The third edition of the focuses on the forces driving the evolution of the operating model of management companies (mancos) and alternative investment fund managers (AIFM). It covers 22 super mancos and eight AIFMs, who together manage more than 4,150 sub-funds, have more than €2,400bn of total assets under management and represent 60% of the Luxembourg market.
“No such thing as a status quo in the operating model”
For KPMG’s asset management consulting leader Alan Picone, there were two key takeaways from the survey.
“The vast majority of [surveyed mancos and AIFMs]--97% to be precise--say that their operating model is in evolution,” said Picone. Almost one-third, or 31% of them, consider their operating model to be in full transformation. “That suggests that there’s no such thing as a status quo in the operating model of AIFMs and mancos.”
This is due to a combination of factors, Picone told Delano. “It’s the consideration about what’s core versus non-core, and how to run the operation seamlessly and efficiently, by means of deciding on what to insource, what to outsource, which continues to be a key driver of the evolution of the operating model.”
“The second driver around the evolution of the operating model is the continuously increased attention on regulatory risk mitigation techniques and regulatory risk onboarded into the data management company settings. So much more attention, so to speak, on a daily basis, to regulatory risk matters and a certain level of engineering around that, within the compliance functions, within the risk functions, etc.”
“And last but not least: the road to alternatives,” Picone added, referring to the third driver of operating model evolution. Companies are continuing to evolve into the alternative business, which explains why the models are also evolving. “The onboarding of alternative funds is just not incremental to the Ucits [undertaking for collective investment in transferable securities] platform. But it’s something that is difficult to scale, actually, where there is a certain amount of complexity around, if you like, the evolution of a liquid business into an illiquid business. So that’s where we’ve got some interesting drivers as well, that fuel this evolution of operating models.”
Shift towards “hub-and-spoke group model”
“The second takeaway is that we noticed an evolution of Luxembourg operations towards what would qualify as a hub-and-spoke group model, i.e., a certain willingness, appetite, strategic decision from the group to capitalise upon and actually extensively leverage their Luxembourg operation to give it a broader remit,” said Picone.
This is assessed via several dimensions, such as the expansion of branch creations. 73% of survey respondents said that they have a branch. The average number of branches, Picone added, was four.
A second dimension that suggests the evolution towards a hub-and-spoke model is “a desire to capture the retail market opportunities for Luxembourg products, such as UCI part II, in the future, probably Eltif [European long-term investment fund] 2,” said Picone. 45% of survey participants said that they are either offering, or seriously considering offering, alternative investment funds for retail investors. For groups, “it entails a certain Luxembourg angle for the creation of the product, and subsequently, the management of the product by the mancos or AIFMs.”
The third dimension relates to license extensions, said Picone. Two-thirds of respondents said they introduced a request for at least one new license last year. This can be for a variety of reasons--real estate infrastructure, private equity or a markets in financial instruments directive [Mifid] top-up, for instance--but it’s a strong sign that groups are interested in capitalising on and leveraging what mancos have to offer. 50% of players offer discretionary portfolio management (DPM), added Picone, which is when a fund mandates “an organisation to devise a fund specifically for their purpose, with their own constraints, their own requirements.”
Moreover, “one-third of the population distributes group products, from the AIFM, through the AIFM top-up,” said Picone. “That means not necessarily products that are managed by the AIFM, but funds that are distributed by the AIFM.”
A fourth dimension is that “55% of the organisations have one person of the exco of the Luxembourg business that bears group responsibility,” said Picone. This could be, for example, a conducting officer with Luxembourg responsibility as well as a global role. It “demonstrates the level of interconnection between the Luxembourg business and the group in general.”
What are the priorities for mancos in Luxembourg?
Picone had three priorities for mancos to focus on. “One is to continue to streamline the operating model and gain efficiency, with a view to actually gain--and I think that’s the real key word--scalability. Scalability for what? Scalability to be in a position to absorb new products, new strategy, new ideas, new licenses, new avenues of business, in a way that is very much business-responsive.” This priority is actually reflected by survey respondents, he added, and is one of the items on their own priority lists.
Not only do we have an engaging regulator, but also the level of engagement has now become thematic
The second priority is regulatory risk management, such as how to prepare for potential inspections or potential inquiries from the regulator. 70% of mancos proactively meet with the regulator to discuss new strategies or changes in the operating model, found the survey.
“It has become very clear that not only do we have an engaging regulator, but also the level of engagement has now become thematic,” said Picone. In the past, two or three themes--like governance or anti-money laundering (AML)--might have been covered. “Last year, you had things like valuation, custom charges, ESG, risk management. So, bespoke, thematic inspections conducted by a regulator, which obviously multiplies the probability for an organisation to receive an inspection.”
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“The third priority that we see is to continue to consolidate the centre of excellence, so to speak, when it comes to distribution and products.” This interlinks with the first priority: streamlining the operating model. “It goes together to ensure that, ultimately, Luxembourg is the product hub, including, to a certain degree, product manufacturing capabilities, you know, structuring and all of that.”
The ESG paradox
Although mancos and AIFMs consider ESG to be a key regulatory area, most mancos don’t consider their framework to be sufficiently mature, found the survey. 62% said it’s a work-in-progress.
So how can this paradox be explained?
There are two paradoxes, said Picone. First of all, “there are different levels of endorsement of ESG as an opportunity.” Looking at the assets under management that are placed in article 8 or 9 products as a ratio of total assets under management, the ratio goes from virtually 0% to 100%. “It means very different levels of endorsement.”
The second paradox has to do with the maturity of ESG frameworks. “What you see is that, when you ask organisations, ‘How mature is your ESG framework?’ Everyone says, it’s of pivotal importance for us in the business. Only a third of them say it’s mature, either mostly or fully.” Or you can look at it from another perspective, where two-thirds say that the control framework is underway, or gaining maturity.
There’s a paradox in the sense that there’s a lot of appeal when it comes to investors or commercial forces, said Picone. “It’s actually very powerful to have funds that have an ESG element attached.”
“When you look at the reality of existing frameworks, the very fact that one-third of the population tells us it’s mature and two-thirds tell us it’s in progress means also why we have not seen, for the moment, a massive ratification of ESG opportunities across the full spectrum,” he said. “The control frameworks are evolving.”
“It’s going to be maturing in the next wave.” Organisations are also managing expectations on the commercial side, “like trying to slow down a little bit, or not being too pushy or aggressive when it comes to the distribution of ESG products, because behind the scenes, you need to have a very proper control framework attached to this, to combat the risks of greenwashing and things like that,” Picone said. “Overall, the market is taking a very prudent approach--I think that’s the message here--around the control framework.”
Find the full KPMG Luxembourg Large-Scale ManCo & AIFM Survey 2023 report .
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .