This publication speaks to the CEO of Luxembourg's main fund industry association to discuss the main challenges facing the sector, and how best to keep the small European jurisdiction competitive.

This publication took the temperature of the European fund management industry during the Association of the Luxembourg Fund Industry (ALFI) conference in March. And it is clear that ALFI members have a lot to think about, such as how to make the wider public more engaged with what the asset management sector does; the need to widen access to private market/alternative investments; adopt digital technologies in new ways, and embrace tax incentives.

WealthBriefing spoke to Serge Weyland (pictured), ALFI chief executive. 

WealthBriefing: How significant is the issue of the general public in Europe not being sufficiently engaged in the asset management space, especially considering their long-term savings needs?
Serge Weyland: At ALFI, we are acutely aware of this issue and believe it should be a focal point in the next phase of the Capital Markets Union, especially with the upcoming European elections and the new commission. In Europe, €14 trillion ($14.93 trillion) of household savings, approximately 41 per cent of total savings, are held in cash accounts and deposits. This contrasts with the US, where only about 25 per cent of household savings are in similar forms to finance the real economy, digital, and energy transitions – but also socially. It is crucial for households to move their savings into capital markets

The under-engagement of European households in capital markets and funds is a concern not just economically – to benefit from returns, especially given the financial opportunities missed over the past decade. We welcome proposals like those in the Letta report “Much more than a market,” which suggest developing second and third pillar pension solutions and creating tax incentives to foster investor education and engagement.

Moving on to a different topic, what are the most significant and urgent regulatory issues in Luxembourg and the broader EU?
Weyland: The industry has been grappling with a myriad of regulations, which have largely proved effective through various crises, from Covid-19 to the Ukraine crisis. The current focus should be on taking advantage of the existing regulatory framework to enhance efficiency. Maintaining the competitiveness of the European financial services industry on a global scale is crucial. European asset managers manage €17 trillion in funds, with €4.5 trillion exported outside Europe. 

While there are areas such as non-bank financial intermediation that need further development, particularly in terms of more granular reporting, our robust regulatory framework needs to ensure competitiveness and avoid adding unnecessary costs to investors.

Let’s discuss the significance of the ELTIF 2.0 for Europe. (Acronym stands for “European Long Term Investment Fund.”) What changes has it brought about?
Weyland: The ELTIF 2.0 is a critical step towards creating a pan-European investment vehicle for private investors to access private markets, tailored to their specific needs and requirements. Unlike its predecessor, which saw only about 100 vehicles approved, the revised framework aims to adequately protect investors while allowing access to several alternative strategies ranging from private equity to fund of funds. We are optimistic, as we have already seen several funds launched in Luxembourg. We aim for this to be a successful model beyond Europe as well.

Can you explain why “delegation” continues to be a relevant topic in fund management and whether specific fund types, such as loan portfolios, are particularly affected?
Weyland: Delegation has become less controversial over time. It allows a fund with a management company licensed in one European country to use portfolio management talent from across the globe, enhancing the fund's performance. For instance, a German management company might benefit from delegating to teams in Asian hubs for an emerging market fund. Political discussions, especially in the post-Brexit era, underscore the importance of maintaining reliance on talent based in the UK. 

The regulatory framework in place ensures that management companies maintain sufficient oversight and substance to monitor delegated activities effectively.

Shifting focus to private markets, how does ALFI view the likelihood of making these more accessible to mass affluent and high net worth individuals?
Weyland: ELTIFs have the potential to become a truly pan-European solution for integrating private investors into private markets; it could become an interesting European investment product to export as well. Among others, they are a promising strategy in terms of asset diversification. ELTIF 2.0 introduces the prospect of establishing secondary markets tailored for retail investors, fostering liquidity creation. 

Blockchain and the distributed ledger technologies will be key in broadening the adoption of private asset strategies. For instance, they could pave the way for tokenized ELTIFs, thereby unlocking new opportunities and avenues for investors.

The primary challenge lies in scaling up capabilities, as many processes in this space are still manual. Technological advancements, including artificial intelligence, are expected to play a significant role in overcoming these hurdles. Despite current transactional slowdowns in private markets, the trend towards private assets is expected to continue growing, reflecting the broader number of privately held companies compared with publicly listed ones.

Regarding digital assets, how well do you think the regulatory framework in the EU, particularly Luxembourg, is keeping pace with technological advancements?
Weyland: Luxembourg has been at the forefront, particularly in tokenizing fund shares. Our market infrastructure and expertise in managing, launching, and overseeing tokens position us well to capitalise on this trend. We closely monitor developments in other jurisdictions, such as Switzerland and Singapore, to ensure Luxembourg remains competitive and adaptive to new opportunities.

Lastly, looking at Luxembourg's position, what reforms would you like to see to maintain its attractiveness as a financial hub?
Weyland: The Luxembourg Ministry of Finance has proposed several reforms, such as reducing the subscription tax for active ETFs and creating further tax incentives to attract talent. Ongoing collaboration between the industry, regulators, and policymakers is vital to ensure that our regulatory framework and general environment remain attractive for all asset classes and help Luxembourg move up the value chain.