembourg law firm Arendt & Medernach, believes Luxembourg has a strong opportunity in the marketing of alternative investment funds

“As a pan-European way of raising capital, you can’t beat Luxembourg”

Alternative investment funds raised in Luxembourg are rising, rising, rising. The person who should know is Camille Bourke, partner in the private equity and real estate practice of law firm Arendt & Medernach. She talks to Delano about Luxembourg’s ability to capture the zeitgeist yet again in the field of investment.

Interview JOSEPHINE SHILLITO Photo ROMAIN GAMBA

Luxembourg went from an international hub for Undertakings for Collective Investment in Transferable Securities (Ucits) to now being one of the most attractive places globally to base an alternative investment fund. How?

Well, alternative assets have been expand ing in Luxembourg for quite a while now. Rewind to 20 years ago, and you had the birth of private equity in Luxembourg. This was thanks in part to the presence of special-purpose vehicles for EU acquisitions domiciled here in Luxembourg for tax reasons. Yet real estate, infrastruc ture and, most recently, private debt have followed, and now Luxembourg is emerging as a hub to raise pan-European alternative investment funds.

The first benefit was a tax attraction. Is this still the case?

Luxembourg is now one of the principal jurisdictions in the world for private assets and, yes, the main reason at first was [the] tax reason. But when regulations like the Alternative Investment Fund Managers Directive (AIFMD) came in 2013, we saw a real ecosystem for infrastructure and service providers pop up, so it became a hub for managers across the world to set up funds.

ALTERNATIVE INVESTMENT IN NUMBERS

What sort of changes did you see in Luxembourg post-AIFMD compared to pre-AIFMD?

One of the main differences is that preAIFMD, you would see feeder and parallel funds set up in Luxembourg for the European investor that would feed into the main fund that, for example, might be structured in the Cayman Islands. But with the AIFMD came a need for a European AIFM, and you saw the consolidation of structures in Luxembourg. Now, pretty much all US and UK fund managers want to have an AIFM based in Luxembourg.

So the attraction was tax driven and then regs driven?

Source CSSF, Alfi, LPEA, IPE magazine (2018)

You could say that. The financial regulator in Luxembourg, the CSSF, has been pragmatic, flexible and responsive in terms of its regulation. Then there was Brexit. When Brexit was voted for in 2016 and in the years after, jurisdictions like Ireland, Luxembourg and Germany benefited. What we saw is every private asset--such as private equity, real estate, infrastructure and private debt--head to Luxembourg, while banks positioned in Frankfurt, and hedge funds and collateralised loan obligations went to Ireland. Any worldwide team that had previously had a base in the UK was then considering a European jurisdiction.

What might the future drivers be? Marketing. What we’re seeing now is Luxembourg positioning to attract alternative investment fund marketing teams. This is because UK-based fund managers are facing the issue of raising funds from the UK and into Europe now that they no longer benefit from the passport. The question that Londonbased marketing teams are asking themselves is: ‘How do we reach Europe?’ This is a huge focus of private assets at the moment. To market into Europe, you need to be regulated, you need to be compliant with AIFMD and the Markets in Financial Instruments Directive for the passport--and if you want that passport, you need to be based in the EU. This is a huge opportunity that Luxembourg is positioning itself for.

Luxembourg positioning as a marketing hub for alternative investment funds?

Yes. Luxembourg has already positioned itself as a jurisdiction for building an investor base. What we’re seeing is alternative investment fund managers putting a head of marketing in Luxembourg. It doesn’t need to be the main marketing person, but it needs to be someone. Imagine the head of investor relations, for example. Some people are already making this very

smart move. This is interesting because formerly the head of marketing would have been in London or Paris.

Aside from the obvious attraction of the European passport, what are the other benefits of having marketing activities in Luxembourg?

The sophistication of Luxembourg’s finan cial services providers, its fund adminis trators and its depositories are very strong. This ecosystem is already in place and makes it an easy place to which to relocate operations. Then the country itself is becom ing more attractive as a place to move to than it was a number of years ago. It’s a great country to live in, it’s a manageable size, for families it’s increasingly an attrac tive option compared to bigger cities. Some people love the greenery. I see some fund marketing managers already making this very smart move. Then Luxembourg has shown itself to be flexible, responsive, able to adapt to what the alternative invest ment fund market is expecting.

What expectations might the alternative investment fund market have that differentiate it from other types of fund markets in Luxembourg?

We are seeing the slow convergence of regulatory requirements, for example Ucits and AIFMD. There’s a lot of expertise in

Luxembourg in these areas. Risk is also a big thing in private assets. Risk management is more important in this sphere due to the illiquid nature of the assets and their higher returns and therefore risks. Fortunately, all of that risk-management expertise is already in Luxembourg. Then the experience with past and upcoming regulation is important too.

Do you mean Eltif [the European regulations concerning the marketing of alternative investment funds to a wider investor pool]?

Yes. There are teams in Luxembourg that already have a strong experience of work ing closely with the Luxembourg regula tor, the CSSF, on Ucits. This means that they will have a strong idea of how the CSSF will approach new rules regarding alternative investment funds. It is becoming important in Luxembourg to share valu able knowledge like this between teams. In Arendt, for example, we have a lot of meetings to share this knowledge between teams. Ucits is very well trusted, and those who have worked with the regulator on Ucits have very important insights for regulatory impacts on alternative funds.

Can you tell me more about Eltif?

There’s a huge appetite amongst alter native investment funds to target and raise money from family offices. Eltif [which gives alternative investment funds a regulatory structure through which to market to smaller investors such as family offices and ultra-high-net-worth individuals] gives them a means of doing this across Europe. In fact, there are around 70 Eltifs in Europe, and around 40 of these are in Luxembourg because the interaction with the CSSF on how to interpret Eltif is that good.

