The alternative investment industry is developing new ways of sharing data across the whole value chain – from portfolio companies and holdings to funds and investors – and from asset servicers to asset managers and asset owners. Luxembourg, as a fund domicile, has been building its niche of expertise in this space and evolving to better serve the whole eco-system as the appeal of particular asset classes continues to grow.
The alternative investment industry is developing new ways of sharing data across the whole value chain – from portfolio companies and holdings to funds and investors – and from asset servicers to asset managers and asset owners. Luxembourg, as a fund domicile, has been building its niche of expertise in this space and evolving to better serve the whole eco-system as the appeal of particular asset classes continues to grow.
“In Luxembourg, this development relates to the strong focus on private markets,” comments Bruno Bagnouls, Head of Sales & Relationship Management, Europe, Alter Domus. “Initially more specialized in real estate, the jurisdiction has been able to grow significantly and progressively in both private equity and private debt. One of the key elements in this progress has been the solutions to capture, process and report financial data. Fund managers and investors want access to data related to their funds quicker, and with more granularity, not necessarily when it’s released at quarter end. They need detailed information at their disposal.”
This is particularly relevant for those managers who outsource their back or middle office functions and rely on third party partners to provide this data.
“Having a platform which allows managers to access data and allows them to potentially build their own customized reports is very powerful. Whether that data is financial information for a single SPV, or performance indicators of the investment activity of a fund, for example,” notes Bagnouls.
This access can be considered to mitigate certain risks in terms of the potential lack of quality information. Having this data available means managers can not only build bespoke reports, but the information can also help drive faster decision making and support communications with investors.
“Some industry commentators have pointed out the more manual nature of the administration of private markets funds, compared to classic equity and bond markets. But through these data solutions, the industry is growing to meet the needs of our clients and their investors,” says Bagnouls.
In order to ensure these new ways of sharing data are as effective as they can be, managers should work closely with their service providers to identify the most appropriate operating model. This involves having the right due diligence processes in place, alongside an outsourcing policy tailored to their needs. Bagnouls also advises managers to not appoint too many service providers: “This way you can clearly cope and manage those relationships while you define a long or mid-term partnership with those providers.”
Reducing the number of providers a firm works with could enhance some aspects of risk. However, in contrast, the relationship between the manager and that single provider is also more likely to develop as a partnership.
Flexibility and oversight
The appeal of private markets in Luxembourg mirrors the global trend seen in the space as the market has been growing in terms of transaction volumes and allocations. As the industry witnessed continued fund launches in the infrastructure, private debt and private equity arena, Bagnouls points to the greater complexity these asset classes represent.
“There has been a strong tendency to outsource certain back-office functions in particular, and also progressively more middle office functions. Asset managers want to focus on attracting investors, launching more specific strategies, deploying capital and making sure they have the right return on investment,” he says, “As a result, a number of back office or middle office functions tend to be outsourced more, providing asset managers with the right level of control and oversight.”
In this respect, Luxembourg is well-placed to provide these services. The jurisdiction is home to a number of flexible fund vehicles, suitable for these asset classes, as a well as a rich eco-system which has been built up over the last two decades. During this time, the Grand Duchy laid down roots for future developments.
“Luxembourg has been able to develop an expertise in real estate, for example. And the infrastructure sector is growing very well as a result. We keep seeing interest in this area both from new and existing managers,” Bagnouls explains.
The industry has also seen progressive use of the flexible fund solutions Luxembourg offers, in particular the reserved alternative investment fund, or RAIF. The growth in this area has enabled the flexibility to continue developing as managers use these structures for varied purposes.
Green ambitions
The domicile has also been a leader in Europe within the sustainable finance sphere, with service providers adapting to handle specific strategies in the space such as micro finance and forestry funds. In Bagnouls’s view, this is a niche which is clearly growing through partnerships between government agencies and private players.
Challenges to these green ambitions mainly revolve around talent. Attracting high calibre experts to Luxembourg remains a critical priority and a need that is unrelenting. “We need more expertise in specific asset classes, beyond the standard real assets or private market type strategies, in areas like microfinance and certain emerging markets,” Bagnouls says. Attracting and retaining skilled professionals in an environment where activity is growing at a fast pace will always be a hurdle for the industry.
Education, coupled with agility, is a vital cog in overcoming this issue and Bagnouls believes Luxembourg has the ability to provide this: “That’s the power of Luxembourg; the collaborative approach between the different structures, industry and governmental bodies and services is unique. When you set up a firm, or administer a fund in Luxembourg, we [the industry] are able to cope, adapt and build an end-to-end offering for clients.”
He also points to the macro-economic environment which is affecting the Luxembourg industry and the broader finance industry as a whole: “We could clearly have an impact, by way of a slowdown, in terms of transactions within the real estate market, although I wouldn’t say we expect a hard stop in terms of activity. In contrast, though, in the realm of private debt, the current interest rate environment creates opportunities for new funds and new investments.”
