Luxembourg
14 Sep 2021
The Grand Duchy is well positioned as a global financial services centre, and if regulators and service providers remain progressive, nimble and embrace change, the Luxembourg market will continue to prosper in the future
Image: romas_ph/stock.adobe.com
During the last two decades, Luxembourg has emerged as one of the most prominent hubs for fund domiciliation, capital raising and transaction activity.
Industry participants in Luxembourg have noticed that many managers that have previously launched funds in offshore jurisdictions are now looking to come onshore, often at the behest of their investors.
Furthermore, Luxembourg is set to be one of the biggest winners from Brexit in 2021 and beyond as businesses shift operations out of the UK to ensure continued access to EU markets.
Aside from Brexit, COVID-19 has increased the need for flexibility and adaptability from businesses during the continuous uncertainty of the pandemic.
Many firms have turned to the outsourcing of administration functions as a cost-efficient way of accessing wider resources and operating infrastructure which they may not have the capacity to build or maintain themselves.
“As the number of funds domiciled in Luxembourg grows, so too does the demand for outsourcing of fund administration, particularly as compliance costs and regulatory pressures grow,” explains Renaud Oury, chief revenue and data officer at Apex, a global financial services provider.
On the client side, Oury has observed a huge shift from public markets into private markets, fuelled by the growth of alternative investments and allocations, which in turn has been driven by insurance and pension fund clients.
Experts believe that by continuing to foster new developments, Luxembourg will reinforce its attractiveness in the global funds space.
Taking centre stage
Luxembourg plays an important role on the global stage as an asset management, distribution and fund services hub, with an embedded ability to adapt quickly as a jurisdiction.
Its important role in the industry has not gone unnoticed by market players, as there has been a notable increase in the migration of expertise from traditional custodians and fund administrators to corporate services with their alternative fund administration divisions. The increasing appetite of investors for private equity, debt, real estate and infrastructure funds has led to greater demand for administration servicing these vehicles.
Keith Hale, executive chairman, TrustQuay, says: “While traditional custodian banks offer alternative fund administration as well as their traditional services, there is an increasing number of corporate services providers with alternative fund administration capabilities also taking advantage of this growing market.”
According to Hale, this growth in private capital investment has led to an acceleration of recruitment of industry experts from custodian banks and long-only fund administrators.
This trend has been fuelled by the need for regulatory and risk management expertise, as specialist fund administrators and their private market clients ensure they are compliant with the regulatory requirements around alternative investments, such as the Alternative Investment Fund Managers Directive (AIFMD), which is the regulatory framework that applies to EU-registered hedge funds, private equity funds, and real estate investment funds.
Meanwhile, market players have also noticed a strong focus on investing in data management systems in Luxembourg. Data management systems enable participants to optimise their operations through actionable insights and efficient reporting. Further benefits of data management include the ability to increase end-user productivity, enhance decision-making, and also improve data access.
Data is also crucial when it comes to environmental, social and governance (ESG), which is another area where industry participants are noticing a lot of attention in Luxembourg. While ESG is a big topic among most markets, Daniela Klasen-Martin, group head of management company services, managing director Luxembourg at Crestbridge, notes that Luxembourg aims to become a world leader in sustainable finance, an area in which an understanding of data management is crucial.
Luxembourg launched a Luxembourg Green Exchange (LGX) in 2016, which established some of the first real standards in the industry. LGX is a dedicated platform for sustainable securities and issuers contributing to financing a low-carbon and more inclusive economy.
LGX currently lists approximately 50 per cent of the world’s green bonds. One advantage in using this platform is that investors can freely access documentation for the underlying products, thus increasing transparency and reinforcing their ability to make informed ESG-driven decisions. For fund promoters, this affords higher visibility and opportunity to expand their suite of ESG-compliant investment products. The green exchange has created an ecosystem that brings together pure ESG players.
Challenges and opportunities
The pandemic brought many challenges to the financial services industry, not just in Luxembourg but globally. The ability of fund managers to work remotely is expected to continue, increasing the demand for asset servicing and banking services in the asset management industry.
Oury says: “Asset managers in Luxembourg are increasingly demanding digital solutions which remove the need for managers to provide physical document copies or the need to send information via mail.”
Given the pace of business expansion as a result of these demands within its private markets and alternative fund services business, Luxembourg is also facing challenges around talent acquisition.
“Having seen a lot of consolidation on the provider side during the last three years which has driven the market, the main challenge facing the asset servicing industry in Luxembourg is the perennial issue of staffing and talent acquisition. It is becoming harder to hire experienced staff to support further growth of asset servicing businesses and to guarantee excellent client service delivery,” Oury notes.
Although demand for highly skilled individuals has historically been most relevant to roles in the compliance and risk management sector, industry players are now also seeing a need for operations and IT staff.
“We want to find a balance between automation and standard flows and processes on the one hand, and bespoke, fine-tuned deliverables as requested by our clients on the other hand,” says Oury.
Consequently, providers need to optimise the way in which their Luxembourg-based teams are used and staffed. It is important for senior client- and solution-oriented experts to be available to partner with clients and to act as an oversight and control function on operational matters, while also developing centres of excellence in other jurisdictions with a more plentiful supply of qualified talent.
