The BaFin annual conference, held on Tuesday in Frankfurt, took a markedly more critical stance on private assets, illiquid funds and technological risks. Without ever directly mentioning Luxembourg, the German regulator issued a series of warnings regarding several sectors in which the Luxembourg financial centre holds a strong position: Eltifs, private credit, private equity, infrastructure and real estate.
The strongest message came from Mark Branson himself. The chairman of the German regulator publicly warned against the growing distribution of illiquid products to retail investors, against the backdrop of the European market for European Long-Term Investment Funds (Eltifs) booming. “We are seeing that investments such as private debt and private equity are increasingly being marketed to retail clients,” said Mark Branson at the conference. “Now is the time to ensure that unsuitable clients do not end up getting involved in these investments.”
Risks deemed not to be sufficiently visible
The German regulator believes that the actual risks associated with these products remain insufficiently transparent to investors. The criticism is directed squarely at the current European risk classification system, which is based primarily on asset volatility. In BaFin’s view, this model fails to adequately reflect factors that are central to private assets: illiquidity, valuation difficulties, structural complexity and high fees.
The issue has become particularly sensitive with the rise of Eltifs following the European reform that made it easier to market them to retail investors. According to figures cited at the conference, 114 new Eltifs were authorised in Europe in 2025, an all-time high for this segment. A large proportion of these vehicles are registered in Luxembourg, which has become the leading European jurisdiction for the domiciliation of such structures.
The German business daily Handelsblatt points out that BaFin now considers the issue significant enough to explicitly call for a reform of European risk indicators. In particular, the regulator criticises the fact that certain ELTIFs invested in private debt, private equity or real estate can still be classified in intermediate risk categories despite their low actual liquidity.
“Many Eltifs are classified as medium risk, for example three or four on a scale of seven,” explained Mark Branson. However, he believes that the example of open-ended property funds has shown that “all relevant risk information” is not properly reflected in these indicators.
Quite high fees
BaFin also highlights the level of fees charged on certain products. “Three to four per cent per year is normal; five to six per cent is also common,” said the German regulator. The regulator believes that these costs, combined with promises of high returns, can create risky situations for retail investors with a shorter investment horizon.
Behind the technical debate on Eltifs, a broader prudential concern is gradually coming to the fore. BaFin is now closely monitoring the growing interconnections between private credit, insurers, banks and asset management. The European private asset market continues to grow rapidly, but has never yet been truly tested in a scenario of major financial stress.
This development is particularly significant for Luxembourg. Although the German regulator is not explicitly targeting the Luxembourg financial centre, a significant portion of the European value chain for private assets passes through the Grand Duchy: fund structuring, AIFMs, administration, custodianship, cross-border distribution and the European passport.
The signal sent by BaFin could therefore extend well beyond Germany. The criticisms voiced on Tuesday automatically increase the likelihood of a gradual tightening of regulations at European level, whether through ESMA, changes to the PRIIPs rules or the prudential requirements imposed on distributors.
BaFin is stepping up its technological oversight
The BaFin annual conference also highlighted a second area of tightening: cybersecurity and the operational risks associated with artificial intelligence. The German regulator announced a step-up in IT controls and digital resilience requirements, at a time when financial institutions are rapidly deploying AI tools within their critical infrastructure.
This aspect is also of direct relevance to Luxembourg, where a significant part of the European financial ecosystem relies on outsourced technological infrastructure, cloud platforms and cross-border subcontracting chains.
The Frankfurt speech signals, above all, a shift in tone. For several years now, European regulators have been encouraging the development of private markets to finance the real economy and support the Capital Markets Union. Now, however, several supervisors are beginning to raise public concerns about the potential consequences of a too-rapid democratisation of products historically reserved for professional investors.
BaFin does not question the growth of private capital as such. However, it now clearly believes that the combination of retailisation, low liquidity, complex structures and promises of high returns calls for stricter regulation. For a European private asset market in which Luxembourg is one of the main operational hubs, the message coming out of Frankfurt is hard to ignore.
