Luxembourg
08 Mar 2023
The small country of Luxembourg is nestled between Belgium, Germany and France. It is just 2586 square kilometres in size, has a population of less than 650,000 and yet is one of the most significant financial services centres in the world. Lucy Carter reports on international relations and what’s next for UCITS
Image: martina/stock.adobe.com
Despite its small stature, Luxembourg has remained one of the most popular locations for banks and service providers to set down roots.
“In the last 35 years, Luxembourg has developed an ecosystem in which the needs of the most sophisticated asset managers are met by service providers,” says Riccardo Lamanna, senior vice president and country head for Luxembourg at State Street.
Sometimes referred to as the “gateway to Europe,” the geographical and political relations the country has with its European neighbours make it an appealing prospect for companies looking to settle into a new market. This works both ways, too — European companies use Luxembourg as a place to branch out and connect with the wider world.
Stable and structured
Of course, one of the country’s major selling points is that it has weathered various storms while maintaining a stable economy and steadily increasing GDP. Even the COVID-19 pandemic saw the country’s growth drop only 1.3 per cent, a far less drastic blow than that suggested by the EU average of 7 per cent.
Listing off the many perks that make the country such a popular financial services hub, Francesca de Bartolomeo, head of business development for CACEIS in Luxembourg, puts its “political stability” at the top of the list. This is a widely supported statement — the country clocked in at number four on a 2021 stability ranking. As this characteristic results in greater investor protection, market participants from across the industry are inevitably attracted to the low-risk, high-reward environment.
Luxembourg’s financial services industry is self-generating, to a degree. The large presence of fintechs and the strong digital infrastructure make it the perfect place for companies to try out new technologies and solutions, with a 2019 study placing the country in the number one spot for technology access.
Maintaining momentum
This is something that the country and its industry bodies are actively cultivating, with the Association of the Luxembourg Fund Industry (ALFI) running several initiatives to both educate those in the industry and encourage further innovation. The ALFI Digital/FinTech Forum, for example, has a number of working groups in place to support regulators and policymakers, share knowledge and identify opportunities and risks.
However, in spite of its long-term success, the country and its authorities are not resting on their laurels. There is a concerted effort to promote investment in the Luxembourg economy, and ALFI holds a number of worldwide events to initiate and foster further international relationships.
“[Luxembourg] has a highly cohesive funds industry in which practitioners, industry bodies, regulators and government entities are aligned to communicate with global audiences,” says Steve David, head of Northern Trust in Luxembourg, outlining the country’s emphasis on educating businesses and investors about what it can offer them as a global funds jurisdiction.
Although there are many benefits that Luxembourg boasts as a financial centre, it is, of course, not perfect. State Street’s Lamanna comments that administrative processes can be time consuming when operating in the country. Along with the pressure on margins from intermediaries, this can impact costs — and may ultimately make Luxembourg a less appealing option for international businesses, particularly as alternatives appear.
The country has also become something of a victim of its own success. Its small population necessitates a large quantity of cross-border workers, and the limited quantities of local talent have created a competitive and somewhat challenging hiring environment. While the workforce is skilled, it is far from infinite in capacity.
International relations
“Luxembourg has proven very effective in communicating its proposition as a home for global investment funds with international partners,” says Northern Trust’s David. The country has a knack for staying in jurisdictions’ good books, even when international relations may be looking bleak.
Brexit dealt an inevitable blow to UK-Luxembourg relations, with UK-based operations having to comply with new rules, regulations and most importantly, costs. However, despite the extra headaches that Brexit brought, UK investments in Luxembourg have remained high. As of December 2022, more than 15 per cent of assets under management in Luxembourg were from UK-originating UCI initiators. Three years after the break officially occurred, there is still a strong connection between the financial hubs of London and the city of Luxembourg, something that will certainly come as a relief to many across the industry.
Luxembourg’s strongest connections are, inevitably, within Europe. Germany is its primary economic partner, holding an 18 per cent share of financial services in the country, followed by France. The country sees a high level of cross-border commuters, with bordering nations’ workforces bolstering the Luxembourg economy.
The physical proximity of so many innovators offers much potential for collaboration, and through its success encourages other firms to build a presence there. Startups are given support by public and privately owned facilities, keeping the country replenished with new ideas and greater international strength.
“Luxembourg’s approach to maintaining strong relationships with other countries is based on a combination of diplomatic efforts, economic cooperation, and cultural exchange,” de Bartolomeo says.
“[The country] has embassies and consulates around the world, and is actively engaged in international organisations.” This, along with the plethora of trade agreements that the country has established, keep it on firm footing with jurisdictions across the map.
