Luxembourg’s innovation has created perfect marriage of opportunity
In a recent article with Private Equity Wire seven months ago, Sean Murray, Managing Director, Alternative Assets (EMEA) at SANNE – a leading provider of alternative asset and corporate administration services with more than EUR235 billion in AuA – discussed a definitive trend among PERE fund managers to outsource their internal accounting and reporting processes.
This trend shows no sign of abating as global PE/RE groups look towards Europe, and specifically Luxembourg, to develop global distribution hubs.
Brexit is another unavoidable catalyst. Brexit has contributed to some of the growth we are seeing in Luxembourg as fund managers are looking for stability and certainty around their fund structures. This allows fund managers to market a fund that they know will have the same rights once the negotiations over Brexit are finished, whatever the outcome.
As fund managers get more comfortable outsourcing tasks to third party specialist fund administrators, we see a shift in mind-set as they come to understand the myriad benefits to using third party management companies, not to mention an independent depositary.
Under AIFMD, these are key service provider relationships and for groups like SANNE, this is playing into their hands.
“The outsourcing trend we saw earlier in the year has continued and ramped up. We see a massive amount of inflows coming in to Luxembourg, as I’m sure other service providers are seeing. The number of clients and the number of new deals is phenomenal. I don’t think we’ve seen a stronger inflow of business since before the 2008 global financial crisis,” states Murray (pictured).
SANNE services its global clients across asset classes on all fronts, from the depositary to the AIFM, administration services, providing corporate services to underlying structures across the board, and offers a full end-to-end AIFMD solution.
Most fund managers have become accustomed over the past few years to having a depositary. “It is there to provide oversight of the structure and be able to provide an extra layer of comfort to investors,” explains Murray. “Investors are looking for transparency and to ensure that there is someone sanity checking the fund structure. The depositary provides the compliance check, alongside the AIFM.
“Outsourcing has become an easier discussion to have with PE/RE fund managers than perhaps it was two or three years ago.”
The concept of having a responsible party in place has always existed in Luxembourg, given that for the last three decades its service provider network has honed its expertise in facilitating UCITS funds, including custodians who have long taken care of fund assets. Murray says that even prior to AIFMD being introduced, Luxembourg’s custodians were evolving to provide a depositary bank function.
“With AIFMD, it has opened up the door to other parties, in addition to the custodial banks, to provide that supervisory role. It has formalised some of those oversight functions, and has established a tried and tested framework.
“Some managers are new to the EU and we need to explain the concept and role of the depositary, but they understand they need one if they want to market their fund(s) into Europe,” says Murray.
Murray views Luxembourg’s continued innovation over the years as one that has created the conditions for its funds industry to flourish. Introducing the special limited partnership (SCSp) and the Reserved Alternative Investment Fund (RAIF) has helped to attract global PE/RE groups, given the amount of capital in the private markets that is floating around. These fund managers want products that are easy to take to market and easy to set up, within a highly regulated and supervised jurisdiction.
“The speed to market is really helping Luxembourg and is why we are seeing such a strong inflow of business. With products like the SCSp and the RAIF, there is still the same level of supervisory oversight on the business, but it is the AIFM who is subjected to this oversight not the fund.
“If you identify an investment opportunity and want to respond quickly because investors are lined up, you don’t want to be waiting six months to set up an investment vehicle,” he says.
In many respects, it has led to a perfect marriage: the flexibility of investment vehicles and the transparency of reporting provided by Luxembourg service providers.
This has not gone unnoticed at SANNE. It has sought to capitalise on the attractiveness of Luxembourg, and its ability to offer an end-to-end solution under AIFMD, with Murray confirming that it now has a large number of RAIFs, in particular, on the books.
“We see a couple of new RAIFs or SCSps being launched weekly. When the fund sponsor sets up a RAIF, we can act as the AIFM, and we have the administration business and the depositary business to support the product at the same time.
“That again helps with speed to market because fund managers don’t have to deal with multiple counterparties, they only need to negotiate with one counterparty. We can quickly turnaround legal agreements and get the fund ready for launch,” explains Murray.
In his view, completing the acquisition of Luxembourg Investment Solution SA (“LIS”) in February this year, was the missing piece of its service offering. LIS is a leading third party Alternative Investment Fund Manager (AIFM) with approximately EUR8.3 billion in AuA. The acquisition allows SANNE to act as the ManCo to both UCITS funds and AIFs.
“Whilst we were enjoying success with our administration and depositary business, we were missing the AIFM leg. Since then, we have seen a lot more interest from fund managers who would like us to provide ‘all in’ services,” says Murray.
“That said, we are still being approached for those services on an individual level. We provide AIFM services to clients who do not use us as their administrator, and equally we provide administration and depositary services to clients who are using a separate third party AIFM.
“Having that flexibility allows us to take advantage of opportunities in the market. Especially where managers are coming in and setting up their own AIFM businesses.”
SANNE is able to support those managers in the short term as they look to build up their substance and hire staff. This is something it is already currently doing for a number of clients. Murray believes that the more fund managers move in to Luxembourg, the more it will help to further enhance the profile and attractiveness of the jurisdiction and increase Luxembourg’s expertise.
“As a group, we welcome seeing new fund managers coming to Luxembourg to create their own substance and add to the industry. It’s all about continuing to build up the industry here. If that means some of our largest fund manager clients set up their own AIFMs, we’re happy with that.
“Equally, we continue to see an increase in fund managers coming to Luxembourg from outside the EU who are happy to use a third party AIFM because they don’t want to create their own presence in Europe. Luxembourg is, and I think will remain, the jurisdiction of choice for international fund managers who are looking to deploy capital into Europe and beyond,” concludes Murray.