A market on the move
04 Mar 2020
VP Bank’s Eduard von Kymmel discusses consolidation in the ManCo sector and the growing ESG interest in Luxembourg
Image: Shutterstock
The dynamic Luxembourg fund centre continues to create excitement. In the market for investment fund management companies, known as ManCos, consolidation of providers has been observed over the past few years, in addition to the establishment of new companies.
On the one hand, this shows that Luxembourg continues to be an attractive destination for the establishment and ongoing operation of a ManCo. On the other hand, it shows that reaching a critical size or delegating activities to external service providers is essential.
Consolidation of the market
The number of alternative investment fund managed- and UCITS-compliant ManCos authorised and supervised by the Luxembourg Financial Supervisory Authority (Commission du Surveillance du Secteur Financier) (CSSF) is currently around 300 companies. It should be noted that in recent years, in addition to a number of new notifications, some ManCos have been removed from the CSSF ManCo list. Although the number of newly founded companies was higher than the number of deletions in 2018, there is still a movement in both directions.
One of the main motivations for the establishment of new ManCo companies since 2018 is likely to be the preparation of certain market participants for Brexit – despite the still uncertain entry date and possible forms. As a precautionary measure, many UK fund initiators have set up their own ManCo in Luxembourg as an alternative to their home base.
On the other hand, one of the main reasons for the numerous deletions from the CSSF ManCo list is still the critical size that a ManCo must manage as assets in order to meet the regulatory and operational requirements of clients and to build up the necessary substance.
For example, more complex funds in the still growing ‘alternative investment fund sector’ such as private equity, real estate and infrastructure investment funds require qualified staff in the areas of risk management, valuation and asset management. In addition, the high regulatory requirements continue to increase the need for trained staff in the compliance and legal departments.
In addition to the net newly established companies of the last two years, this explains the further increase in the number of employees in the ManCos division. This increase of around 15 percent clearly shows that, in addition to the new companies, existing ManCos also had to significantly expand their substance: this is due to the establishment of new funds, but also to the improvement and expansion of their own substance and corporate governance.
Furthermore, fund initiators are increasingly demanding sophisticated services that ManCos have to meet.
Increased costs
Among other things, rising personnel and material costs meant that despite higher fund volumes to be managed, the net result of all ManCos fell due to the high investment costs. Around one-sixth of the ManCos recorded an economic loss. As a consequence, some initiators of Man-Cos discontinue their activities and transfer this task to ManCos, which act as service providers and outsourcing partners – so-called Service ManCos.
The advantage: the fund initiators can not only focus on their core business - asset management and, if necessary, sales - but also transfer regular tasks and duties as well as liability risks to the ManCo service providers.
With regard to the deletions of ManCos, these are not only companies that have discontinued their activities, but often also those that have been taken over by other ManCos or merged with other companies.
This is particularly or almost exclusively true for ManCos services which offer their services to fund initiators.
Consolidation in the ManCo sector
Several years ago, a number of ManCos of German “Landesbanken” were already undergoing consolidation and – following the EU Commission decision – no longer maintained their ManCos in Luxembourg due to state aid and high-cost pressure.
This consolidation of German and other foreign and Luxembourg initiators continued into 2018 and into the current year. It can be observed that these companies are often taken over by companies held via private equity or by internationally oriented companies, especially those with an Anglo-Saxon background. This also affected some ManCos with initiators from the German-speaking area.
Due to these mergers and the associated increase in the volume of assets under management, these houses are reaching the critical size and, due to economies of scale, can bear the high fixed costs or offer their services at even more attractive fees.
Own experiences
Thus VP Fund Solutions, the investment fund subsidiary of VP Bank Group, was also commissioned as early as 2014 to manage the HSBC Trinkaus & Burkhardt Funds, and in 2018 by Carnegie Investment Bank to manage its funds in Luxembourg, as both of its parent companies had decided to no longer maintain their ManCos in Luxembourg, but nevertheless wanted to retain their Luxembourg investment funds for the international market. For the same reason, VP Fund Solutions in Liechtenstein has in recent years been commissioned by a major Swiss bank and an Italian insurance group in Liechtenstein to manage their investment funds as a Service ManCo.
Further measures to meet the pressure on margins, increasing regulatory challenges and client demands are located in the area of automation and digitalisation of work steps in the value chain of a ManCo, which also involves material costs and investments. Offshoring of ManCo tasks, which is not unusual for large global custodian banks and fund administrators, is not yet evident to such an extent in the ManCo market.
The ManCo market is therefore still in motion. It can be assumed that more fund initiators will monitor the critical size of their ManCo and take appropriate measures so that they can concentrate on their core competencies in a competitive environment.
Growing interest in ESG
Environment, social and governance (ESG) is another driver of the market. This is an abbreviation that has shaped economic life for well over a decade. ESG expresses whether and how ecological and social aspects are taken into account in business practice. Many investors integrate ESG criteria into their corporate and securities analysis.