The US also has a strong partnership with Luxembourg, demonstrating its global reach. “US banks and asset management companies have a significant presence,” the US Department of State website says. US companies often use Luxembourg as a base for their European operations and foreign investments, again giving credit to the country’s ‘gateway’ reputation.
What next for UCITS?
In 2023, UCITS will celebrate their 35th anniversary. One of the most popular collective investments and broadly seen as a standard for the industry, their success is showing no sign of wavering. Despite the turbulence of recent years, the expectation is that the Luxembourg market will recover to its pre-pandemic levels. According to the European Fund and Asset Management Association (EFAMA), UCITS saw a reduction in their net assets, sales and inflows in December 2022. Although long-term UCITS were up significantly, it’s hard to ignore the worrying figures. EFAMA’s report highlights UCITS’ €175 billion in net outflows over 2022, the highest rate seen since 2011.
However, State Street’s Lamanna believes that the conditions and support that allowed UCITS to thrive at their inception are beginning to emerge for the private markets and the digitalised versions of several asset classes. Once again, Luxembourg is showing itself to be at the cutting edge of the industry, facilitating the development of new ideas and industry focus points.
David agrees: “UCITS are well-established and effectively drive opportunity for clients, something that is unlikely to change anytime soon,” he predicts. Although, he is sure to remark that UCITS are not the only reason that Luxembourg is “a natural home to our European bank.” Growth around alternative funds such as private equity, real estate and private debt strategies are also an attractive selling point.
“We should see continued growth in asset under management (AuM) for UCITS funds due to their reputation for providing investor protection, transparency, and accessibility,” CACEIS’ de Bartolomeo assents.
However, it won’t necessarily all be smooth sailing. “The next five years are likely to bring both challenges and opportunities for UCITS,” de Bartolomeo continues, “and their ability to adapt will be crucial for their continued success.”
The challenges she expects to see include competition from non-traditional investment structures, new technologies such as artificial intelligence and blockchain, and, of course, increased regulation and regulatory scrutiny.
While jurisdictions across the world have been thrown into confusion, with industry bodies and participants alike scrambling for a foothold in an unfamiliar environment, Luxembourg has remained, for the most part, a stable presence amidst the chaos. While not entirely exempt from the repercussions of events in the wider world, the small country has done well to maintain the services it is known for and continues to draw in international players and investments. The country’s fintech investments will doubtless continue to bear fruit, with its international connections supercharging the incubation of new ideas and products. Luxembourg offers stability alongside cutting-edge advancements, and although there will always be challenges, it doesn’t seem that the country will be changing its ways anytime soon.
“In the last 35 years, Luxembourg has developed an ecosystem in which the needs of the most sophisticated asset managers are met by service providers,” says Riccardo Lamanna, senior vice president and country head for Luxembourg at State Street.
Sometimes referred to as the “gateway to Europe,” the geographical and political relations the country has with its European neighbours make it an appealing prospect for companies looking to settle into a new market. This works both ways, too — European companies use Luxembourg as a place to branch out and connect with the wider world.
Stable and structured
Of course, one of the country’s major selling points is that it has weathered various storms while maintaining a stable economy and steadily increasing GDP. Even the COVID-19 pandemic saw the country’s growth drop only 1.3 per cent, a far less drastic blow than that suggested by the EU average of 7 per cent.
Listing off the many perks that make the country such a popular financial services hub, Francesca de Bartolomeo, head of business development for CACEIS in Luxembourg, puts its “political stability” at the top of the list. This is a widely supported statement — the country clocked in at number four on a 2021 stability ranking. As this characteristic results in greater investor protection, market participants from across the industry are inevitably attracted to the low-risk, high-reward environment.
Luxembourg’s financial services industry is self-generating, to a degree. The large presence of fintechs and the strong digital infrastructure make it the perfect place for companies to try out new technologies and solutions, with a 2019 study placing the country in the number one spot for technology access.
Maintaining momentum
This is something that the country and its industry bodies are actively cultivating, with the Association of the Luxembourg Fund Industry (ALFI) running several initiatives to both educate those in the industry and encourage further innovation. The ALFI Digital/FinTech Forum, for example, has a number of working groups in place to support regulators and policymakers, share knowledge and identify opportunities and risks.
However, in spite of its long-term success, the country and its authorities are not resting on their laurels. There is a concerted effort to promote investment in the Luxembourg economy, and ALFI holds a number of worldwide events to initiate and foster further international relationships.
“[Luxembourg] has a highly cohesive funds industry in which practitioners, industry bodies, regulators and government entities are aligned to communicate with global audiences,” says Steve David, head of Northern Trust in Luxembourg, outlining the country’s emphasis on educating businesses and investors about what it can offer them as a global funds jurisdiction.
