Fresh registrations for alternative investment funds in Luxembourg, considered the top European hub for private investments, this month are at their lowest monthly level in nearly six years. Regulatory changes as well as market conditions are cited as a reason for the slowdown. Some issuers have decided to wait for the new year to avoid regulatory reporting in 2022.
Merely four new Reserved Alternative Investment Funds, known as Raifs, have been registered during the first two weeks of this month, official Luxembourg business register data shows. During October a total of 28 new Raifs were created, while November last year saw a grand total of 41 new funds. Final November data will become public next Thursday. The last time Luxembourg reported single-digit new Raif registrations was April 2017.
The lacklustre state of the alternatives market also is clear from the alternative funds list maintained by financial supervisor CSSF. This list, known as the AIFM Identifier list, shows that so far in November about 30 new additions were entered, compared to about 200 additions in November last year. This CSSF list includes some 13,300 alternative funds in which only professional and institutional investors are allowed to invest.
Two main factors
Private equity specialists at Alternative Investment Fund Managers, or AIFMs, attributed the current market drought to two factors. Firstly, general uncertainty in financial markets due to inflation and rising rates. And secondly, new rules for pre-marketing alternative funds that entered into force this year. This new regime makes it possible to market a fund even when it is not yet formally registered.
Under the rules of EU pre-marketing regime, an AIFM now is permitted to approach potential professional investors with a draft prospectus or other offering documents. Before, AIFMs were first required to incorporate the fund and to complete the formal notification process before starting their marketing
Stephan Grimm, managing director at Avega Capital Management, a Luxembourg AIFM. said that one of their clients recently was ready to incorporate a Raif but decided to set it up in January to avoid having to do any regulatory reporting in 2022.
“So it’s smarter to use this regime and move to January to not run into additional work for one month in 2022,” said Grimm. “We have a lot of uncertainty in the markets, because of rising interest rates and upcoming recession. So the GPs test the water even more (pre-marketing) to have sufficient LP commitments in place before they incorporate.”
In private equity, a Limited Partner, LP, is the one who invests and provides the capital for the fund but who is not really involved in the daily management. A General Partner, GP, is the investment professionals vested with the responsibility of making decisions with respect to the actual ventures in which the funds invest.
Lagging six months
The slowdown in alternatives may also reflect the effects of steep declines in public asset values so far this year. Private equity specialists generally believe that valuations in alternative markets tend to lag public valuations - with listed stocks and bonds - by approximately six months. Unlike liquid listed investments, the value of an illiquid private fund - designed as a long-term investment - is calculated on a less regular basis, for example monthly.
Professional investors face difficult choices now that private market investments have become overweight in institutional portfolios following the declines in public markets. A study by Bfinance presented last week shows that half of investors are waiting “as long as necessary” for this dislocation to subside.
Luxembourg’s Raif market will be hard-pressed to beat the record of 447 new registrations set last year. So far this year, 383 new Raifs have been created. During the first half of this year, new registrations were still up 36 percent from last year.
(November 2022 data is only for registrations up to 15 Nov.)