The Alternative Investments Sector has the Wind in its Sails

Author: Camille Thomas, Director General, ALFI
Date: June 2018

Driven by an environment of low interest rates and the quest for return and portfolio diversification, the alternative investments sector has the wind in its sails.

With the aim to replicate the UCITS success story in the alternative investments area, Luxembourg has consistently expanded its range of structuring opportunities over the past few years.

After the creation, in 2004, of the investment company in risk capital (Société d’investissement en capital à risque – SICAR) designed to suit the specific needs of private equity and venture capital, the specialised investment fund (SIF) regime was added in February 2007 and the special limited partnership (SLP / société en commandite spéciale— SCSp), a limited partnership without legal traits comparable to the common law limited partnershipin July 2013, followed by the reserved alternative investment fund (RAIF) in early 2016.

Today, 401 SICAR units, 3,424 SIF units, 1735 SCSps and 325 RAIFs are currently operational. The number of such structures set up since their inception is a clear indication that the legislator has assessed the needs of the industry quite well.

During the last couple of months, the Association of the Luxembourg Fund Industry (ALFI) investigated how some specific areas of the alternative investments world have evolved in Luxembourg. The findings are encouraging.

In 2016 and 2017, the number of Luxembourg domiciled Real Estate Investment Funds (REIFs),an area where Luxembourg plays a leading role in Europe, continued to expand bringing the total number of REIFs to 344 vehicles according to latest statistical data provided by the Luxembourg supervisory authority.

ALFI’s Private Equity and Venture Capital Investment Fund Surveyrevealed that the opportunities offered by the Luxembourg fund structuring toolbox have motivated many large international houses to set up and conduct business out of Luxembourg. 34% of PE vehicles are structured as Specialized Investment Funds and 63% are structured as SICAR. The interviews conducted with large PE fund managers revealed that the vehicles of choice for future fund structuring will either be LLPs or RAIFs. In both cases, time-to-market and investor negotiation flexibility are the main drivers for such preferences.

Since bank lending in Europe has been significantly reduced in the aftermath of the 2007-2008 financial crisis, loan funds have emerged as an alternative to the banking industry as a source of financing the real economy and are gaining rising investor attention. Regulators and policymakers are encouraging this trend as a greater diversity of financing options is one of building blocks of the EU’s Capital Markets Union initiative.

A snapshot of the Luxembourg loan fund marketshows that the aggregate amount of capital invested in regulated loan funds mid-2017 amounted to EUR 40 bn and that the number of loan funds increased by 160% in 2017 compared to 2016 and by 280% since 2015, a trend that is expected to continue. An ALFI study has revealed that 70% of major asset managers use Luxembourg vehicles for their loan fund investments. Around half of loan fund managers are looking to increase their presence in Luxembourg.

Last but not least, the above mentioned low interest environment has led renowned hedge fund companies to launch UCITS-compatible alternative funds. Luxembourg’s UCITS reputation should contribute to further enhance its position in the alternative investments sector.

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