As announced in our previous blog, Pierre Kreemer, Alison Macleod, Victor Chan Yin, Yves Courtois, Jane Wilkinson, Lutfije Aktan, Mickael Tabart and I joined the ALFI London Roadshow that took place in the fantastic historical setting which is Guildhall on 14 May 2014. Just like the success of The Clash hit “London Calling” – which often makes it’s way onto lists of the greatest songs of all time – this ALFI Roadshow was probably one of the most spectacular and successful to date.
As announced in With over 950 attendees – the highest number ever for an ALFI Roadshow – and the right combination of professionals from Luxembourg and the UK, the roadshow offered plenty of networking opportunities. As Luxembourg Minister of Finance Pierre Gramegna pointed out, there are strong links between the UK and Luxembourg in the asset management business and both countries have demonstrated their long term commitment to the fund industry as well as their key strengths and experience.
What was hot?
As expected, AIFMD was at the heart of many conversations. Statistics regarding AIFM authorizations were discussed, including the rather limited number of license requests from internally-managed AIFMs, which may be compared to the continuous decrease in UCITS self-managed SICAVs.
AIFMD, which was initially perceived as an additional layer of regulation, is now viewed as a real opportunity for distribution – but also for asset managers – to review their current business model and rationalise their products.
Many asset managers are finalizing their strategy, such as where to domicile their Management Company and Funds. Others are still in waiting mode, especially managers outside Europe. The first step is to obtain the AIFM license, before further reviewing business models and working towards efficiency gains.
Although UCITS is a little pale beside AIFMD, it is still the flagship product for Luxembourg. The brand is now mature and growth comes from additional inflows rather than from additional fund launches: total assets have increased by 30% over the past 5 years, although fund launches were at their lowest level in 2013. The industry is in product innovation and concentration mode in order to gain efficiencies. A key barrier for additional fund launches is the cost of the product, partly driven by the continuous increase in regulatory requirements. However the potential for growth remains, significant and is driven by demography and related pension schemes, large emerging markets with high potential for distribution – such as Asia and Latin America – as well as product innovation: RQFII UCITS, short duration bond ETFs, Multi-credit investment strategies and smart beta and alternative index strategies were quoted as examples during the conference.
Hedge Funds: The impact of AIFMD on hedge funds was discussed at length. The choice of domicile for the AIF is largely influenced by the investors: when Continental European investors are involved, Luxembourg is their preferred location. Taxation remains an issue that needs to be considered by asset managers when choosing their AIF’s domicile. Regarding the distribution of AIFs, the general consensus was that notification to regulators seems to be going well. Private placements are still an option, but some countries are stricter than others, meaning that it really depends on the distribution strategy of the asset managers. Finally, with regards to valuation, it is recommended to have a valuation committee in place with robust processes for the identification of sources and escalation procedures for illiquid positions.
Real Estate: The BEPS (base erosion and profit shifting) draft proposals are likely to impact how alternative investment funds are set-up. Together with AIFMD, these measures should lead to a consolidation and concentration of senior substance, as well as experts, in key jurisdictions. Substance is becoming a critical topic and Luxembourg should seize this opportunity to further strengthen its prime jurisdiction status for the launch of investment funds.
Private Equity: the discussion started with a survey about the large Private Equity firms’ perceptions about the Luxembourg environment and, specifically, its key strengths and weaknesses. Interestingly, a significant number of General Partners are considering Luxembourg as a potential location for their fundraising vehicle. Yves explained how to address the challenge of valuation in an AIFMD setting and how to find innovative solutions while remaining cost effective. The developments behind the OECD paper on BEPS was also highlighted, especially the need to strengthen real substance.
Yves Courtois explaining how to address the challenge of valuation in an AIFMD setting
Luxembourg remains the leading domicile for Responsible Investing Funds in Europe; this is based upon the country’s long track record and reputation in the financial sector and also as the place with the investment vehicles which asset managers are looking for. Impact Investing and Microfinance are also being addressed, with the creation of tailored legal structures – such as the social impact company and EU SEF – which address these niche markets. Promoters of mainstream SRI funds will also be very pleased to hear that LuxFLAG, the Luxembourg Fund labelling agency, has also just issued an International ESG fund label (in addition to the existing microfinance and environmental labels), addressing the lack of an internationally recognized label for mainstream SRI funds.