Eltif requires a certain liquidity so that smaller investors do not face long lockups of their money. One of the main questions funds are asking is: ‘How liquid is liquid enough?’ We have been able to look at fund redemptions to help us anticipate the regulation and to give us an idea of what the regulators will be looking for.

Luxembourg has put in a lot of effort with the Eltif; lobbying, working hard with the CSSF, there’s been a lot of effort preparing Luxembourg as a country for this.

What used to hold the Eltif back was the uncertainty around it, and Luxembourg

“Any alternative investment manager will find law firms in Luxembourg very well equipped to support fundraising into Europe”

has been keen to eradicate that uncertainty. This is a huge draw for alternative investment fund managers. We already have an idea of what the CSSF will be asking alternative fund managers for in order to class themselves as Eltif, and large fund managers are very attracted to this.

You say Eltif is a big draw of alternative funds to Luxembourg. How would you say it compares to the Long-Term Asset Fund (LTAF) [the UK equivalent]?

The LTAF is very attractive for UK-based private clients for UK-based investment. But it’s not finalised yet, and it doesn’t offer that European passport. So if you’re trying to convince a US-based client on where to put their vehicle, convincing them via a UK-based product is difficult. Most US clients will have a Luxembourg vehicle on their checklist. The Luxembourg products have taken over the market.

Can you tell me more about the Luxembourg products that attract alternative investment fund managers?

In Luxembourg we have the Special Limited Partnership, an unregulated structure to which you can apply a Raif (Reserved Alternative Investment Fund) or Eltif wrapper. The SLP is really rising in popularity. I’d say it has overtaken alternative structures such as the Specialised Investment Fund (Sif) or the Investment Company in Risk Capital (Sicar) because of its flexibility. As a pan-European way of raising capital, you can’t beat Luxembourg.

You said in the past it was common to have a feeder or parallel fund set up in Luxembourg and the main fund elsewhere. Has this changed?

Yes. Not only was there the consolidation after the AIFMD when fund managers began to place their AIFMs in Luxembourg, but the attractiveness now of the invest ment structures means that the main fund will also be domiciled in Luxembourg. More than €962bn of assets managed by alternative fund managers are based in Luxembourg, showing that it really is becoming a jurisdiction of flagship funds and not just feeders. However, it’s not just a question of volume, it’s a question of sophistication. The service providers are increasingly specialised, increasingly sophisticated, in the sense that this is no longer a back-office place.

ALTERNATIVE INVESTMENT FUND STRUCTURES IN LUXEMBOURG

UCI Part II Funds

AIFs not governed by a specific product law (such as Sif, Sicar or Raif) nor are they set up in pure company form. Must be authorised by the CSSF.

Sif

A specialised investment fund that can invest in all types of assets. Must have appointed an EU AIFM. Limited to ‘well-informed’ investors. Subject to Sif law. Must be authorised by the CSSF.

Sicar

An investment vehicle that was designed for investments in private equity or risk capital. Must have appointed an EU AIFM. Limited to ‘well informed’ investors. Subject to Sicar law. Constituted as a corporate entity. Must be authorised by the CSSF.

SLP

A corporate form of fund structuring. Contractual flexibility. Can be structured as an AIF or a Raif. Not always subject to CSSF approval.

Raif

An investment fund that can invest in all types of assets. Can have external AIFM, but if marketing to EU investors, the AIFM must be EU-domiciled. Limited to ‘well informed’ investors. Subject to Raif law. Not subject to CSSF approval.

Eltif

Pan-European regime for AIFs with specific requirements regarding their investment policy, fund portfolio composition and diversification. Open to a wider variety of investors.

What can the financial services industry do to support the development of alternative investment?

We believe that Luxembourg as a marketing hub is a huge opportunity. What we need to do as an industry is lobby to make it far easier for alternative investment managers to put their teams here. We need to work not just on the expertise, but on the attractiveness of the country to showcase Luxembourg as a place that listens, that is close to the market.

What is the role of law firms

like Arendt in this?

Law firms have a lot to do here, not just in the field of alternative investment funds, but in many fields. Any alternative investment manager will find law firms in Luxembourg very well equipped to support fundraising into Europe. Their expertise and responsiveness are much better than they used to be, and within Europe, Luxembourg itself is far more respected than it used to be.

Looking forward, I’d say that we’re at the stage of succession planning in legal teams, and we’re finding the new generation of lawyers are proactive and not at all complacent. Luxembourg in the past used to have a reputation for sitting still and allowing business to come forward, but now we’re seeing a closeness to the market, the pragmatism of the CSSF and the sophistication of the service providers really creating a hub. We look forward to it continuing!

WHAT IS THE AIFMD?

The Alternative Investment Fund Managers Directive grants a European passport to the managers of alternative funds. Rapid implementation of the directive has helped Luxembourg to further develop its role as a well-regulated hub for the global alternative investment industry.

Luxembourg chose this moment to overhaul and modernise its limited partnership regime, ensuring maximum compatibility and flexibility under the new AIFMD rules, with a structure more familiar to asset managers from Englishspeaking countries.

Source Luxembourg for Finance

Now that the European Council has reached an agreement on Eltif, can you talk me through some of the principal changes and what that might mean for Luxembourg’s financial centre?

Now that the European Council has in principle reached an agreement on the Eltif review, we believe that this will result in additional traction for this vehicle. We welcome, more specifically, the possibil ity for-loan originating Eltifs to use lev erage in the same way as other Eltifs; the funds of funds investments limitations that have been removed so that Eltifs will be able to invest in EU funds for this pur pose; and more generally, the additional flexibility that has been granted with respect to the product design and definition of eligible assets.

