FUND SERVICES PROVIDERS AND ASSET MANAGERS FROM AROUND THE WORLD HAVE SET UP OPERATIONS IN LUXEMBOURG. THEY BENEFIT FROM A UNIQUE ECOSYSTEM THAT HAS EVOLVED TO SUPPORT CROSS-BORDER FINANCIAL SERVICE PROVIDERS DISTRIBUTING PRODUCTS AND SERVICES UNDER THE EU PASSPORT REGIME AND THE FREEDOM TO PROVIDE SERVICES. LEADING PLAYERS EXPLAIN WHY LUXEMBOURG CONTINUES TO REAFFIRM ITS LEADING POSITION IN THE FUNDS INDUSTRY AND WHAT IT MEANS TO THEIR FUTURE OPERATIONS.

In the aftermath of Britain’s decision to leave the EU and following its acquisition of UBS Asset Management’s fund administration services in Luxembourg and Switzerland, Northern Trust decided to make Luxembourg its EU hub to support the company’s growth in Continental Europe. Northern Trust, a Chicago based provider of wealth management, asset servicing, asset management and banking services, opened an office in Luxembourg in 2004 because they wanted to expand their global fund services and mutual fund business.

“Luxembourg is the second largest mutual fund domicile in the world and the largest in Europe, and we felt it was vital to be present here,” explains Steve David, Country Head, Luxembourg, Northern Trust.

“One of the things that attracted us to Luxembourg was the diversity of talent available. That is helpful when we think about servicing, not just a European, but a global client. The AAA rating is obviously another important factor, and I think it adds to the confidence of our clients not only to partner with us but to partner with us in Luxembourg.”

SETTING UP AN EU BANKING HUB IN LUXEMBOURG

In fourteen years, Northern Trust has grown from six people to approximately 300. The recent acquisition of UBS Asset Management’s fund administration service has established the company as a top ten asset servicing provider in terms of assets under administration in Luxembourg. It has chosen this location as the future domicile for its EU banking presence, with London remaining the headquarters for the company’s wider business in Europe, Middle East and Africa.

“We spoke to our European clients and prospects, talking them through the shortlist of places where we could domicile our bank,” explains David. “Luxembourg emerged as a strong favourite for the type of clients that we are looking to attract, and it fits well with our recent acquisition and as we target growth in Continental Europe.”

The company has been working with the Luxembourg financial regulator, to prepare its application to the European Central bank.

“Luxembourg is very helpful. That is one of the reasons we chose the jurisdiction. As we expand our presence in Continental Europe, having a responsive regulator and a business-friendly government is important to help navigate our way through the various approvals and requirements as efficiently as possible.”

MANAGING THE UNCERTAINTY OF BREXIT

The outcome of the Brexit referendum has created ongoing uncertainty for many other UK based financial institutions. International asset manager M&G announced earlier this year it would establish a new management company in Luxembourg. It will move some of its fund range to Luxembourg to ensure that it can sell across the EU after Britain leaves the bloc in 2019.

“Currently this is a distinctly political issue until the terms of the “divorce” are understood,” says Jon Griffin, Managing Director and CEO of J.P. Morgan Asset Management Europe. “This creates uncertainty which is unhelpful to business as we need to plan for continuity for our clients. The point concerning recognition of the UK when it becomes a third country, and how agreements will be put in place for the continuation of delegation of portfolio management, for example, is a significant point for which we are seeking clarification from the authorities.”

J.P. Morgan is the largest fund administrator and custodian in Luxembourg, with approximately 20% of the market. Its international fund business can be traced back to 1988, when the company was an early adopter of the UCITS brand.

LEADING IN THE DISTRIBUTION OF UCITS

“Luxembourg is our international UCITS product distribution platform with currently 350 billion USD in assets under management. Being primarily a UCITS house we feel that we have everything that we need to develop solution based investment products for our investors in the current regulatory tool kit in Luxembourg. Our funds are distributed internationally, and we deliver an array of investment opportunities to investors leveraging the breadth of J.P. Morgan Asset management’s worldwide investment capabilities across all asset classes.”

J.P. Morgan’s management company in Luxembourg has grown to 170 staff with another 170 employees in eight branches in continental Europe. Overall, J.P. Morgan’s presence in Luxembourg makes it the firm’s second largest presence in Europe with a combined Bank and Asset Management staff of over 500 people.

“Luxembourg is able to draw talent from the region beyond its borders. Having staff that can cross any of the three surrounding countries each working day is a unique feature of the Luxembourg, employment model. Also, Luxembourg can attract talent from abroad.”

Having been associated with the Luxembourg funds business since 1989, Griffin has experienced first-hand the growth and development of the financial centre.

“Luxembourg is a small country with a significant fund industry. It has a focus on, and competency in, all aspects of the fund and investor value chain from end-to-end. It is unique in that industry actors here focus their attention on fully understanding how the saving product needs to operate to ensure its efficiency in someone else’s country; that “export” mindset is part of the DNA here.”

