Our Luxembourg panel report hears that real estate investment could be a casualty of market changes in the past year, stemming from central bank rate increases and other factors.
- Chrystelle Veeckmans, head of asset management EMA, partner, KPMG in Luxembourg
- Frederic Van Ingelgom, continental Europe head of business development and client management Luxembourg, asset owners and managers, HSBC Securities Services
- Silke Bernard, Global head of investment funds practice, Linklaters Luxembourg
- Cuan Coulter, Global Head of Asset Managers and Head of UK and Ireland, State Street
Allocations to private markets have continued, with ongoing significant interest from existing asset managers launching new products – including the European Long-Term Investment Fund (Eltif) – and from traditional asset managers coming into the space.
“Debt and infrastructure investments are two of the bigger areas that we see. But real estate appears to be slower, both in terms of growth and transactions,” noted one of our Luxembourg panellists.
A further panellist – Frederic Van Ingelgom, a business development and client management leader at HSBC Securities Services in Luxembourg – agreed there had been a slowdown in real estate movements, but that infrastructure was “on the up” and private equity was still a “high trend”. He added: “Surprisingly, private debt is still there, despite an environment of high-interest rates.”
Cuan Coulter, Global Head of Asset Managers and Head of UK and Ireland at State Street, the fund administrator with a large presence in Luxembourg, said private assets demand remained a fixture of the market. But in public markets, there had been a ‘risk-off’ sentiment since February, according to State Street’s proprietary data, which showed money market funds received inflows as investors sought relative safety.
ETFs, meanwhile, continued to attract inflows from mutual funds, said Coulter, adding that sentiment for China – as indicated by flow data – was “much cooler” than last year but that emerging markets, in general, were still a trade people were prepared to make.
Eltif: Full steam ahead
Silke Bernard, global head of investment funds practice at Linklaters based in Luxembourg, said the Eltif was one of the biggest trends that she saw in Luxembourg at present – a trend necessitating “our entire team working on it”.
The Eltif – now referred to as ‘Eltif 2.0’ following a recent review that aimed to increase its popularity – is a key fund structure aimed at bridging private-markets assets with larger pools of investment to support the European economy, including investment from retail investors and smaller pension schemes that typically find ‘alternative’ assets difficult to access.
“Debt and infrastructure investments are two of the bigger areas that we see. But real estate appears to be slower, both in terms of growth and transactions.”
Bernard said the CSSF, Luxembourg’s financial regulator, had been highly responsive to a recent launch. “I had a really positive experience with the CSSF when the first Eltif with 2.0 built-in features was approved and went through in record time. Many players are on this right now, with legal teams working alongside portfolio management teams to build eligible investment strategies.”
She said that some “nitty-gritty” details had surfaced during implementation and that it will take a bit of time – “as with every new piece of legislation” – until a crystal-clear picture of the new Eltif regime has emerged and market understanding has aligned.
“For example, the new rules provide that an Eltif can invest in financial institutions less than five years old but not into a larger, more established bank. Some people are still discovering the details of the new rule and the relevant structural constraints.
“But mostly it is ‘full steam ahead’ with portfolio structuring and with the drafting of documentation.”
Van Ingelgom of HSBC also had conversations with lawyers and confirmed “a couple of dozen” Eltifs were likely to launch.
“The question is about whether the Eltif is really going to access the untapped money that is out there in the retail market. There has been some success with high-net-worth individuals through the use of UCI Part II, and we hope that the Eltif will somehow mirror that story. However, ultimately, the question for the service providers is about whether we are ready to effectively take retail investors directly onto our books for this.”
‘Age of uncertainty’
Speaking more broadly about the fund management business environment, Chrystelle Veeckmans, EMA head of asset management at KPMG, said that assets under management (AuM) – having fallen in 2022 for the first time in a decade – were now normalising.
“In 2022, we saw that the industry was shrinking in terms of AuM, but if we look at the first semester of 2023, I would say that we are back to kind of normal with more net inflows than net outflows.”
However, asset management is still in a state of flux on other levels, she said.
“The industry is subject to a significant disruption. It’s not just about the market correction that we have seen, but a deeper radical change because we are now in an age of uncertainty that calls for unprecedented measures.”
“The question is about whether the Eltif is really going to access the untapped money that is out there in the retail market. There has been some success with high-net-worth individuals through the use of UCI Part II, and we hope that the Eltif will somehow mirror that story.”
Asset managers are seeking to achieve the best possible returns for investors against a backdrop of changing investor demands and uncertain markets. The combined impact of climate change, geopolitical tensions and social tensions are creating a volatile environment for policymakers and industry alike. Technological innovation is bringing benefits to firms and their clients but also giving rise to different and increased risks, such as the frequency and impact of cyber-attacks.
Veeckmans pointed to the issue of cyber security, with the EU’s Digital Operational Resilience Act – known as ‘Dora’ – expected to be implemented in January 2025.
At the domestic level, last year, the CSSF issued circular 22/811 on internal organisation and good practices of fund administration. This also focuses on information and communication technology, particularly on the resources available during episodes of disaster recovery.
“This all has an impact on the operating models of our clients because it reinforces the substance and control functions that must be carried out in the EU,” said Veeckmans.
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