“Private debt requires the largest spectrum of services”

The ongoing boom in private debt in Luxembourg is matched only by its insatiable demand for better services. Gautier Despret of third-party manco IQ-EQ walks us through the unique asset servicing universe that this demanding asset class requires.

Words JOSEPHINE SHILLITO Illustration SALOMÉ JOTTREAU

Private debt has long attracted institutional investors seeking yield, with 40% average growth in assets under management in Luxembourg alone in the 12 months to June 2021, according to fund industry asso ciation Alfi. However, with this stellar rise in AUM to €182bn comes increasingly complex demands for asset servicing--from reporting requirements to transaction vol ume to investor onboarding.

“Because it’s the debt market, it’s the largest spectrum [of services] you can imagine,” said Despret. “When you do debt you can originate, syndicate, do a club, do secondaries, put in place senior secured debt or even unitranche. Then you have leverage, multiple currencies, cashflow reporting and requirements.”

Despret argues that private debt’s requirements and its transaction volume make it a more complicated asset class

to service than its alternative asset pre decessor, private equity.

But service private debt Luxembourg must. As a financial services centre of excel lence in Europe, Luxembourg cannot afford to let the private debt opportunity pass it by as other jurisdictions will be only too happy to become domicile of choice for this growing alternative asset class.

Fortunately, as far as third-party man agement companies (mancos) go, Lux embourg is “developing extremely well”, said Despret. “But it is facing challenges from the private debt world.”

Institutional investors take a pause

One of the first challenges for mancos is the upcoming recession in both the US and Europe, which, according to Despret, will stem the flow of institutional inves tor capital into private debt funds.

“Private debt has grown constantly but in the past two years we have seen a decrease in fundraising over the first half of each year, followed by a rebound in the second half.” Despret says the finger is being pointed at covid for the decrease in H1 2021, and the invasion of Ukraine for the same slump in H1 2022. “We could see possibly even the same in H1 2023 as we come out of a bad winter in Europe.”

The dips illustrate how institutional investors are likely to pause in a tradi tional, closed-ended, illiquid market like private debt. “So more and more we’re seeing the retailisation of funds,” said Despret. “So more sophisticated high net worth individuals knocking at the door. We’re seeing good products like the Euro pean Long-Term Investment Fund (a framework for retail investors to enter into alternative assets). We are seeing

asset managers buying dedicated feeders (funds that channel sophisticated retail investor capital into alternative assets). But retail investors involve challenges.”

The principal challenge being, accord ing to Despret, the mixing of liquid and illiquid strategies in a private debt fund, necessitating a move from closed-ended into open-ended funds.

“We’re talking open-ended funds with ten institutional investors plus one thou sand or more retails,” said Despret.

“The reporting requirements are not the same between these two types of investors, and the right technology [is needed] to do reporting distributions.”

Services have developed to cater to this, most notably software solutions that streamline fund administration.

Regulatory challenges

Europe-wide regulation of alternative investments aims to harmonise cross-bor der transactions. However, certain iter ations in the Alternative Investment Fund Managers Directive (AIFMD) would restrict the activity of precisely the kind of pri vate debt funds needed to welcome retail investors.

“The [potential restrictions] on AIFMD loan origination are not fixed yet,” said Despret. Previous AIFMD drafts had proposed that if more than 60% of a loan fund contained originated loans, then the fund must be closed-ended. Although it appears as though this stipulation might be relaxed in the regulation’s final iter ation, the focus on loan origination will still require the support of mancos.

“You can’t put everything on the sec ondary market,” said Despret, referring to the importance of originating loans in private debt. “[Therefore] more con trols will need to be performed when loans are originated, additional duties and additional checks.”

Environmental and social governance

The importance of ESG reporting hangs over all alternative assets, not the least private debt. And to do this properly requires specialists and an entirely new spectrum of specialist services.

“All asset managers have an ESG pol icy, but building an ESG scorecard that’s robust and coherent, that defines the KPI, collects the data, ensures it’s accurate-that is the challenge,” said Despret.

Private debt

PRIVATE DEBT LANDSCAPE IN LUXEMBOURG

Fund structures

78% of private debt funds are closed-ended 22% of private debt funds are open-ended 45% are debt-originating 55% are debt-participating

The rise of ESG 33% of private debt funds by ESG classification are Article 8 funds, 6% Article 9

Investment strategy

72% of debt funds are focused on direct lending 12% of debt funds are focused on distressed debt 11% of debt funds are focused on mezzanine

Source: Alfi Private Debt Fund Survey 2021

cess suitable for the unique requirements of private debt.

Onboarding a new investor breed Alternative asset classes in general are facing the challenge of onboarding a marked increase of investors. A large and granular base of small-ticket retail inves tors will gradually join the stalwart hand ful of big-ticket institutional investors, particularly in private debt.

“Equity markets (shares) are perform ing poorly so fund managers are often doing diversification strategies with debt to compensate,” said Despret. “The decor relation of shares with debt--lots of inves tors are using private debt to mitigate return variation.”

In many cases, private debt funds are accompanied by a private equity sponsor that holds equity in the deal, presenting a new set of challenges to the lender who has to make sure their ESG objectives are in harmony with those of the private equity sponsor. This can sometimes bring the pair into conflict.

“What do you do if it’s not good news? What’s the impact on the valuation of the underlying company--what do you do as the debt holder--ask the corporate to pay more interest?” said Despret.

For third-party mancos, ESG require ments change reporting. “Article 9 is very difficult to put in place in terms of report ing,” said Despret. “Whereas Article 8 says that you will take ESG considerations into account, Article 9 is more of a pos itive screening.”

According to Despret, funds doing Article 9 currently have their own inter nal rules on how it is defined. “There’s some subjectivity there, even with the guidelines.”