“The Luxembourg talent market remains as competitive as ever and we remain excited to find, train and retain the best local talents, combining their expertise with international pools of resources attracted by our global reach,” comments Oury.
Despite these challenges, Luxembourg remains a key and growing corporate services and alternative fund administration market, and there are opportunities for continued growth servicing the private equity, debt, real estate and infrastructure markets.
To capitalise on this growth, Hale suggests corporate services providers and specialist alternative fund administrators need to accelerate the digitalisation of their business models.
Hale comments: “There are many, many tasks — not just regulatory — that remain very manual and very paper-based. Using automation to reduce the reliance on people increases accuracy, reduces the need for operational staff, and is less repetitive and boring for those working in the business, while also reducing costs for the business and for the end client.”
Additionally, in terms of opportunities, unsurprisingly, ESG has been named as one of the biggest drivers for growth in Luxembourg.
“Luxembourg is extremely well regulated and is well positioned to benefit from investors and managers prioritising governance over other factors like cost. EU finance regulation is moving to a place where sustainability is no longer just optional,” says Klasen-Martin.
A prosperous future
Over the next 12 months and beyond, industry participants are optimistic about the continued growth of Luxembourg’s asset servicing industry.
In the context of Brexit, more than 60 financial firms have decided to either strengthen their existing activities or establish a new EU hub in Luxembourg to ensure continued access to the EU single market.
Apex’s Oury predicts funds in Luxembourg will continue to prioritise quality ESG data capture, analysis and reporting, which is critical for ensuring risk mitigation and sustainable returns for investors.
The recent launch of a dedicated accelerator for climate finance asset managers and a toolbox of suitable investment vehicles in the country is evidence that Luxembourg is in a position to further strengthen its role in impact investing.
Oury states: “We expect to see an evolution in the way that managers engage with service providers. Managers are now increasingly seeing the major advantages to having one provider — primarily the cost and administrative efficiencies achieved, seamless integration and a single point of contact for ongoing management of the relationship — and are shifting their buying behaviours accordingly.”
Speed to market can also be argued as a clear benefit of using a single source solution because it can greatly reduce time spent navigating through different know-your-customer processes with multiple providers, which can be a source of great frustration for managers.
Apex sees the Grand Duchy as well positioned as a global financial services centre and the growth of its business in Luxembourg is a key strategic priority for the group in 2021 and beyond.
Commenting on Luxembourg’s future, Hale concludes: “My prediction is that we will see increased growth with more market share being gained by the independent corporate services providers with special alternative fund administration divisions as the industry grows and as that sector grows. However, to continue to be successful in this market, automation and digitisation are key to growing market share and maintaining margins.”
Industry participants in Luxembourg have noticed that many managers that have previously launched funds in offshore jurisdictions are now looking to come onshore, often at the behest of their investors.
Furthermore, Luxembourg is set to be one of the biggest winners from Brexit in 2021 and beyond as businesses shift operations out of the UK to ensure continued access to EU markets.
Aside from Brexit, COVID-19 has increased the need for flexibility and adaptability from businesses during the continuous uncertainty of the pandemic.
Many firms have turned to the outsourcing of administration functions as a cost-efficient way of accessing wider resources and operating infrastructure which they may not have the capacity to build or maintain themselves.
“As the number of funds domiciled in Luxembourg grows, so too does the demand for outsourcing of fund administration, particularly as compliance costs and regulatory pressures grow,” explains Renaud Oury, chief revenue and data officer at Apex, a global financial services provider.
On the client side, Oury has observed a huge shift from public markets into private markets, fuelled by the growth of alternative investments and allocations, which in turn has been driven by insurance and pension fund clients.
Experts believe that by continuing to foster new developments, Luxembourg will reinforce its attractiveness in the global funds space.
Taking centre stage
Luxembourg plays an important role on the global stage as an asset management, distribution and fund services hub, with an embedded ability to adapt quickly as a jurisdiction.
Its important role in the industry has not gone unnoticed by market players, as there has been a notable increase in the migration of expertise from traditional custodians and fund administrators to corporate services with their alternative fund administration divisions. The increasing appetite of investors for private equity, debt, real estate and infrastructure funds has led to greater demand for administration servicing these vehicles.
Keith Hale, executive chairman, TrustQuay, says: “While traditional custodian banks offer alternative fund administration as well as their traditional services, there is an increasing number of corporate services providers with alternative fund administration capabilities also taking advantage of this growing market.”
According to Hale, this growth in private capital investment has led to an acceleration of recruitment of industry experts from custodian banks and long-only fund administrators.
This trend has been fuelled by the need for regulatory and risk management expertise, as specialist fund administrators and their private market clients ensure they are compliant with the regulatory requirements around alternative investments, such as the Alternative Investment Fund Managers Directive (AIFMD), which is the regulatory framework that applies to EU-registered hedge funds, private equity funds, and real estate investment funds.
Meanwhile, market players have also noticed a strong focus on investing in data management systems in Luxembourg. Data management systems enable participants to optimise their operations through actionable insights and efficient reporting. Further benefits of data management include the ability to increase end-user productivity, enhance decision-making, and also improve data access.
