Ceri Jones, Global Investor/ ISF:  How has Luxembourg’s position versus other financial centres changed over the last year? Can it repeat its UCITS success with AIFs?

Marc-André Bechet, head of legal and tax affairs, ALFI:   It’s fair to say that 2015 was a good year for the Luxembourg market. The growth of assets was slightly above 13%, with 72% of that coming from net subscriptions. Growth on UCITS and AIFs together accounted for 41% of net subscriptions for the European market. Luxembourg’s historical market share of UCITS is 36%, so that 41% means an increase in our market share. On AIFs we have a slightly lower market share, which is explainable by the fact that traditionally these funds are rather domestic funds, so you see countries such as France and Germany leading the pack. 

I would say, yes, we can repeat the success of UCITS with AIFs, for several reasons. In terms of net sales in 2015, we had a market share of 22% for Luxembourg AIFs in Europe, which is again growing our market share. I would not like to predict 2016 because markets are so bumpy, but last year is a good place to start. Of course, on the management company side, we have a tremendous presence of Luxembourg UCITS ManCo, and these ManCos have traditionally moved into the alternative space and transforming the licences into what we call a Super ManCo, looking at UCITS and AIFs.

What are the legal reasons for the success of UCITS and AIFs in Luxembourg?

Claude Niedner, partner at Arendt & Medernach: We have to distinguish between the UCITS and the alternatives side. On the UCITS side, Luxembourg is the leading European jurisdiction, and Luxembourg UCITS are recognised as the reference for cross-border international distribution. UCITS is a more mature market, but from time to time we still see additional asset managers bringing funds to Luxembourg, either new funds, re-domiciling funds or launching new funds. Some Channel Islands funds are coming over, which have more a retail-distribution approach. Recently, we had a Danish initiative coming to Luxembourg, but it’s generally a mature market.

On the alternatives side, Luxembourg can grow significantly. For me, the most important point was that the Alternative Investment Fund Managers Directive (AIFMD) created a European passport for distribution of alternative investment funds for professional investors in Europe. What created the success of Luxembourg was having European passports for distribution. We are recognised as a pan-European fund distribution centre, and even though France and Germany have quite a significant role, going forward, this international, cross-border component will become more important.

Ewald Hamlescher managing director of GAM (Luxembourg):  AIFs will take time gaining as prominent a role as UCITS, which are clearly a marketdominant brand that Luxembourg has disseminated globally. But I think in the AIF space, though we have more competition, there is clear and strong potential, definitely.

What other innovations have there been in Luxembourg?

Bechet: We have always been at the forefront of innovation in terms of legal structures, covering the needs of any European asset manager, be it German or French, and more recently, the Anglo-Saxon world, because we have introduced the limited partnership and special limited partnership regimes, which are geared to asset managers in the alternative space. But we have also traditionally had umbrella funds for maximum flexibility. Other centres are copying what we’re doing, but we have the lead. Maximum flexibility for asset managers and promoters is, of course, a key consideration in terms of innovation.

Ilias Georgopoulos, managing director, Luxembourg, global client coverage, RBC Investor & Treasury Services: As Luxembourg continues to consolidate its leading position for cross-border distribution, we’re seeing a rising trend occurring in the creation of third-party independent AIFMs, which are not necessarily linked to a specific asset manager, and offering the substance for asset managers that don’t have a physical presence here but want to utilise the jurisdiction and its regulatory oversight to distribute through Europe, Asia, Latin America or other places. Many asset managers globally view Luxembourg as a key jurisdiction in facilitating the distribution of their UCITS, but also want to leverage its efficient regime of funds, be that private equity, real estate or the loan and debt funds that are growing right now.

Bettina Graeber, head of relationship management at Pictet Asset Services, Luxembourg: Yes, Luxembourg is well-positioned to make AIFs a similar success. We have the infrastructure in place, combined with expertise in distribution. The AIFMD passport is definitely an important element in this regard. With the introduction of limited partnership structures, in our company we have seen quite a number of AIFs being set up under this regime. This has really pushed new initiatives and accelerated developments.

Georgopoulos: The AIFM success has to be differentiated from UCITS success. From an assets perspective, it will never reach UCITS levels. I see AIFMs as a success in terms of the number of funds and in the diversity of service provision, because we are seeing a lot of differentiated projects and ongoing fund creation.

Are you seeing most growth from one particular asset area?