What is more, Article 9 is a challenge to the lending psychology. “I’m not sure lenders are ready for Article 9 because they are lenders and what is more import ant to them is the return. It is the finan cial industry, the first requirement is returns.” All of this presents challenges to mancos to create ESG reporting pro

As a result, a new model of investor relations is emerging, whereby the asset manager keeps the institutional investor relationship, but the relationship with the larger retail investor base is held by the investment adviser--often the place ment agent or the bank through which the retail investors access the fund.

A number of very different processes will therefore be required both for onboard ing and for relationship management. “This is why they outsource more and more, delegate to technology,” said Despret.

There has been an increase in the num ber of third-party mancos that provide software to streamline the onboarding process for a more fragmented investor base. The technology can speed up the necessary know-your-customer and anti-money-laundering processes that would otherwise stall fundraising if done manually. Then there is the burden of ongoing asset valuation needed in an open-ended fund. Performing this inter nally or delegating it to an external party requires time-chewing methodology and data modelling as well as administrative and accounting procedures in place.

However, distributed ledger technol ogy has been used by financial services providers to relieve the operational bur den on alternative investment managers. A digital shareholder registry and soft ware will have the edge over traditional third-party outsourcing.

“Private debt is the only alternative asset class experiencing constant growth. You see lots of services developing in private debt. We see more and more competition,” said Despret.

“One fifth of sponsors and under half of borrowers have no formal ESG plan”

Words JOSEPHINE SHILLITO

Private debt started in 2008 as an answer to bank retrenchment, but as time goes on, its reach has extended far beyond the purely financial. “Lenders like Ares can provide more than just capital. We can share resources to portfolio companies and sponsors alike to help drive greater ESG integration,” said Fitzgibbon. “Struc turing sustainability-linked loans (SLLs) is a way to do this.”

Sustainability-linked loans are a way of incentivising borrowers to comply with ESG targets in a similar way to which performance-related loans might reward the hitting of financial targets. SLLs typ ically include sustainability targets (STPs). If the borrower reaches these targets, they can benefit from a decrease in the margin that they pay the lender. Con versely, if they fail to meet the STPs, they may instead face a margin uplift. The so-called one or two-way margin ratchet is determined on a case-by-case basis with Ares and designed specifically for the borrower.

Driving a sustainability agenda

It is useful, said Fitzgibbon, in an indus try that is still in the process of adopting sustainability characteristics. “In our experience of offering sustainability-linked loans and integration of ESG principles, we have observed that about one-fifth of sponsors and just under half of the bor rowers we have engaged with do not have a formal ESG plan,” said Fitzgibbon. “That’s where we see opportunity.”

The opportunity, according to Fitzgib bon, extends beyond individual borrowers to developing ESG standards across pri vate credit. “Ares is committed to being a leader in the industry dialogue to develop ESG standards. The global alternative investment manager is chair of the United Nations Principles of Responsible Invest ment Private Debt Advisory Committee, something that it believes can help shape market standards in this area.”

On top of this, Fitzgibbon points out that the industry body Loan Market Asso ciation and the Loan Syndications and Trading Association have published “sus tainability-linked loan principles, in which key areas of agreement are that there should be third-party verification on out

comes related to STPs and that ESG tar gets should be material beyond traditional business operations.”

Multiple parties in a deal

However, private debt often shares its interest in the underlying borrower with a private equity sponsor. The sponsor will also have ESG criteria, and the trick is to get these to align rather than to bur den the borrower, or worse, even create conflicting incentives.

“Ares typically has worked to align incentives with sponsors and borrowers to improve their ESG initiatives,” said Fitzgibbon. “One of these aims is to estab lish tangible STPs that are aligned with the overall business strategy.”

This also applies to other lenders in the deal--where they occur. The results of this kind of work have been promising. “The industry has increased adoption of sus tainability characteristics in private debt funds, and we have seen a convergence around Article 8 [where a financial prod uct promotes environmental and sustain able characteristics] funds,” said Fitzgibbon.

In fact, the industry is beginning to understand that financial performance climbs hand in hand with better ESG. “Nearly 70% of LPs surveyed by the Insti tutional Limited Partners Association have investment policies that include an ESG approach, with one of the primary motivations being the belief that ESG factors

additive to performance.”

are

A behemoth in the private credit world, Ares works with its borrowers to help create a sustainability agenda and to move their journey forward. Hilary Fitzgibbon, principal in the Ares Credit Group Luxembourg explains.

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“Luxembourg inputs a great deal into regulation”

Words JOSEPHINE SHILLITO

With over a third of Europe’s private debt funds domiciled in Luxembourg and the asset class among the fastest growing of alternative assets, the financial centre and its actors are keen to lay the foun dations for further growth.

Regulations such as the AIFMD and the Eltif will be crucial in the cross-bor der functioning of Europe’s private debt market as a whole, says partner at inter national law firm Linklaters, Martin Mager, so it’s no surprise that Luxembourg has been particularly vocal in ensuring that regulations nurture the asset class.

“Luxembourg is the place to be for alternative funds. And, as a result, the AIFMD and the Eltif reviews show a lot of input from Luxembourg,” said Mager.

AIFMD

Of main concern for private debt has been the AIFMD. The alternative investment regulation is designed to protect investors in alternative funds by providing a super visory framework for the fund manager. However, a recent review by the European Commission proposed aspects that may be damaging to private debt.

“The AIFMD had sought to put in place restrictions on loan origination for alter native investment funds. This would have particularly affected private debt, which originates loans for a diversified range of businesses,” said Mager.

The amendments would have prohib ited open-ended funds from originating

more than 60% of their assets. In the case where origination breached that percentage, the funds would have had to become closed-ended.