A VERY MODERN INVESTMENT TOOLBOX

A wide range of structures is available to meet the needs of different investors and different target investments.

“The toolbox is very diverse which is important when selecting the appropriate investment vehicle,” says Griffin.

He has implemented a globally coordinated strategy for sustainable investing to help clients achieve their ESG investment objectives.

“We recently launched a best-in-class UCITS fund in our Luxembourg-domiciled SICAV range, JPMorgan Funds – Europe Sustainable Equity Fund. The fund focuses on identifying attractively valued, high-quality European companies whose governance fosters a longterm sustainability view.”

ALTERNATIVES GO MAINSTREAM

The Swedish private equity firm EQT has worked with Luxembourg since 2004.

“When those activities expanded in 2007, EQT decided it was the right time to open an office,” explains Peter Veldman, Partner and Head of Fund Management, EQT Luxembourg.

“We chose Luxembourg as it provided an opportunity to centralise business in a supportive jurisdiction, creating a Fund Management platform that could keep up with the growth of EQT and demands from the industry, while also standing out in the regulatory landscape.

The advantage of being in Luxembourg is that it offers a good environment for Alternative Investment Funds; there is a skilled multilingual workforce, a wide network of advisory firms, a large presence of service providers and above all, a business-friendly climate.” Today EQT manages a number of Alternative Investment Funds from Luxembourg, as well as offering portfolio management, risk management and other activities defined under the AIFM Directive.

Like Griffin, Veldman appreciates the “fund toolbox”. “Luxembourg offers a great variety of fund and investment vehicle structures; these offer the flexibility that we would look for when setting up new investment vehicles.”

In 2012, EQT decided to create one onshore hub for all future EQT funds as part of the firm's strategy to bring all funds onshore. They chose Luxembourg.

“We decided not to go beyond our current hubs, so the choice was really between the UK, Luxembourg and Amsterdam. From a jurisdictions perspective, Luxembourg is a well-known and established domicile. Many of the private equity and alternative investment fund players and service providers are very experienced and therefore quicker and more efficient. Equally, the regulators understand what private equity is all about, which makes discussions easier and more productive. The most important signal that Luxembourg is giving to us is that they are always available to listen to the industry and that they will make sure that whatever change occurs with regards to legislation, they will work with the PE firms to ensure interests are aligned with Luxembourg as a jurisdiction.”

Environmental, social and governance (ESG) considerations are an integral part of how EQT operates. Investments are made in companies that subscribe to high ethical and moral standards.

“Our EQT Infrastructure II fund has been supporting EEW, the market-leading energy from waste company in Germany into a highly efficient organisation focused on providing long-term, environmentally friendly waste disposal solutions and energy-from-waste production. The company incinerates waste to reap energy, thereby saving 1,000,000 tons of greenhouse gas emissions per year. During the incineration process, the volume of waste is reduced by 90 percent, while at the same time generating energy.”

OPENING UP NEW MARKETS

“The loans fund business is booming in Luxembourg,” says Frédéric Perard, Managing Director at BNP Paribas Securities Services, a global multi-asset servicing specialist and one of the largest financial institutions in Luxembourg.

“The search for yield in an environment of persistently low interest rates is driving demand for alternative asset classes. There has been a fast-growing demand from pension funds, insurers and so on, for private equity, real estate, and infrastructure funds. This is a new development in the Luxembourg marketplace.”

The global custodian and securities services provider, a wholly-owned subsidiary of the BNP Paribas Group, offers a network of over 95 markets from its headquarters in the city.

FINTECH AND INNOVATION HUB

“Luxembourg has demonstrated the capacity to develop the fund business in a very positive way. It is a first mover in implementing European fund regulation, and this has opened new markets for us in fund distribution across the globe.”

Perard sees a growing demand for digital solutions from investors which is driving digitalisation in the fund industry. It is a big focus at BNP Paribas which is continuously investing in new technologies. The specialist is one of the founding members of the Luxembourg-based blockchain initiative, Fundchain, and is partnering with a diverse range of innovators to build new FinTech solutions.

“We strongly believe that digitalisation in the fund industry will be massive. We are working with the Luxembourg marketplace on a blockchain solution for fund trading execution, and we are also working with the market on Know your customer and Anti-money laundering applications. We have recently launched a product at the financial services event, SIBOS, that will predict whether the trade will settle or not. At the end of the year, we will also launch a new application to read and interpret the prospectus using the data and evolution of the fund's performance and reports analysis.”

In recent years the banking industry, faced with competition from new online banks, has made significant efforts to digitalise its services. The investment industry is only now taking the plunge, but as Perard explains, the challenge is to predict at what point to dive deep.

“This is the Kodac moment for the investment fund industry. We know the change will be massive, but the difficulty you have is to decide at what point you switch because on one side if you switch too soon you may lose a lot of money, but if you switch too late you will lose.”