Data is also crucial when it comes to environmental, social and governance (ESG), which is another area where industry participants are noticing a lot of attention in Luxembourg. While ESG is a big topic among most markets, Daniela Klasen-Martin, group head of management company services, managing director Luxembourg at Crestbridge, notes that Luxembourg aims to become a world leader in sustainable finance, an area in which an understanding of data management is crucial.
Luxembourg launched a Luxembourg Green Exchange (LGX) in 2016, which established some of the first real standards in the industry. LGX is a dedicated platform for sustainable securities and issuers contributing to financing a low-carbon and more inclusive economy.
LGX currently lists approximately 50 per cent of the world’s green bonds. One advantage in using this platform is that investors can freely access documentation for the underlying products, thus increasing transparency and reinforcing their ability to make informed ESG-driven decisions. For fund promoters, this affords higher visibility and opportunity to expand their suite of ESG-compliant investment products. The green exchange has created an ecosystem that brings together pure ESG players.
Challenges and opportunities
The pandemic brought many challenges to the financial services industry, not just in Luxembourg but globally. The ability of fund managers to work remotely is expected to continue, increasing the demand for asset servicing and banking services in the asset management industry.
Oury says: “Asset managers in Luxembourg are increasingly demanding digital solutions which remove the need for managers to provide physical document copies or the need to send information via mail.”
Given the pace of business expansion as a result of these demands within its private markets and alternative fund services business, Luxembourg is also facing challenges around talent acquisition.
“Having seen a lot of consolidation on the provider side during the last three years which has driven the market, the main challenge facing the asset servicing industry in Luxembourg is the perennial issue of staffing and talent acquisition. It is becoming harder to hire experienced staff to support further growth of asset servicing businesses and to guarantee excellent client service delivery,” Oury notes.
Although demand for highly skilled individuals has historically been most relevant to roles in the compliance and risk management sector, industry players are now also seeing a need for operations and IT staff.
“We want to find a balance between automation and standard flows and processes on the one hand, and bespoke, fine-tuned deliverables as requested by our clients on the other hand,” says Oury.
Consequently, providers need to optimise the way in which their Luxembourg-based teams are used and staffed. It is important for senior client- and solution-oriented experts to be available to partner with clients and to act as an oversight and control function on operational matters, while also developing centres of excellence in other jurisdictions with a more plentiful supply of qualified talent.
“The Luxembourg talent market remains as competitive as ever and we remain excited to find, train and retain the best local talents, combining their expertise with international pools of resources attracted by our global reach,” comments Oury.
Despite these challenges, Luxembourg remains a key and growing corporate services and alternative fund administration market, and there are opportunities for continued growth servicing the private equity, debt, real estate and infrastructure markets.
To capitalise on this growth, Hale suggests corporate services providers and specialist alternative fund administrators need to accelerate the digitalisation of their business models.
Hale comments: “There are many, many tasks — not just regulatory — that remain very manual and very paper-based. Using automation to reduce the reliance on people increases accuracy, reduces the need for operational staff, and is less repetitive and boring for those working in the business, while also reducing costs for the business and for the end client.”
Additionally, in terms of opportunities, unsurprisingly, ESG has been named as one of the biggest drivers for growth in Luxembourg.
“Luxembourg is extremely well regulated and is well positioned to benefit from investors and managers prioritising governance over other factors like cost. EU finance regulation is moving to a place where sustainability is no longer just optional,” says Klasen-Martin.
A prosperous future
Over the next 12 months and beyond, industry participants are optimistic about the continued growth of Luxembourg’s asset servicing industry.
In the context of Brexit, more than 60 financial firms have decided to either strengthen their existing activities or establish a new EU hub in Luxembourg to ensure continued access to the EU single market.
Apex’s Oury predicts funds in Luxembourg will continue to prioritise quality ESG data capture, analysis and reporting, which is critical for ensuring risk mitigation and sustainable returns for investors.
The recent launch of a dedicated accelerator for climate finance asset managers and a toolbox of suitable investment vehicles in the country is evidence that Luxembourg is in a position to further strengthen its role in impact investing.
Oury states: “We expect to see an evolution in the way that managers engage with service providers. Managers are now increasingly seeing the major advantages to having one provider — primarily the cost and administrative efficiencies achieved, seamless integration and a single point of contact for ongoing management of the relationship — and are shifting their buying behaviours accordingly.”
Speed to market can also be argued as a clear benefit of using a single source solution because it can greatly reduce time spent navigating through different know-your-customer processes with multiple providers, which can be a source of great frustration for managers.
Apex sees the Grand Duchy as well positioned as a global financial services centre and the growth of its business in Luxembourg is a key strategic priority for the group in 2021 and beyond.
Commenting on Luxembourg’s future, Hale concludes: “My prediction is that we will see increased growth with more market share being gained by the independent corporate services providers with special alternative fund administration divisions as the industry grows and as that sector grows. However, to continue to be successful in this market, automation and digitisation are key to growing market share and maintaining margins.”
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