The Luxembourg investment fund body Alfi and the financial regulator rec ommended instead that the AIFMD’s “closed-ended” rule were replaced with appropriate liquidity measurements. They also recommended that liquidity meas urements replace an AIFMD proposal to hold 5% of the value of any loan they sell as a risk retention requirement.

The European Parliament this year upheld these recommendations. A pos itive thing for private debt, said Mager, although it still needs to be voted for by the European Council.

Eltif

What will be really interesting is how the AIFMD interacts with the Eltif. “What

the industry tried to push for is whether the requirements under the AIFMD would actually be applicable with respect to the Eltif, or if the Eltif product overrides this,” said Mager.

The Eltif is a fund dedicated to longterm, alternative investments that can be distributed on a cross-border basis to both professional and retail investors.

As with the AIFMD, Luxembourg worked hard on making sure the Eltif was suita ble for every variety of alternative invest ment. This included lobbying through working groups set up within Alfi and working closely with the financial regu lator to provide stronger guidelines on the framework and structuring of Eltifs.

However, unlike with the AIFMD, the Eltif did not contain any stipulations about loan origination that would have particularly harmed private debt.

“The Eltif is a good regime to set up but not so addressed at loan-originating funds,” said Mager.

Instead, the framework’s problem was more an issue of a general lack of clarity. This has now been resolved by the Euro pean Council’s October approval of the “Eltif 2.0”.

“In general, it’s going in the right direc tion,” said Mager.

Luxembourg has historically maintained a liberal regulatory regime for private debt. Its challenge now is navigating key regulations such as the Alternative Investment Fund Managers Directive and the European Long-Term Investment Fund.

MARTIN MAGER Partner at Linklaters

Mager is a partner in the Luxembourg investment funds group

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Private debt funds market matures

2 3Investor profile trends

Merkel: “Figures about the European market show 17% of private debt assets are held by private pension funds, with foundations and public pensions at about 11% each. Those investors are looking for reliable income streams, and they find this in private, direct lending, which accounted for 58% of this market in 2021.”

No longer an interesting niche addition to the Luxembourg alternatives scene, private debt funds are challenging more established asset classes for the limelight. Regulatory trends are working in their favour, and many are structured in a way to help them ride out the current inflationary surge.

Words STEPHEN EVANS

1Macroeconomic trends

Vincent Remy, private debt leader at EY Luxembourg: “2021 witnessed a strong increase of cash deployment compared to 2020. The first two quarters of 2022 followed the same trend. Whilst cash deployment has been quite resilient, new fundraisings have sputtered. Yet the [private debt] asset class will continue to grow due to political support and tighter regulations [such as Basel III], leading to large bank disintermediation and deleveraging.”

Valeria Merkel, asset management partner at KPMG Luxembourg: “The consequences of recent geopolitical uncertainties could mean that corporate default rates rise, and this could negatively affect existing private debt investments. On the other hand, this could increase the number of distressed debt opportunities. Also, in a world of rising interest rates, the private debt sector is protected, with rates of return generally floating in step with market benchmarks. This compares favourably to fixed-rate public debt where returns can be fixed for up to 10 years.”

Remy: “Whilst the US remains the largest private lending market, the EU is a solid second, with a notable refocus on Asia-Pacific, which is regarded as a market with higher growth potential. Most borrowers in the structures we help set up are EU mid-market companies backed by private equity sponsors: thus potentially an option for a European borrower market with 20m+ SMEs.

In terms of sectors, managers stay away from retail, preferring to focus on companies in high-end sectors such as healthcare, technology and pharma.”

Growth trends

Merkel: “We see that private debt is overtaking other alternative asset classes. The European private debt market is set to grow by 17.4% compound average annual growth [rate] over the next five years, and despite recent market turbulence, we remain broadly confident in this direction of travel.”

Remy: “Private debt is luring hungry investors at a time where private equity may have reached full valuations. The asset class is a good selling point for managers, as it continues to yield higher returns compared to public markets while being a safe haven against their volatility.”

4Structuring trends

Merkel: “We see more funds being established but also increasing growth in the average fund size, as well as consolidation and the specialisation of debt managers. These factors reflect maturity and an asset class which is not saturated. Strategies are becoming more complex and diversified, with investors able to structure portfolios as they wish.”

Remy: “Luxembourg is the leading jurisdiction in this asset class due to its flexibility to manage all credit strategies. It will be interesting to see how Luxembourg will fare against competitive markets such as Ireland, which has modernised its limited partnerships, or the UK, which has overhauled its holding company regime.”

Vincent Remy

Valeria Merkel

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ALTERNATIVE INVESTMENTS

New investor relations niche

Luxembourg private equity players should target the growth of the investor relations activity, says the local industry body Luxembourg Private Equity and Venture Capital Association (LPEA). We spoke to their chairman, Claus Mansfeldt, about what the industry and local regulators could do to make this happen.

Words STEPHEN EVANS Photo GUY WOLFF

Claus Mansfeldt is chair of the Luxembourg Private Equity and Venture Capital Association and chair of Swancap Investment Management

In the decade since the alternative invest ment fund managers directive (AIFMD) has transformed Luxembourg’s role within the private assets space in Europe, the country has grown its niche of helping fund managers achieve regulatory com pliance. When considering how to take this to the next level, thoughts often turn to attracting fund deal makers to Lux embourg. However, movement in this direction has been minimal.

Digitalisation and rationalisation

Claus Mansfeldt, chair of the LPEA trade association, continues to see promise in this direction. “We know that some deal teams and portfolio managers are setting up in Luxembourg,” he said. “You don’t necessarily have to be walking the streets daily of the city where you might be doing your next transaction.” He also sees other directions where the country would be able to step up.

“More of the entire workflow can be done digitally, and that’s to Luxembourg’s advantage.” Aspects such as governance have migrated considerably to the grand duchy, particularly during the pandemic. Board meetings and their related proce dures plus contractual and [anti-money laundering] work have taken place in digital formats and “the evidence is that it has worked quite well,” Mansfeldt commented.

