Luxembourg, a prime location for private equity
What are the challenges facing the sector?
Luxembourg is an important jurisdiction of the domiciliation of private equity funds. With its stable economic and legal environment, including a strict but supportive regulatory environment, the country has attracted the main private equity players," said Mr RochThe Grand Duchy’s private equity domicile has grown more than any other over the last five years, with the exception of China. Luxembourg is recognised globally as a location of choice for managing this type of investment.
A significant development potential
Mr Roch believes this trend could be strengthened further. "At the global level, private equity represents 60% of all alternative asset classes, but it is estimated to represent only 25% of those managed from a Luxembourg vehicle," he said. “We see strong potential for growth here, and private equity in Luxembourg funds could double or triple in the next few years.”
In an uncertain global economic environment, private equity players must consider new risks as well as opportunities.
Coping with rising interest rates
One of the biggest current changes is rising interest rates. "We are coming out of a period of historically low rates, cash is likely to be less readily available in the future, and this could lead investors to become more selective," Mr Roch explained. Given this, they will have to make more use of bridging finance solutions, such as those offered by Société Générale. “Rising interest rates will, to some extent, compete with yields," he added. “In order to meet investors' expectations, private equity fund managers will most certainly seek to achieve economies of scale by simplifying their processes and approaches. The trend towards greater professionalism in this sector should therefore accelerate further, with much of this change being driven from Luxembourg.”
The ESG challenge
Environmental, social and governance (ESG) regulations and investor concerns are another major trend likely to impact the private equity business. “These developments could shake up this sector considerably," said Roch. “It is crucial that we are part of this change as there are so many challenges regarding the sustainability performance of invested assets. Determining the relevant evaluation criteria, collecting reliable data, verifying this data and more is an extremely complex process. This is particularly the case for private equity where players lack the maturity of listed firms, which are better equipped to assess and report on these criteria. To meet these challenges, private equity players must seek synergies with the bigger players.”
Reaching out to a wider audience
In addition to this, private equity fund managers also want to democratise access to their products, with a view to raising more capital. "To reach more clients classified as ‘retail’, players will have to transform themselves (particularly using the possibilities offered by digital technologies such as distributed registers) and standardise administration," said Mr Roch. “The challenge is not to reach every investor, but to be able to approach private clients more easily to help them benefit from asset management services.”
If private equity in Luxembourg wants to remain competitive it must also meet other specific challenges. "There is a significant need for skills. Luxembourg is a small market, so needs to attract talent from abroad and to invest in training locally," said Mr Roch. “It is a collective challenge that we must be able to address quickly and effectively. Over the long term, if a shortage of skills leads to an increase in salary costs, this could weigh on the competitiveness of local players.”
Facilitating the establishment of new vehicles
Another challenge identified by Guillaume Roch relates to the difficulty that some private equity players may encounter in simply opening a bank account in Luxembourg. "For good reasons, banks are strictly regulated, but these can significantly increase the costs of managing cash accounts. Given this issue, and the low level of revenue generated when providing a simple bank account, it may become very difficult for a private equity fund to avoid the temptation of outsourcing the whole activity to a single provider.”
Finding suitable solutions
Despite these risks, we are seeing tremendous growth in the private equity market in Luxembourg. “As a banking institution, we need to implement appropriate solutions to support private equity players," said Mr Roch. “The private equity market in Luxembourg could experience double-digit growth over the next five years given the great opportunities linked to the development of private equity. It is up to us as players in the market to participate and strengthen this growth by showing agility and pragmatism. This will enable us to maintain Luxembourg's competitiveness in private equity.”