The Alternative Investment Fund – or ‘AIF’ – has reached maturity since its birth a decade ago, says Jervis Smith, Luxembourg country managing director of Vistra.
As we celebrate the 10th Anniversary of the Alternative Investment Fund Managers Directive (AIFMD), it is important to recall that the purpose of the directive was to reassure investors in Europe that they would have similar protection for their investments in ‘alternative’ funds as they had enjoyed for many years in the traditional funds that invested in listed securities.
This was a result of the enormous rise in popularity of alternatives, caused by low interest rates and government bond yields at rock-bottom levels, and listed share valuations at their highest, steering investors to look at more illiquid assets such as private equity and real estate, and many asset managers were keen to follow the trend by investing in this space.
The risk was brought into sharp focus by the Madoff affair and the fallout the $50 billion fraud had on European-based funds of funds. Politicians and regulators moved swiftly to make a repetition of the events impossible. And so the AIFMD was born.
Now ten years on, there have been continued improvements and tweaks to the original legislation and brand new concepts such as ‘Depositary Lite’, ‘AIFMs’, are now mainstream activities. So, what does the future hold and how will Luxembourg as a funds centre take advantage of the opportunities?
The context
During those past years when there was a resurgent investment in funds, Luxembourg was already a popular domicile for asset managers in the Ucits space. With circa €5000 billion of assets under management in regulated funds, Luxembourg is Europe’s largest investment fund centre and, from a global perspective, second only to the US. In addition, Luxembourg-domiciled funds are distributed in more than 70 countries around the world and have become the most common ‘cross-border’ product.
Luxembourg offers a wide range of asset classes under management as well as a wide range of investment vehicles, in different legal forms, tax regimes (Luxembourg has signed tax treaties with more than 100 countries around the world) and favourable regulatory frameworks.
As such, Luxembourg’s ‘tool box’ of funds provides investors with legal, regulatory and structural choices.
Launched in 2013, AIFMD has introduced requirements on the depositary and custodian in terms of managing and administering an alternative investment vehicle. Luxembourg moved quickly to incorporate the change into its domestic law, just as in the eighties it had done with Ucits and has consequently become a well-regulated and well-known hub for the global alternative investment industry.
The Luxembourg fund industry also benefits from a wealth of well-established service providers in central administration and third-party AIFM services. Most of them provide bespoke and end-to-end solutions to cater for the size and complexity of each asset manager.
Market growth
With the increased investor protection, the opportunities for alternative investment managers to raise capital in Europe have increased significantly. The managers that have complied with AIFMD have been the great winners and were likely to be rewarded with the highest increase in inflows.
This outcome confirms that AIFs tend to benefit from regular net inflows from institutional investors with a long-term investment horizon.
In 2021, fundraising for alternative assets, including private equity, real estate, infrastructure, private debt, and natural resources, surpassed $1.1 trillion, and total assets under management in alternatives exceeded $9 trillion, according to Moody’s 2022 asset management outlook.
A survey by ALFI and KPMG showed a 40.6% climb in AuM in Luxembourg private debt funds in 2021, to a total of over €180 billion. Direct lending strategies make up 72% of the private loan market.
The market has also witnessed increased demand for alternative sources of funding, whether debt or equity.
Where does AIFM go from here?
The role played by the AIFM in supervising and supporting the AIF has greatly expanded. The country has witnessed a growth in the number of AIFs. At the time of writing, Luxembourg now hosts around 270 licensed AIFMs, more than half of which offer third-party AIFM solutions and 605 registered AIFMs (Source: LPEA).
“…Luxembourg now hosts around 270 licensed AIFMs, more than half of which offer third-party AIFM solutions and 605 registered AIFMs”
The Cross-Border Distribution Framework (CBDF) reduces the administrative cost burden as the registration will be channelled through one single appointed AIFM to complete the pre-marketing registration with one single regulator. Then the same AIFM will thereafter complete the actual marketing notification process where applicable.
It is also important to mention the implementation of the Sustainable Financial Disclosures Regulation (SFDR). SFDR requires investment managers such as AIFMs to provide prescript and standardised disclosures on how ESG factors are integrated at both an entity and product level.
“Mature teenager”
Fund structures are becoming more complex, especially in the AIF segment and service providers must adapt to this trend, which is not expected to slow down, in addition to the sector consolidation. More than ever, fund formation requires a holistic approach where legal, regulatory and tax aspects are intertwined
End-to-end service is expected from clients.
From its exciting early years, the AIF is now developing into a mature teenager and the future is rosy for a highly successful adult to rival the success of its highly liquid cousin, the Ucits!
*Jervis Smith is Luxembourg country managing director of Vistra.
(Read about fund manager Payden & Rygel’s decision to go down the AIF route, in our Ireland roundtable.)
© 2022 funds europe