Investor relations hub

Inspired by this, the LPEA has decided to promote the country as a centre of excellence for private equity investor relations. This activity is about manag ing relationships with current investors while attracting new interest.

“We have the entire value chain here,” said Gilles Dusemon, LPEA executive committee member, speaking at the Insights Fundraising conference organ ised by the association in October. He said this gave the country the founda tions from which to grow as an investor relations hub. “We have over 600 regis tered investment fund managers, over 6,000 people employed in the sector, we have the custodians, the central admin istrators, we have the TAs [transfer agents], the risk management. And we have the product,” Dusemon noted. “The entire world is using the Luxembourg fund product, so investor relations is a huge opportunity for our industry.”

WHAT IS PE INVESTOR RELATIONS?

Private equity investor relations specialists manage relationships with current investors (known as limited partners in this sector) while marketing funds to prospective investors, be they individuals or institutions. The role is about providing a point of contact between investors and the PE firm.

The LPEA sees it possible to divide this activity from the deal-making front office. Investor relations can be viewed as part of the infrastructure of a fund, and that could be handled from Luxembourg. Having a seamless back-end operation would potentially offer the investor a smoother experience once the fund is up and running.

of activities of this nature, but so far this has been minimal. The LPEA sees signs of this starting to happen, however.

It appears that the pandemic and the move to remote working removed imme diate pressure to change, which encour aged players to carry on using the UK as a base as per normal. “But now there is a lot more focus on the investor relations function all together,” said Mansfeldt, and this could bring firms to reconsider how these operations are organised.

Marginal gains reforms

Split model

“The business model could be split between specialised hubs,” Mansfeldt suggested. “The investment management, the deal making could be in one, while the fund raising and investor relations in another.” Furthermore, he believes that investor relations is set to come to the fore: “In boom times, on the whole, the money finds the deal, and therefore investor rela tions perhaps doesn’t have such a huge role. But now we are clearly entering a phase where that will play a bigger part.”

A few companies have this activity located in Luxembourg, but Mansfeldt characterises this as “embryonic”. Asked to quantify how big these investor rela tions teams could be, he suggested they could start gradually, with 10-20 people representing about a tenth of a firm’s investor relations activity. “But when you start your project you will add over time.”

Cross-border DNA

An instinctive advantage for Luxembourg is the fundamentally cross-border nature of the work here. “Funds are being raised cross border with the Luxembourg dom icile, so it’s in the DNA already, unlike some other hubs,” he said. London also has this outlook, and hence has a con siderable specialisation in investor rela tions for the global market. However, from a European perspective, the ques tion of Brexit is a concern. Many in the industry thought that the UK leaving the EU would have caused a faster outflow

To provide a jolt, the LPEA would like the government to make some small but significant adjustments to the regulations around the private equity business. “It’s not so much failings as there being room for improvement. We are not looking for a revolution,” said Mansfeldt. “I have a three-page list of very technical legal clarifications that our legal committee is communicating with the government.”

For example, he cites the rules around the use of distributed ledger technology and how they could be reformed. TAs and custodians are turning increasingly towards these fintech and regtech options, and the regulator has allowed such play ers to use blockchain-based tools. How ever, the fundamental laws that govern certain details of these transactions date back to before the internet was invented.

Joined up regulation

“Distributed ledger technologies are to a large extent accepted at the CSSF level, but this is not reflected in the laws,” he commented, referring to Luxembourg’s financial regulator. Details like that makes some managers hesitate. “The London lawyers, the New York lawyers will point out that there’s one thing on the regula tor’s website, but there’s another thing in the law that doesn’t quite correspond.”

He added that this is a side effect of having a proactive regulator, with the CSSF being forward-looking in embrac ing new trends and adding to a first-mover advantage dynamic. “That’s great, but it’s the synchronisation of the regulatory interplay between the two frameworks that is also important.”

Entry requirements

Another tweak would be lowering the minimum entry threshold for investors in private equity. Luxembourg law puts

this bar at €125,000, but the likes of Ire land, Germany, the Netherlands and Italy have this at €100,000. “Anecdotally, we’ve heard some have chosen not to domicile funds in Luxembourg simply for that rea son,” said Mansfeldt.

This move goes with the growth of the “democratisation” of the alternative invest ments sector, with these seen more widely as being relevant for a greater number of individual private investors, including in the mass affluent client segment. EU reg ulators have signalled their interest in moving in this direction as they aim to help entrepreneurs gain access to a wider pool of investments. Hence, Mansfeldt would like Luxembourg to go with this momentum.

“The change from €125k to €100k might not sound like much but can tip the balance away from Luxembourg,” he said. Moreover, it is also a somewhat emblematic figure that is easy to com prehend. Reform would reassert the desire of Luxembourg to be a pacesetter.

Either way, there is general industry optimism that the sector is set to grow, with the grand duchy able to take its

share. Recent data from the research firm Preqin forecast that assets under man agement in alternative funds globally would increase from $13.7trn at the end of 2021 to $23.3trn at the end of 2027. In Europe, assets are set to nearly double to $4.1trn over this period.

As one would expect, Mansfeldt believes the attractiveness of PE investing remains despite the changed global economic cir cumstances. “It’s more important than ever to make a relatively significant pos itive real return, hence the relevance of a strategy including a significant portion of investment in private equity,” he said, citing “mid-teens” returns over the long term on average. The work has commenced on carving out a larger share of this prom ising activity for Luxembourg.

Photo Nader Ghavami

Claus Mansfeldt is seen speaking at the LPEA Insights Fundraising conference in October

Striving to add unique value in private markets

Alternative asset classes are maturing and diversifying. Asset managers need to work strong niches to thrive.

