Traditional asset management in Europe is facing two major trends – the European Long-Term Investment Fund II (ELTIF II) and a focus on sustainability through new ESG principles and regulation. Currently the 2nd largest fund center in the world after the US, Luxembourg is the country that has the key expertise and experience in retailisation and alternatives to help drive investment democratisation.
The democratisation of private assets for retail investors is not a new, it has been trending for quite some time. But with the introduction of ELTIF II, the updated rules on European Long-Term Investment Funds, these investments are now more accessible than ever. This new regulation also puts Luxembourg in a prime position for global managers to access a broader European investor pool.
At the recent ICI Investment Management Conference, HSBC, PwC, Arendt & Medernach and ONE group solutions highlighted the growth opportunities in Luxembourg, as the country has a well-established infrastructure with a significant number of private capital managers operating for over two decades, and now growing as a leading hub for ESG and democratised private assets.
“Luxembourg has over €5,028bn in net assets under management (AUM) and funds distributed in over 70 countries around the world,”[1] said Anastasia Aurol, Director, Platform Solutions, HSBC Markets & Securities Services.
“It continues to be a distribution hotspot amongst European UCITS and AIF domiciles with over 26% of market share. It's also quickly establishing itself as a core centre for alternative asset classes with growing activity and appetite across private debt, private equity, real estate and renewable energy.”
The beginning of democratisation
It’s been over 30 years since the first Undertaking for Collective Investment in Transferable Securities (UCITS) regime was implemented. The regulatory framework allows for the sale on a cross-border basis of EU mutual funds amongst member states and was designed to allow retail investors to have transparent, regulated, and cross-border investment opportunities. This first step in democratising access for retail investors has grown speedily in the intervening years and 57% of the UCITS funds that are registered for distribution in at least three countries are domiciled in Luxembourg[1].
At the same time, Luxembourg has also been growing its credentials in alternative assets. Today, it is a core centre for alternatives, with AUM amounting to more than €843bn.[2]
“Now what we’re seeing is the merging of the accessing of the retail space through private capital and the growth in alternatives. The large global PE managers are successfully gathering assets by utilising Part II UCI’s and now ELTIFs, as ELTIF 2.0 provides greater flexibility,” said Revel Wood, Founding Partner at ONE Group Solutions.
What ELTIF II brings
ELTIFs in their current form are vehicles designed for long-term investments into EU companies and projects. The current regime allows all types of investors to invest long-term in European non-listed companies and in long-term assets such as real estate and infrastructure projects. However, certain restrictions have hampered their success.
ELTIF II aims to build on the original framework, expanding the focus beyond real estate and infrastructure to a much broader range of assets, including securitisations and target funds. It now offers more flexible fund rules, including the facilitation of fund of fund strategies, and has removed other barriers for retail investors. The minimum investment in eligible assets has been reduced from 70% to 55%. The requirement for investors with a portfolio of less than €500,000 to not invest more than 10% in ELTIFs has been repealed. The regulation also allows investors to invest less than €10,000 in the future.[1]
“The ELTIF label may be added to any alternative investment fund. Luxembourg has a diverse toolbox and it is possible to add the ELTIF as a backpack sort of label which allows to broaden the investor base,” explained Stefan Staedter, Partner at Arendt & Medernach.
ELTIFs can also be used as an add-on to Luxembourg Part II funds. A fund set up under Part II of the Luxembourg Law on collective investments (UCIs) is an investment fund that can invest in all types of assets. It qualifies as an alternative investment fund (AIF) and can be sold to all types of investors. UCI Part II Funds that have appointed an EU alternative investment fund manager (AIFM) can market their shares, units or partnership interests via the AIFMD passport to professional investors across the EU. If the ELTIF label is added, it will be possible to market also via the passport to retail investors.
“If you use a Part II fund, you will be fully flexible and you can make use of the ELTIF regime in its entirety,” said Staedter. “And what’s exciting is that there’s also further flexibility coming for Part II which will facilitate structuring opportunities for access to Part II funds.”
“The big success of ELTIF II is described with two keywords – simplification and flexibilization. Now you can plug in your ELTIF as an investment vehicle, which will invest ultimately in an existing portfolio, which will ultimately make the deployment of capital very easy.”
This was certainly true for Amundi Real Assets in Luxembourg, which offered a testimonial to the ELTIF II regime in an interview with Florence Stainier, Partner at Arendt & Medernach. Loredana Carletti, Head of Amundi Real Assets, told Stainier that the structure was very flexible, allowing them to reach a wide spectrum of investors in an efficient way.
“We were looking for a solution that could be adapted to our offering and could develop our offering,” she said. “ELTIF allows us to tailor-make vehicles for investors, instead of being constrained by the requirements of the investment.”
Proposed: A European ESG fund asset leader
In Luxembourg, a large portion of alternative investments are likely to be in ESG. By the end of 2022, the EU’s total ESG AUM was €5.2tn. With almost half of that – €2.4tn – and 44,509 ESG funds domiciled in Luxembourg, the country is top in the EU, covering a 67.6% market share.[1] The majority of these are Article 8 funds, which promote environmental or social characteristics and have good governance practices. But there are also 7,962 Article 9 funds, those that make a positive impact on society or the environment through sustainable investment and have a non-financial objective at the core of their offering, which make up €0.4tn AUM.[2]
“If you’re a large global asset manager, or really, any asset manager, there are two things you have to be thinking of. One is everything around ELTIF, because the big alternative players are diversifying and preparing to bring products to retail investors and serve those investors better. So all that sweet spot that was traditionally reserved for traditional asset managers is now target,” said Steven Libby, EMEA Asset & Wealth Management Leader at PwC.
“The other one is ESG. 25% of the market is going into these funds. European regulators are giving us disclosures, clarity and SFDR to make everything more transparent and there’s going to continue to be a huge focus on this.”
[3] https://www.alfi.lu/en-gb/pages/setting-up-in-luxembourg/alternative-investment-funds-legal-vehicles
[4] https://www.europarl.europa.eu/doceo/document/TA-9-2023-0040_EN.pdf
[5] PwC -Global AWM & ESG Market Research Centre
[6] PwC -Global AWM & ESG Market Research Centre
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