Embracing alternatives enables Luxembourg to continue to punch above its weight

Luxembourg’s fund industry is in rude health, but Alfi’s Serge Weyland is under no illusions that future success is guaranteed.

Between forkfuls of fresh salmon at the Dean Street Townhouse in London’s Soho, Serge Weyland briefly takes time to dream.

He talks about small fish: how back-street football clubs such as Brentford FC get to play against the giants of the English Premier League; how family owned wealth managers like Banque Syz and LGT ended up competing with European and Asian behemoths; and how small European financial centres can rise to be the next Singapore.

Luxembourg, where he serves as CEO of Alfi, the Grand Duchy’s investment funds association representing assets worth €5.6tn ($6tn), has always been a minnow, looking up at the surrounding sharks of London, Frankfurt and Paris.

But the tiny country – home to slightly more than 670,000 people – has always had a strategy to punch well above its weight. It was the first in Europe to enact the 1985 European Ucits Directive, enabling distribution of investment products across borders, into its domestic legislation.

It similarly rode a wave of enthusiasm around the Alternative Investment Fund Managers Directive of 2011, allowing regulated hedge funds, private equity and real estate vehicles to be sold across the European Union.

Now it hopes to benefit from the revised European Long-Term Investment Fund (ELTIF) regulation, designed to boost long-term investment into Europe’s real economy.

Strong growth

While most of the action in the early days of Ucits, when the likes of Flemings and Fidelity lorded it in Luxembourg, toasting the fortune and vision of being early movers, was in plain vanilla equity and bond funds, it is the alternatives space which the latest legislation is tackling.

Mr Weyland is a mine of statistical information, having an occasional glance at his mobile for latest figures, confirming that €2.3tn is invested in Alternative Investment Funds (AIFs) currently domiciled in Luxembourg, with private assets accounting for one third of this total, with a 20 per cent compound annual growth rate for the last five years.

But there are “roadblocks to our expansion”, he says earnestly, briefly fixing the interviewer’s gaze through his black, thick-rimmed glasses. Firstly, the industry must fight the so-called “retailisation” of alternative investments. “The ELTIF is a wealth management product, not a retail vehicle,” he says adamantly.

As well as these challenges of perception, there are tax issues and problems in social structures and labour markets that need to be tackled with diplomacy in order to keep his dream alive.

Along with other representatives of Luxembourg, Mr Weyland, who was previously working as CEO of the Luxembourg business at Edmond de Rothschild Asset Management, was busy on missions to London investment firms after Brexit, persuading them to move some operations to continental Europe after the UK’s exit from the single market for financial services.

He remembers those efforts with some satisfaction. “Luxembourg was very clear about the expectations,” he says smiling, meaning that all migrant firms were instructed they had to have boots on the ground immediately after their arrival in the country. So-called “brass plate” operations with just a mailbox, telephone and secretary would not be tolerated.

“Not all the larger states were doing this. Some larger countries were giving the impression that you could come without substance, but in no time they realised this was not the case,” he adds.

“A number of players have been ramping up their teams and activities,” he says, with private assets in particular benefiting from the migration of staff and resources.

Broader access

It is no longer just the surrounding European states which his burgeoning funds industry is targeting. “We are talking about broader access to alternatives,” says Mr Weyland, warming to his theme. “This could be another Ucits story, with Chile, Brazil and potentially India opening up to offshore funds.”

He knows all about attracting major international clients to Luxembourg from previous roles at local leaders Banque Internationale à Luxembourg and CACEIS. But he stresses the promotional effort must be accelerated, but without deviation from the existing strategy. “Luxembourg has always been the toolbox, relying on other pieces of the value chain,” he suggests. “But this toolbox benefits from success of other financial centres. Let’s not forget the asset management champions in other countries have been so successful, because they have been able to use Luxembourg to sell their products across Asia and Latin America.”

Yet there is always a danger of European complacency in financial services, believes Mr Weyland. “This is a big risk for Luxembourg. If Europe gets it wrong, maybe Singapore can play a stronger role as global distribution hub for funds.”

He takes another glance at the data. “Europe has €22tn of fund assets, and €5tn of this has been sold outside Europe. We could lose all of this if we get it wrong. A Taiwanese wealth manager might just ask: ‘Why don’t we go to Singapore?’ We could easily be down to zero in a few years.”

While Luxembourg’s fund firms are currently living by the teeming Moselle river, the fear is that without regular fishing expeditions they may one day be devoured by predators from further afield.