Words STEPHEN EVANS

Ilavska Vuillermoz Capital

PRIVATE DEBT

Partners Group

Founding partner, Ilavska Vuillermoz Capital

Ilavska Vuillermoz Capital is a Luxembourg-based venture capital/private equity firm founded in 2019. Laurent Hengesch and Alain Wildanger co-founded the firm as a private investment vehicle, then opened up to institu tional investors, with the firm targeting €100m total investments. Three-quarters of companies supported are financial technology firms, from local digital wealth management firm Investify to global online bank N26. They have stakes in firms like the Heimkapital real estate platform. “We invest between €1m and €10m per company,” Hengesch said.

“Our outlook is to become more like a hybrid venture capital-private equity fund,” he added. “We’re not a traditional venture capital company: we are more like a private equity firm, providing great deals to our inves tors. So we want to expand our LP base.”

The firm’s website says: “Our goal is to create value by investing in great businesses where our strategic insight, capital and relationships can drive the trans formation that unlocks the company’s potential.”

“We’re a leading global private markets firm, truly ded icated to this space,” said Vanessa Camilleri, senior legal counsel at Partners Group in Luxembourg. She highlighted their particular approach to working with the projects in which it invests. “Entrepreneurial gov ernance is about steering away from short-termism, but rather prioritising putting talent to work to trans form businesses and to create value.”

Partners Group works in all private markets, with private debt making up about one-fifth of assets under management. The firm’s website talks of providing “tai lored financing solutions to private businesses seeking non-bank funding due to their lim itations in entering capital mar kets.” This includes capital provision across the whole debt structure, ranging from senior loans to mezzanine financing. They favour a thematic approach, seeking com panies in sectors with above-average resilience and then investing with an “ownership mentality” that contributes to long-term value creation.

YEAR FOUNDED 1996

Photos

“We’re not a traditional venture capital company: we are more like a private equity firm”

Laurent Hengesch

“Entrepreneurial governance is about steering away from short-termism”

Vanessa Camilleri Senior legal counsel, Partners Group

Cube Infrastructure Managers

Pictet Alternative Advisors

“Pioneer and transform infrastructure assets with ESG integration...”

Aurélien Roelens Investment director, Cube Infrastructure Managers

Cube Infrastructure Managers is as an independent mid-market infrastruc ture investor that works to transform essential and local infrastruc ture assets in Europe. These include areas such as fibre, district heating, mobility and EV charging. They high light their strategy of using a hands-on approach to invest small and midsized infrastructure projects rarely consid ered by larger investors. “Cube is an independent mid-market infrastructure investor taking (co-)control positions in European companies to pioneer and trans form essential and local infrastructure assets with full life cycle ESG integration,” said Aurélien Roelens, investment director at Cube Infrastructure Managers. They operate two fund ranges. The investment strat egy of Cube I, II and III focuses on relatively low-risk, brownfield, regulated infrastructure assets operating on availability-based contracts, in growth sectors in western Europe. Meanwhile, Connecting Europe Broad band targets the rollout of the latest technology wired and wireless networks and ancillary telecom infrastruc ture in the European Union, Norway and Iceland.

The four managing partners are former infrastruc ture and public services industry executives, mainly with organisations based in France. For example, found ing CEO and managing partner Renaud de Matharel was previously with Vinci Concessions and BNP Pari bas in Milan and London.

YEAR FOUNDED 2007

INVESTMENT

STRATEGY

Small and mid-sized infrastructure

FUNDS RAISED €3.9bn

FUNDS Cube I, II and III, Connecting Europe Broadband Fund

PROJECTS BACKED 30 STAFF

Pictet Alternative Advisors is responsible for both direct and indirect investments in private equity, hedge funds and real estate for private and institutional clients. It is part of the Pictet Group, a Swiss independent wealth and asset manager founded in 1805, which has had a substantial Luxembourg presence for over 30 years.

Speaking about its private equity offering, Arrigo said: “Pictet grants clients access to investment oppor tunities in private companies--directly and through a long-standing manager network.” This work in the alternative space began in 1989 with the first private equity fund investment. Co-investments followed soon after, with an opportunity executed in 1992 and the thematic private equity approach launched in 2020.

According to Arrigo: “What better asset class than private equity to benefit from megatrends? Given its long-term investment horizon, private equity offers the possibility to tackle high growth themes and nav igate through temporary shocks or short-term cycles.”

The environment has been identified as a theme supported by strong secular trends. “Private equity firms can lead the way in generating value through sustainability.”

Investors are given the opportunity to sup port and benefit from fast-growing businesses active in greenhouse gas reduction, sustain able consumer goods production, pollution con trol, circular economy devel opment and an ecosystem of enabling technologies.

YEAR FOUNDED 1991

PAA HEADCOUNT 100+ investment experts

SELECTED PRIVATE EQUITY GPS 70+

Maurizio Arrigo Global co-head of private equity

Pictet Alternative Advisors

PAA AUM OVERALL $37.6bn, of which $24.4bn in private equity, as per end of June 2022

PRIVATE EQUITY CO-INVESTMENTS 200+

“PE firms can lead the way in generating value...”

New ELTIFs to open up private equity

Private equity funds and alternative investments are about to be opened up to eager retail investors thanks to the upcoming new and improved ELTIF regulations.

The word that is on everyone’s lips at the moment is inflation. Its effects are widespread and pernicious: a higher cost of living, a lower purchasing power and decisions by central banks to increase interest rates. Savers are wondering how to avoid having their money wiped out by inflation, and small-ticket investors are

choosing to sit on their funds. Relief might soon come in the form of an opening up of private equity funds and alterna tive investments to retail investors.