Niedner: I suppose credit funds, because that is a domain that was not that well-known in Europe. Now with the Capital Markets Union initiative credit funds are taking off, and with Luxembourg’s pragmatic and flexible approach in terms of funds being authorised to do loan origination, we have seen many of those loan origination structures coming to Luxembourg. The interesting point, as Marc-André mentioned, is that we have had the partnership structure available since 2013, which is very flexible. It’s more of an Anglo-Saxon type of structure. It’s now very efficient to come to Luxembourg, set up a partnership doing loan origination, using a third-party AIFM, and that is a new development.

Bechet: We have a market share in Europe of 9%. If you look at the range of structures across Europe, and funds that are geared at institutional investors, we have a market share of 30% in real estate investment funds. So that’s really an area where we have built up competencies over time. Next to loan funds, which is a newer asset class, real estate is more established.

Sandra Müller, managing director at MEAG (Luxembourg): When selecting the right financial product, UCITS or AIF, the investor is at the heart of our decision process. One has to keep in mind that more than two-thirds of the asset management market is held by institutional investors. They are looking more closely at alternative strategies to improve performance and get uncorrelated returns. 

In the past, we saw growth in liquid alternative assets and strong demand for multi-asset strategies under the UCITS wrapper. That may be rebalanced by AIFMD-compliant structures, as UCITS rules impose stricter investment limits to ensure adequate investor protection. Institutional investors with a longer-term horizon, such as insurance companies and pension funds, do not want the disruption of daily liquidity imposed by UCITS rules, nor do they want to have their strategy curtailed. That’s why they prefer AIF solutions. They are looking for comprehensive strategies and robust risk management to underpin every investment decision.

How will Brexit impact Luxembourg?

Niedner: We view it as a way to partner with the financial institutions that are based in London and are going to face a problem in how to access Europe. The Luxembourg approach is not to try to make a pitch to get the London business to Luxembourg, because that’s not going to happen. Luxembourg needs to be a gateway into Europe, or a bridgehead of London operations in Europe to be able to continue to manage products out of London. There will be a number of consequences. First, a number of asset managers that already have their products in Luxembourg and have started UCITS management companies or AIFMs in Luxembourg, are going to slightly increase their substance, asking for a dual licence. They need to have a solution to for managed accounts for customers who are not in London but actually in Continental Europe. Luxembourg needs to be able to offer that solution. 

Bechet: I will not say it’s business as usual, but it’s not something that is entirely new as UK-based asset managers are the second-largest group in Luxembourg. 16.6% of assets come from UK-based asset managers, so they’re already using the UCITS product to sell cross-border. 

Hamlescher: We’ve definitely seen increased interest from across the Channel. The UK’s decision to leave the EU will likely benefit the Luxembourg market. The question is, of course, how we position ourselves vis-a-vis other domiciles vying for business. One downside is we lost an ally within the EU Commission in Jonathan Hill, a strong ally for the financial industry. It remains to be seen how that pans out in terms of Capital Market Union and other initiatives still pending. 

Would you hazard a guess of where the industry will be in two to three years?

Müller: Most Luxembourg management companies follow a semi or fullydecentralised operating model, whereby some core functions are outsourced to related entities within the group or to third parties. For example, one key benefit of outsourcing fund administration is the ability to migrate onto modern technology platforms that can scale to support growth. Risks and costs can be reduced and quality improved, via shifting to variable cost structures and a shared service model. 

Asset managers can focus on their core competencies and establish new product lines or access geographies quickly. To provide top quality and state-of-the-art asset management solutions we follow a flexible business model – it is the cornerstone and enabler to grow a business faster. The design of the operating model is based on efficiently-delegated functions in different locations with a centralised oversight responsibility and a material presence in Luxembourg. 

Georgopoulos: Asset managers are looking to add value for customers, and outsourcing is one of the top subjects for optimising their own internal structures. The one-stop-shop solution is the most demanded model right now, with one provider that can handle most of the services, so it’s actually not only an outsourcing trend, but a consolidation drive to a long-term partner. It’s a deeper relationship. 

Bechet: We spoke about competition, consolidation and probably some providers disappearing from the scene. The number of AIFMs in Luxembourg has increased over the past few years and we’ve seen the same thing on the service provider side, especially on the custody side where you need specific competencies to service alternative investment funds. On top of newcomers to Luxembourg for UCITS products, we have six large Chinese banks being set up here, setting up UCITS to distribute in Europe. That’s a new trend.