Although there are many benefits that Luxembourg boasts as a financial centre, it is, of course, not perfect. State Street’s Lamanna comments that administrative processes can be time consuming when operating in the country. Along with the pressure on margins from intermediaries, this can impact costs — and may ultimately make Luxembourg a less appealing option for international businesses, particularly as alternatives appear.
The country has also become something of a victim of its own success. Its small population necessitates a large quantity of cross-border workers, and the limited quantities of local talent have created a competitive and somewhat challenging hiring environment. While the workforce is skilled, it is far from infinite in capacity.
International relations
“Luxembourg has proven very effective in communicating its proposition as a home for global investment funds with international partners,” says Northern Trust’s David. The country has a knack for staying in jurisdictions’ good books, even when international relations may be looking bleak.
Brexit dealt an inevitable blow to UK-Luxembourg relations, with UK-based operations having to comply with new rules, regulations and most importantly, costs. However, despite the extra headaches that Brexit brought, UK investments in Luxembourg have remained high. As of December 2022, more than 15 per cent of assets under management in Luxembourg were from UK-originating UCI initiators. Three years after the break officially occurred, there is still a strong connection between the financial hubs of London and the city of Luxembourg, something that will certainly come as a relief to many across the industry.
Luxembourg’s strongest connections are, inevitably, within Europe. Germany is its primary economic partner, holding an 18 per cent share of financial services in the country, followed by France. The country sees a high level of cross-border commuters, with bordering nations’ workforces bolstering the Luxembourg economy.
The physical proximity of so many innovators offers much potential for collaboration, and through its success encourages other firms to build a presence there. Startups are given support by public and privately owned facilities, keeping the country replenished with new ideas and greater international strength.
“Luxembourg’s approach to maintaining strong relationships with other countries is based on a combination of diplomatic efforts, economic cooperation, and cultural exchange,” de Bartolomeo says.
“[The country] has embassies and consulates around the world, and is actively engaged in international organisations.” This, along with the plethora of trade agreements that the country has established, keep it on firm footing with jurisdictions across the map.
The US also has a strong partnership with Luxembourg, demonstrating its global reach. “US banks and asset management companies have a significant presence,” the US Department of State website says. US companies often use Luxembourg as a base for their European operations and foreign investments, again giving credit to the country’s ‘gateway’ reputation.
What next for UCITS?
In 2023, UCITS will celebrate their 35th anniversary. One of the most popular collective investments and broadly seen as a standard for the industry, their success is showing no sign of wavering. Despite the turbulence of recent years, the expectation is that the Luxembourg market will recover to its pre-pandemic levels. According to the European Fund and Asset Management Association (EFAMA), UCITS saw a reduction in their net assets, sales and inflows in December 2022. Although long-term UCITS were up significantly, it’s hard to ignore the worrying figures. EFAMA’s report highlights UCITS’ €175 billion in net outflows over 2022, the highest rate seen since 2011.
However, State Street’s Lamanna believes that the conditions and support that allowed UCITS to thrive at their inception are beginning to emerge for the private markets and the digitalised versions of several asset classes. Once again, Luxembourg is showing itself to be at the cutting edge of the industry, facilitating the development of new ideas and industry focus points.
David agrees: “UCITS are well-established and effectively drive opportunity for clients, something that is unlikely to change anytime soon,” he predicts. Although, he is sure to remark that UCITS are not the only reason that Luxembourg is “a natural home to our European bank.” Growth around alternative funds such as private equity, real estate and private debt strategies are also an attractive selling point.
“We should see continued growth in asset under management (AuM) for UCITS funds due to their reputation for providing investor protection, transparency, and accessibility,” CACEIS’ de Bartolomeo assents.
However, it won’t necessarily all be smooth sailing. “The next five years are likely to bring both challenges and opportunities for UCITS,” de Bartolomeo continues, “and their ability to adapt will be crucial for their continued success.”
The challenges she expects to see include competition from non-traditional investment structures, new technologies such as artificial intelligence and blockchain, and, of course, increased regulation and regulatory scrutiny.
While jurisdictions across the world have been thrown into confusion, with industry bodies and participants alike scrambling for a foothold in an unfamiliar environment, Luxembourg has remained, for the most part, a stable presence amidst the chaos. While not entirely exempt from the repercussions of events in the wider world, the small country has done well to maintain the services it is known for and continues to draw in international players and investments. The country’s fintech investments will doubtless continue to bear fruit, with its international connections supercharging the incubation of new ideas and products. Luxembourg offers stability alongside cutting-edge advancements, and although there will always be challenges, it doesn’t seem that the country will be changing its ways anytime soon.
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