ALFI: The alternatives markets are getting ‘larger and larger’
01 October 2021 US
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Fund distribution in the European economic area was a hot topic at the Association of the Luxembourg Fund Industry (ALFI) Digi Pulse USA Virtual Event.
“Assets under management have grown globally between 2004 to 2020; so over the last 15 years there has been a staggering growth at a rate of 7.5 per cent, which is a compounded annual growth rate, bringing it to about 117 trillion, at the end of December,” said Serene Shtayyeh, partner, PwC.
Based on PwC’s reach, Shtayyeh detailed what European distribution represents in terms of volume and trends. With its global research group, PwC has forecasted the potential in this space over the next five years ending in 2025.
But the most interesting trend to note is actually the breakdown of products. “The different types of products in 2004 were split between mandates and mutual funds. As you move on to 2020 through the years, and certainly into what we're expecting in 2025, the alternative markets are getting larger and larger,” she explained.
Looking at where those assets are actually based, it was found that at the end of 2020, the majority of those assets (60 per cent) came from North America, 30 per cent came from Europe and the rest were from Asia, the Middle East and Africa.
In Europe, investment funds are split between UCITS and alternative investment funds (AIFs) in terms of regulated products, versus alternative and mutual funds.
According to Shtayyeh, the majority of the growth came from alternative investment fund (AIF) products and 7.8 per cent came from UCITS.
“So while it's true that we see more and more coming in the alternative sector, I want to highlight that UCITS is still very much a growing product as 7.8 per cent over the last 10 years is still a very good growth rate.”
Digging a little deeper into the specific products in Europe starting with UCITS, Shtayyeh found Luxembourg ranks the highest when it comes to the domiciliation of the UCITS funds; it has the majority of the net assets, followed by Ireland which is also a significant domiciliation for UCITS.
Meanwhile, France and the UK have less in terms of net assets. “I think the reason they’re a little bit less is they tend to be a much more local market fund versus Luxembourg and Ireland — they're much more cross border funds. But the takeaway is there is significant growth in the UCITS product over the years.”
Later during the panel, James Hays, partner, Simpson Thacher & Bartlett, highlighted: “I think it's important to categorise sponsors looking to set up Luxembourg funds based on whether they're doing it for the first time, or whether they're experienced in the space.”
Discussing ‘first time’ concerns, Hays observed that asset managers are generally focused on timing in terms of how long it will take from the decision to establish a Luxembourg fund to actually being able to market it.
“In my experience, for sponsors entering the space, the determination to set up a Luxembourg fund typically comes a little bit later in the product launch process, and it's driven by investor demand and investor relations considerations. As a result, there is generally a timing crunch to get the product to market.”
Second and equally as important are questions around the utilisation of a Luxembourg structure and its potential impact on the sponsor’s ability to quickly close capital into the fund. According to Hays, asset managers are also focused on the cost of operating a Luxembourg fund, with a particular focus on whether service provider fees will have a material impact on investor returns—in his experience, this is rarely, if ever, the case.
Additionally, Hays says clients want to understand the burdens of the structure going forward. Generally, these concerns originate from the legal and compliance, and finance teams at the sponsor.
Specifically, asset managers are focused on compliance obligations related to the Alternative Investment Fund Managers Directive (AIFMD), the Sustainable Finance Disclosure Regulation (SFDR), the new cross border distribution directive and the integration of outside fund administrators into a sponsor’s in-house finance and operations group.
For experienced clients, or those that have established Luxembourg structures in the past, the concerns and considerations are different, explained Hays.
“At the foremost and especially following Brexit, the key consideration is product distribution. For non-European sponsors seeking to avail themselves of the AIFMD marketing passport, most utilise a hosted AIFM solution. Following the receipt of the passport, the question becomes how to distribute the fund in Europe. For sponsors in the alternatives space, many are accustomed to having their investor relations professionals distribute products and interact directly with prospects globally. With a hosted AIFM solution, non-European sponsors are discovering that this can be somewhat more challenging in Europe,” he noted.
Hays mused: “In light of Brexit, our expectation is that European regulators are going to be much more focused on distribution going forward. So the question for many asset managers is how to address this concern. While options exist, including tied agent and chaperoning solutions, the industry has not yet settled on an approach.”
Last week, during ALFI’s Global Distribution Conference, HSBC’s Dan Rudd said:
“If you don’t take environmental, social and governance (ESG) risk into account in the same way that you manage money then you are putting your clients at risk”.
