Professor Ulf von Lilienfeld-Toal is head of the Private Assets programme at the University of Luxembourg. Photo: Professor Ulf von Lilienfeld-Toal. Montage: Paperjam

Professor Ulf von Lilienfeld-Toal is head of the Private Assets programme at the University of Luxembourg. Photo: Professor Ulf von Lilienfeld-Toal. Montage: Paperjam

Long reserved for a handful of institutional investors, private assets are now establishing themselves as a pillar of global finance. Driven by the real economy’s growing need for funding, this asset class is proving increasingly attractive. Its development, however, is not without its challenges, as Professor Ulf von Lilienfeld-Toal, head of the Private Assets programme at the University of Luxembourg, points out.

Over the past decade, alternative investments – and private assets in particular – have established themselves as one of the most dynamic segments of the asset management industry. This asset class is currently experiencing sustained growth in Europe, driven both by structural market changes and by deep-seated economic needs.

“If we look at the global picture, private assets constitute one of the largest asset classes, although they have long remained under the radar,” explains Professor Ulf von Lilienfeld-Toal, who heads the Private Assets programme within the Master’s in Economics and Finance at the University of Luxembourg. Historically, their development began in the United States, with the emergence of major private equity players capable of raising significant capital from institutional investors. It is only more recently that this trend has spread to Europe, where it has found a regulatory framework in the AIFMD, which has been in force since 2014.

“The directive has helped to shape the European market, particularly through the introduction of a passport enabling the distribution of alternative funds across the European Union,” the professor points out. “Luxembourg, in particular, has capitalised on this development by transposing the directive swiftly and effectively, making alternative investment a key growth driver for its fund industry.”

Diversification and return prospects

Market dynamics are also driven by growing investor interest in private assets. “This can be explained primarily by investors’ desire to further diversify their portfolios and expand investment opportunities beyond listed markets,” notes Professor Ulf von Lilienfeld-Toal. “There are also indications that these assets may generate higher returns, but there is no definitive academic conclusion on this matter.” There is no guarantee that these assets will perform as well in the future as they have done so far. However, as part of a portfolio diversification strategy, these illiquid assets help to smooth out the shocks associated with listed markets, with the hope of seeing capital grow over the long term.

Meeting the economy’s financing needs

Beyond the financial rationale, these investments meet significant needs within the real economy. “The challenges we face – from infrastructure development to the energy transition, not to mention the need for innovation – require massive investment in assets that are illiquid by nature,” the professor points out. Installing wind turbines to support the development of renewable energy is a long-term project which, although it generates regular income, requires patient capital.

The transfer of ownership of SMEs is another major challenge in Europe. “There is a significant wave of business owners reaching retirement age, without necessarily having any buyers. Private equity and private debt play a key role here in facilitating these transfers. And when it comes to innovation, venture capital remains a crucial missing link in Europe. This lag stands in stark contrast to the US dynamic, where the venture capital ecosystem continuously fuels innovation.”

The challenge going forward will be to mobilise private capital to finance the needs of the real economy. “In this regard, the growth potential of this asset class is considerable,” says the professor.

Between democratisation and liquidity: a delicate balance

The growth of alternative investment has been accompanied by a shift in investor profiles. Whilst these products were long the preserve of institutional investors (pension funds, sovereign wealth funds and high-net-worth individuals), they are now gradually becoming accessible to a wider client base. “There is a desire to democratise access to this asset class, to enable individual investors to participate,” observes Ulf von Lilienfeld-Toal. Indeed, individuals’ dormant savings represent a windfall that people are now seeking to tap into.

This does, however, present significant challenges. “These products are complex and have specific characteristics that need to be fully understood,” the professor continues. “The illiquid nature, which is intrinsic to the assets in which we invest, means accepting that the capital will remain inaccessible for a long period, ranging from seven to ten years. This constraint requires rigorous discipline and financial planning, which often runs counter to the instincts of retail investors.”

In response to this lack of liquidity, certain initiatives are seeking to introduce greater flexibility, such as the launch of semi-liquid or evergreen funds. But for the professor, this development has its own limitations. “If you try to make an asset liquid that isn’t, it comes at a cost and may run counter to the very logic of these investments,” he explains. In other words, the yield premium associated with private assets is also the trade-off for their illiquidity. Seeking to mitigate this constraint potentially amounts to reducing their appeal.

Maintaining trust in the long term

Whilst alternative investment is part of a long-term trend, it is not immune to market turbulence. Recently, concerns regarding private debt funds have sent shockwaves through the markets. “The performance of private assets is ultimately linked to economic development. In an environment marked by macroeconomic shocks, leading in particular to rising interest rates or slower growth, there will inevitably be turbulence and necessary adjustments,” explains Professor Ulf von Lilienfeld-Toal. “The challenge, however, is to maintain confidence in this asset class, whilst avoiding the trap of over-reacting with regulation. It will be essential to avoid overreacting to the slightest sign of tension.”

Moving up the value chain in the face of AI

Whilst the Luxembourg fund industry has successfully identified private assets as a new growth driver, the financial centre must ensure it supports their development. Beyond regulatory challenges, the country—which has historically focused on back- and middle-office functions—must now move up the value chain. “This asset class enables Luxembourg to move up the value chain and attract more front-office activities,” the professor emphasises. “Initiatives such as adapting the framework around carried interest are a step in this direction, enhancing the country’s appeal to asset managers.”

This move upmarket appears all the more crucial against a backdrop of rapid technological transformation. “The rise of artificial intelligence could indeed reshape the balance of power within the financial industry. Some of the more routine tasks could be automated, which raises the question of how financial centres such as Luxembourg should position themselves,” observes Ulf von Lilienfeld-Toal. In this context, the ability to position itself in higher value-added activities is becoming a decisive factor for the future of the financial centre.