Fiddich Review Centre
Alternative Investment

“Dry powder” and new fund types: Luxembourg remains resilient

The attractiveness of Luxembourg has not decreased, according to Arnaud Bon, a partner in Deloitte’s strategy and corporate finance department. Regardless of the current economic situation, the advantages remain the same and haven’t changed over the past few years.

Decrease in activity in the alternative sphere has been observed, said Bon, and this is very recent. That translates to a slower pace of fundraising, but also in terms of capital deployments or investment activities. “Indirectly, it does impact the activities of service providers or advisors.”

“A lot of dry powder”

“The slowdown is being amortised, or cushioned, by a few elements,” added Bon. “When we speak about the alternative players, there is a lot of dry powder.” In fact, the levels of dry powder–intentions or commitments to invest that have not yet been put to work–are at historically high levels.

“This means that the industry overall, and that’s true for all alternative investments, still has a very strong firing power when it comes to actually deploying capital and investing.” Because funds are sitting on this “pile of dry powder,” the industry isn’t stopping.

The second element of the cushion, Bon explained, is that these funds are closed. This means that there’s no “irrational exuberance” when it comes to asset valuation or investor behaviour.

There is a very strong trend to launch this type of open-ended alternative fund.

Arnaud Bon

Arnaud Bonpartner in the strategy and corporate finance departmentDeloitte

An innovative new product–open-ended funds–has also served as a cushion. “We’ve seen [these] over the last couple of years, and it has been amplified in the last six months,” explained Bon. “There is a very strong trend to launch this type of open-ended alternative fund, which aren’t aiming at exactly the same investor base, which don’t necessarily have the same investment teams.”

“I do not believe, at this stage at least, that the activity is going to drastically drop,” said Bon. The funds that are already here are here for a few years, and those that aren’t at the end of their lifetime will be here for the years to come, no matter the economic conditions.

Demand remains strong for Eltifs

In terms of volume, “we haven’t observed a decrease in client demand,” Bon mentioned. This sentiment is echoed by Stefan Staedter, counsel in investment management at Arendt & Medernach.

In fact, just before his interview with Delano, Staedter was at a client meeting to discuss setting up a Raif, a reserved alternative investment fund. Given the multitude of crises–the war in Ukraine, inflation, the post-covid environment, the lawyer said, “I would have expected a sort of slow-down and less acceleration. But honestly, I cannot confirm what I would have expected, which is the good news.”

Staedter continued, “In all areas, there is a lot of demand for setting up funds, setting up new sub funds, creating Raifs, and creating also Eltifs.” At the moment, there are approximately 81 Eltifs–European long-term investment funds–in the EU; Luxembourg currently leads the way with 45. But there’s a big wave to come, added Staedter, with 30 to 35 new Eltifs in the pipeline for the grand duchy alone.

“It’s really a lot, if you think about it. In 2017, there might have been three or four. And since then, there was a boom in Eltifs,” said Staedter. He started to work on Eltifs in 2016, and at the time, it was very niche. Now, asset managers are seeing non-professionals as potential investors in the product.

Investors are becoming more diverse, added Staedter. They’re not just institutions and professionals. And with increased diversity–the institutional, the professional, the non-professional–you also have less risk.

But it’s not for the “man on the street.” For some of the new products, “they allow retail investors if they are professionally advised, or if they come in with a certain minimum ticket.” It requires a certain sophistication in the portfolio and in financial knowledge.

An Eltif is something which is a new normal, rather than the exception.

Stefan Staedter

Stefan Staedtercounsel in investment managementArendt & Medernach

Staedter also discussed some of the benefits of closed-ended funds, which can steadily produce growth in the portfolio in the longer term. Short shocks therefore wouldn’t necessarily have a big impact on this, considering the fund lifetime of eight to ten years.

Eltif 2.0

But why Luxembourg? The grand duchy has lots of experience, making it the dominating power in the Eltif sphere. The regulator and service providers, including lawyers, in Luxembourg are highly sophisticated, according to Staedter. “An Eltif is something which is a new normal, rather than the exception.”

Countries like France and Italy have Eltifs, but these are for the domestic, or local, market. “If you compare it with Luxembourg, you see clearly that there is a pan-European approach,” he said. “Luxembourg is taken as the natural hub across Europe for the distribution.”

Furthermore, the new regime, called Eltif 2.0, “will remove a couple of distribution barriers,” said Staedter. “Actually, the product will become even more attractive because it’s easier to manage.”

“I have to say, the outlook so far is very positive,” said Staedter.

Demand in Asia also continues

Alessandro Silvestro, managing director Asia Pacific of Lemanik Asset Management and based in Hong Kong, was similarly optimistic. He said that when funds come to Luxembourg, it’s when they are at a more sophisticated stage and want to get to the “next level of growth.” Silvestro thinks, in a couple of years, that he will have more AIF than Ucits clients.

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