The market for sustainable investments is growing very dynamically. Two-thirds of these investments are invested in Europe. Investors are rightly losing their fear of SRI: the risk and return situation of these investments can be compared in principle with that of conventional investments.
Experts believe that the marked growth in sustainable investments since 2008 is due to the financial crisis of 2008/2009. The trigger for this crisis was a lack of responsibility, and as a result, many investors have adjusted their stock selection criteria and reallocated capital. The financial crisis, in particular, has shown how important it is to consider sustainable aspects when making investment decisions. At the level of the European Commission, too, a significant change can be observed in the area of ESG. One of the priorities of the new EU Commission President Ursula von der Leyen will be to transform the European Investment Bank (EIB) into a European climate bank to promote a climate- neutral economy.
Climate risks can thus affect the valuations and earnings of companies. Customers and investors alike are demanding solutions to how companies deal with these risks. The role of the financial markets is very important in this context.
Stakeholders from the fund industry, such as the Association of the Luxembourg Fund Industry, and politicians, such as Luxembourg’s Minister of Finance Pierre Gramega, also agree that sustainable investment criteria, including ESG, will play an increasingly important role for investors and asset managers. In the investment process alone, the topic is rapidly gaining in importance.
KPMG in Luxembourg also sees enormous potential in its “European Responsible Investing Fund Survey”, which was developed in cooperation with the ALFI association. In addition, ALFI chairwoman Corinne Lamesch suggests that asset management should take on greater social responsibility and that the industry and all parties involved should work together to achieve this goal.
A view from Europe confirms these trends. According to the American asset managers’ association NICSA, sustainability has been the main topic in the investment process of US companies, asset managers and investors over the past year and a half. Similar developments among asset managers and a growing interest in sustainable investment products are also confirmed by the Hong Kong Investment Funds Association, the association of asset managers in Hong Kong.
The market in Luxembourg is expanding
Due to global developments and the increasing demand for new sustainable investment products, the volume of ESG-compliant funds in Luxembourg has grown considerably. As the number one fund domicile in Europe, Luxembourg covers 31 percent of all sustainable investment funds and 39 percent of the managed investment fund assets in Europe. At the same time, Luxembourg’s fund assets, with a focus on products investing in infrastructure, sustainable projects, start-ups and small and medium-sized companies, have grown by 26 percent over the last three years.
The trend is therefore also towards specialists who are currently recording considerable growth in assets in the ESG sector and are gaining new clients. VP Fund Solutions possesses extensive expertise in this specialised segment, as a wide variety of ESG-compliant products have already been launched for numerous asset managers.
As a result, asset managers receive highly qualified advice and support with regard to the launch and life-cycle management of ESG-compliant products and can profit from the opportunities offered by this growing sustainable product category.
On the one hand, this shows that Luxembourg continues to be an attractive destination for the establishment and ongoing operation of a ManCo. On the other hand, it shows that reaching a critical size or delegating activities to external service providers is essential.
Consolidation of the market
The number of alternative investment fund managed- and UCITS-compliant ManCos authorised and supervised by the Luxembourg Financial Supervisory Authority (Commission du Surveillance du Secteur Financier) (CSSF) is currently around 300 companies. It should be noted that in recent years, in addition to a number of new notifications, some ManCos have been removed from the CSSF ManCo list. Although the number of newly founded companies was higher than the number of deletions in 2018, there is still a movement in both directions.
One of the main motivations for the establishment of new ManCo companies since 2018 is likely to be the preparation of certain market participants for Brexit – despite the still uncertain entry date and possible forms. As a precautionary measure, many UK fund initiators have set up their own ManCo in Luxembourg as an alternative to their home base.
On the other hand, one of the main reasons for the numerous deletions from the CSSF ManCo list is still the critical size that a ManCo must manage as assets in order to meet the regulatory and operational requirements of clients and to build up the necessary substance.
For example, more complex funds in the still growing ‘alternative investment fund sector’ such as private equity, real estate and infrastructure investment funds require qualified staff in the areas of risk management, valuation and asset management. In addition, the high regulatory requirements continue to increase the need for trained staff in the compliance and legal departments.
In addition to the net newly established companies of the last two years, this explains the further increase in the number of employees in the ManCos division. This increase of around 15 percent clearly shows that, in addition to the new companies, existing ManCos also had to significantly expand their substance: this is due to the establishment of new funds, but also to the improvement and expansion of their own substance and corporate governance.
Furthermore, fund initiators are increasingly demanding sophisticated services that ManCos have to meet.
Increased costs
Among other things, rising personnel and material costs meant that despite higher fund volumes to be managed, the net result of all ManCos fell due to the high investment costs. Around one-sixth of the ManCos recorded an economic loss. As a consequence, some initiators of Man-Cos discontinue their activities and transfer this task to ManCos, which act as service providers and outsourcing partners – so-called Service ManCos.
The advantage: the fund initiators can not only focus on their core business - asset management and, if necessary, sales - but also transfer regular tasks and duties as well as liability risks to the ManCo service providers.