Also during this conference, panelists discussed the current industry trends in Latin America.
“Assets under management have grown globally between 2004 to 2020; so over the last 15 years there has been a staggering growth at a rate of 7.5 per cent, which is a compounded annual growth rate, bringing it to about 117 trillion, at the end of December,” said Serene Shtayyeh, partner, PwC.
Based on PwC’s reach, Shtayyeh detailed what European distribution represents in terms of volume and trends. With its global research group, PwC has forecasted the potential in this space over the next five years ending in 2025.
But the most interesting trend to note is actually the breakdown of products. “The different types of products in 2004 were split between mandates and mutual funds. As you move on to 2020 through the years, and certainly into what we're expecting in 2025, the alternative markets are getting larger and larger,” she explained.
Looking at where those assets are actually based, it was found that at the end of 2020, the majority of those assets (60 per cent) came from North America, 30 per cent came from Europe and the rest were from Asia, the Middle East and Africa.
In Europe, investment funds are split between UCITS and alternative investment funds (AIFs) in terms of regulated products, versus alternative and mutual funds.
According to Shtayyeh, the majority of the growth came from alternative investment fund (AIF) products and 7.8 per cent came from UCITS.
“So while it's true that we see more and more coming in the alternative sector, I want to highlight that UCITS is still very much a growing product as 7.8 per cent over the last 10 years is still a very good growth rate.”
Digging a little deeper into the specific products in Europe starting with UCITS, Shtayyeh found Luxembourg ranks the highest when it comes to the domiciliation of the UCITS funds; it has the majority of the net assets, followed by Ireland which is also a significant domiciliation for UCITS.
Meanwhile, France and the UK have less in terms of net assets. “I think the reason they’re a little bit less is they tend to be a much more local market fund versus Luxembourg and Ireland — they're much more cross border funds. But the takeaway is there is significant growth in the UCITS product over the years.”
Later during the panel, James Hays, partner, Simpson Thacher & Bartlett, highlighted: “I think it's important to categorise sponsors looking to set up Luxembourg funds based on whether they're doing it for the first time, or whether they're experienced in the space.”
Discussing ‘first time’ concerns, Hays observed that asset managers are generally focused on timing in terms of how long it will take from the decision to establish a Luxembourg fund to actually being able to market it.
“In my experience, for sponsors entering the space, the determination to set up a Luxembourg fund typically comes a little bit later in the product launch process, and it's driven by investor demand and investor relations considerations. As a result, there is generally a timing crunch to get the product to market.”
Second and equally as important are questions around the utilisation of a Luxembourg structure and its potential impact on the sponsor’s ability to quickly close capital into the fund. According to Hays, asset managers are also focused on the cost of operating a Luxembourg fund, with a particular focus on whether service provider fees will have a material impact on investor returns—in his experience, this is rarely, if ever, the case.
Additionally, Hays says clients want to understand the burdens of the structure going forward. Generally, these concerns originate from the legal and compliance, and finance teams at the sponsor.
Specifically, asset managers are focused on compliance obligations related to the Alternative Investment Fund Managers Directive (AIFMD), the Sustainable Finance Disclosure Regulation (SFDR), the new cross border distribution directive and the integration of outside fund administrators into a sponsor’s in-house finance and operations group.
For experienced clients, or those that have established Luxembourg structures in the past, the concerns and considerations are different, explained Hays.
“At the foremost and especially following Brexit, the key consideration is product distribution. For non-European sponsors seeking to avail themselves of the AIFMD marketing passport, most utilise a hosted AIFM solution. Following the receipt of the passport, the question becomes how to distribute the fund in Europe. For sponsors in the alternatives space, many are accustomed to having their investor relations professionals distribute products and interact directly with prospects globally. With a hosted AIFM solution, non-European sponsors are discovering that this can be somewhat more challenging in Europe,” he noted.
Hays mused: “In light of Brexit, our expectation is that European regulators are going to be much more focused on distribution going forward. So the question for many asset managers is how to address this concern. While options exist, including tied agent and chaperoning solutions, the industry has not yet settled on an approach.”
Last week, during ALFI’s Global Distribution Conference, HSBC’s Dan Rudd said:
“If you don’t take environmental, social and governance (ESG) risk into account in the same way that you manage money then you are putting your clients at risk”.
Also during this conference, panelists discussed the current industry trends in Latin America.
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