Private equity has long been reserved for institu tional investors and wealthy individuals. Entry tickets often start in the millions of euros, and low liquidity

means capital is tied up for a prohibitively long time, with the life of a fund often lasting five or ten years. However, there has been growing demand from retail investors to take advantage of this asset class. Not only does it offer high returns (and high risks), but it allows inves tors to get involved in impact investing, helping to

Photo Marie Russillo (Maison Moderne)

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Funds

BENEFITS OF THE CHANGES TO ELTIF RULES

support companies that prioritize ESG goals or technological innovation, for example.

The 2015 ELTIF regulation

The European Council tried to address this growing demand for a more accessible private equity industry in 2015 by imple menting the European Long-Term Investment Fund (ELTIF) regulation. The idea was to drastically lower the entry price from several millions of euros to €10,000, while also ensuring that retail inves tors would enjoy certain protections. As well-mean ing as the regulation was, it failed to result in a substan tial increase in ELTIFs, largely because the constraints were too tight. To respond to the inertness, this year the European Council moved to improve the ELTIF regulation. The Council’s priorities are to alleviate constraints around port folio compositions and remove the €10,000 investment threshold while maintaining investor protections. A provisional agreement with the European Parliament was reached on September 19 and, following revisions,

the finalised text will likely be submitted before the year’s end, meaning we could see the changes implemented by early 2023.

Second time’s a charm

Retail investors will, at long last, be able to gain access to what has been until now a restricted asset class, allowing them greater diversification in their portfolios and the potential for returns that might beat inflation rates. The changes will also be welcome in the private equity and alterna tive industrie as they will have a new class of inves tors. For national govern ments, improved ELTIFs will result in funds current ly held in savings accounts being injected back into the real economy where they will help to build new companies. With new opportunities for high returns come risks, of course, because as they say in finance, there is no free lunch. Just as you might get high returns, you might find a negative return. As with all portfolios, diversification is always the smart choice.

While the private equity industry is looking favorably upon the improved ELTIF regula tion, it is recognised that an opening of funds to retail investors will come with added burdens, both on the regulatory and the administrative sides. Investors’ data will have to be compiled and safeguarded for due diligence and KYC. Also, technology will have to be leveraged to keep up with increased requirements for reporting, transparency, and information for tax declarations, which could pose a challenge.

Luxembourg will certainly be an early adopter of the improved ELTIFs. We can be sure that as soon as the new regulation comes into effect, the local ecosystem will create ELTIFs, put them on the market and service them. We are already the biggest hub for cross-border fund distribution in the world, and we have a highly developed and robust ecosystem of lawyers, auditors, fund administra tors, directors, tax advisors, and so on. This ecosystem is always at the forefront of new regulation and will be with ELTIFs, much as it was with SIFs, RAIFs, and SICARs.

Just as Luxembourg is ready, so is BDO. We have a highly qualified and experienced team which enables us to provide full-fledged services in fund administration to our clients in the alterna tive investment space and accompany them through the ever-evolving environment.

Retail investors

Small-ticket and other retail investors will now have the opportunity to benefit from high yields that some private equity funds generate.

Private equity funds

Private equity funds will now be open to a new class of investors and no longer limited to institutional investors and HNWIs.

National governments Money currently held in savings accounts will be put back into the real economy to generate business and support innovation.

Society

Younger investors are more eager to invest in funds that support companies and start-ups with environmental or social dimensions.

learn more about BDO’s range of

visit: www.bdo.lu

“New ELTIFs will aim to protect retail investors but grant access to private equity funds.”

Raphaël Eber Partner, BDO CF Fund Services Luxembourg

“ With more small-ticket investors, so too will administrative and KYC burdens increase.”

Jessica Ott Partner, Audit, BDO Luxembourg

To

services,

The outlook for private market funds in 2023 and 2027

Words STEPHEN EVANS

LIZE GRIFFITHS

Partner, real estate leader, Deloitte Luxembourg

Geopolitical, social and economic uncertainties continue to filter through to the private market fund industry, which is working to convert these challenges into opportunities. “Opportunities that could benefit the entire value chain include impact strategies to maximise value creation at the asset level, improved efficiency through technology, and transformation at asset service level,” said Griffiths.

GIULIANO BIDOLI

Director, tax, BC Partners and Luxembourg Private Equity and Venture Capital Association (LPEA) executive committee member.

“Looking at private markets in 2023, we think we will see institutional investors increasing their investments in this space, even given the current environment of rising inflation,” said Bidoli. The main motivation will be the ongoing desire for diversification of investment in the search for returns in a variety of sectors and asset classes.

Regarding managing this growth, he believes that “ensuring cost control is a particular challenge for next year and beyond.” Relying exclusively on manual processes is not an option, not least because more effort is required to analyse performance, costs and energy use in portfolio companies. “It will require an upgrade in digital technology, which will speed the collection and processing of the data needed to inform decision making,” Bidoli said.

The government could help. “A change that many are calling for in the industry is a reduction in the minimum investable amount required by individuals to access alternative funds. Other countries have done this.”

She notes that higher net-worth individual investors are exploring private market fund investments to diversify their portfolios. “Interest in the shift toward the democratisation of private assets is growing, giving exposure to longer-term investments and benefiting from the expected outperformance of this market,” Griffiths said.

Deloitte Insights’ 2023 commercial real estate outlook survey found the following priorities of 450 chief financial officers of major commercial real estate owners and investors: strategic portfo lio execution; prioritising ESG to meet regulatory and stakeholder demands; understanding recent and pending changes to structures and operations; rethinking talent approaches; and using technol ogy to innovate and improve efficiency.

A return to a world of inflation and interest rates will change recent investment assumptions. What space is there for private markets in this environment?

“The shift toward the democratisation of private assets is growing.”

“We will see institutional investors increasing their investments in this space.”