With regard to the deletions of ManCos, these are not only companies that have discontinued their activities, but often also those that have been taken over by other ManCos or merged with other companies.
This is particularly or almost exclusively true for ManCos services which offer their services to fund initiators.
Consolidation in the ManCo sector
Several years ago, a number of ManCos of German “Landesbanken” were already undergoing consolidation and – following the EU Commission decision – no longer maintained their ManCos in Luxembourg due to state aid and high-cost pressure.
This consolidation of German and other foreign and Luxembourg initiators continued into 2018 and into the current year. It can be observed that these companies are often taken over by companies held via private equity or by internationally oriented companies, especially those with an Anglo-Saxon background. This also affected some ManCos with initiators from the German-speaking area.
Due to these mergers and the associated increase in the volume of assets under management, these houses are reaching the critical size and, due to economies of scale, can bear the high fixed costs or offer their services at even more attractive fees.
Own experiences
Thus VP Fund Solutions, the investment fund subsidiary of VP Bank Group, was also commissioned as early as 2014 to manage the HSBC Trinkaus & Burkhardt Funds, and in 2018 by Carnegie Investment Bank to manage its funds in Luxembourg, as both of its parent companies had decided to no longer maintain their ManCos in Luxembourg, but nevertheless wanted to retain their Luxembourg investment funds for the international market. For the same reason, VP Fund Solutions in Liechtenstein has in recent years been commissioned by a major Swiss bank and an Italian insurance group in Liechtenstein to manage their investment funds as a Service ManCo.
Further measures to meet the pressure on margins, increasing regulatory challenges and client demands are located in the area of automation and digitalisation of work steps in the value chain of a ManCo, which also involves material costs and investments. Offshoring of ManCo tasks, which is not unusual for large global custodian banks and fund administrators, is not yet evident to such an extent in the ManCo market.
The ManCo market is therefore still in motion. It can be assumed that more fund initiators will monitor the critical size of their ManCo and take appropriate measures so that they can concentrate on their core competencies in a competitive environment.
Growing interest in ESG
Environment, social and governance (ESG) is another driver of the market. This is an abbreviation that has shaped economic life for well over a decade. ESG expresses whether and how ecological and social aspects are taken into account in business practice. Many investors integrate ESG criteria into their corporate and securities analysis.
The market for sustainable investments is growing very dynamically. Two-thirds of these investments are invested in Europe. Investors are rightly losing their fear of SRI: the risk and return situation of these investments can be compared in principle with that of conventional investments.
Experts believe that the marked growth in sustainable investments since 2008 is due to the financial crisis of 2008/2009. The trigger for this crisis was a lack of responsibility, and as a result, many investors have adjusted their stock selection criteria and reallocated capital. The financial crisis, in particular, has shown how important it is to consider sustainable aspects when making investment decisions. At the level of the European Commission, too, a significant change can be observed in the area of ESG. One of the priorities of the new EU Commission President Ursula von der Leyen will be to transform the European Investment Bank (EIB) into a European climate bank to promote a climate- neutral economy.
Climate risks can thus affect the valuations and earnings of companies. Customers and investors alike are demanding solutions to how companies deal with these risks. The role of the financial markets is very important in this context.
Stakeholders from the fund industry, such as the Association of the Luxembourg Fund Industry, and politicians, such as Luxembourg’s Minister of Finance Pierre Gramega, also agree that sustainable investment criteria, including ESG, will play an increasingly important role for investors and asset managers. In the investment process alone, the topic is rapidly gaining in importance.
KPMG in Luxembourg also sees enormous potential in its “European Responsible Investing Fund Survey”, which was developed in cooperation with the ALFI association. In addition, ALFI chairwoman Corinne Lamesch suggests that asset management should take on greater social responsibility and that the industry and all parties involved should work together to achieve this goal.
A view from Europe confirms these trends. According to the American asset managers’ association NICSA, sustainability has been the main topic in the investment process of US companies, asset managers and investors over the past year and a half. Similar developments among asset managers and a growing interest in sustainable investment products are also confirmed by the Hong Kong Investment Funds Association, the association of asset managers in Hong Kong.
The market in Luxembourg is expanding
Due to global developments and the increasing demand for new sustainable investment products, the volume of ESG-compliant funds in Luxembourg has grown considerably. As the number one fund domicile in Europe, Luxembourg covers 31 percent of all sustainable investment funds and 39 percent of the managed investment fund assets in Europe. At the same time, Luxembourg’s fund assets, with a focus on products investing in infrastructure, sustainable projects, start-ups and small and medium-sized companies, have grown by 26 percent over the last three years.
The trend is therefore also towards specialists who are currently recording considerable growth in assets in the ESG sector and are gaining new clients. VP Fund Solutions possesses extensive expertise in this specialised segment, as a wide variety of ESG-compliant products have already been launched for numerous asset managers.
As a result, asset managers receive highly qualified advice and support with regard to the launch and life-cycle management of ESG-compliant products and can profit from the opportunities offered by this growing sustainable product category.
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