While the inherent complexity and limited transparency of alternative investments long made them the exclusive preserve of institutional investors and High-Net-Worth Individuals (HNWIs), a regulatory and policy momentum in Europe is changing the landscape.

In fact, a wave of “democratisation” is gradually emerging, whereby mass affluent investors – i.e. those with assets surpassing the average holdings of retail investors but still falling underneath the HNWI thresholds – are increasingly pouring their capital into alternative investment funds. This is due to the potential for higher returns offered by such funds, coupled with the diversification benefits they offer and their ability to serve as a hedge against inflation.

Given its decades-long expertise in open-ended alternative funds, the Luxembourg financial centre is ideally positioned to capture this trend.

A leading hub for alternatives

Since its far-sighted transposition of the UCITS Directive back in 1988, Luxembourg has become the world’s second largest fund domicile, with the alternatives segment of the asset management industry rapidly taking hold.

As Figure 1 shows, Luxembourg is now a major hub for alternatives, with private markets Assets under Management (AuM) jumping from US$0.8tn in 2019 to an estimated US$2.2tn in 2024, growing at a Compound Annual Growth Rate (CAGR) of 22.4%.

Figure 1. Luxembourg private markets AuM, by asset class (US$ tn)

Apart from its early adoption of the Alternative Investment Fund Managers Directive (AIFMD) which helped create a harmonised and lean regulatory environment for Alternative Investment Funds (AIFs), the Luxembourg financial centre is equipped with a veritable alternative investment toolbox that has allowed countless asset managers to set up a wide range of investor-friendly alternative products.

This toolbox is directly responsible for the rapid growth in private markets AuM, and two fund structures stand out: the Special Limited Partnership (Société en commandite spéciale – SCSp) and the Reserved Alternative Investment Fund (RAIF), introduced in 2013 and 2016 respectively.

Luxembourg financial centre is equipped with a veritable alternative investment toolbox that has allowed countless asset managers to set up a wide range of investor-friendly alternative products.

Valérie Tixier, Partner, Clients & Markets Private Equity Leader, PwC Luxembourg

Coupled with their tax-efficient structure, RAIFs offer a wide array of investment strategies and private market asset classes and can be set up rapidly without the need for direct regulatory approval. As for SCSps, not only is the setup process fast and straightforward, but they also offer much flexibility in the partnership’s structure, allowing for customised agreements tailored to investors’ specific needs. Although they do not fall under the purview of the CSSF, both fund structures require an authorised AIFM to manage them, which ensures a high degree of investor protections and operational efficiency.

As Figure 2 and Table 1 show, SCSps and RAIFs have been a major success, with the largest private equity firms making much use of them.

Figure 2. Evolution of the number of RAIFs and SCSps in Luxembourg (2016 – Jan.2025)

Table 1. RAIFs and SCSps of the five largest private equity firms (end-2023)

A toolbox fit for democratisation

Although the existing funds within the Luxembourg alternative toolbox, such as the SICAV Part II funds, are already capable of targeting investors within the mass affluent category, recent regulatory and policy developments have given a new impetus to the democratisation of alternatives.

Originally launched in 2015, the European Long-term Investment Fund (ELTIF) structure was amended in 2023 to help steer investment flows towards strategic projects and sectors. Since then, the market has grown significantly.

As Figure 3 shows, Luxembourg has positioned itself as the primary hub for ELTIFs, with 100 set up in the country as of 2024. As for the clients targeted, over half (55.1%) target both institutional and retail investors, while 15.7% target retail investors only (Figure 4).

Constraints to democratisation

Launching a “democratised” alternative fund is no mean feat. For starters, careful planning and strategic execution is needed, and having a committed institutional investor before launch is very useful to demonstrate the fund’s credibility and fundraising potential.

Asset managers need to also have a well-structured operational framework (fund administration, technology etc.) as well understand the nuances of ELTIF 2.0 and other relevant regulations to ensure smooth market entry and compliance. Mass affluent investors might also require more transparency, education and simplified access through dedicated platforms and advisory networks.

Moreover, liquidity management is often an issue brought up by regulators who demand appropriate safeguards. Given their heavy exposure to illiquid assets, alternative funds must be able to balance redemption structures and liquidity windows to meet investor expectations.

Launching a “democratised” alternative fund is no mean feat. For starters, careful planning and strategic execution is needed, and having a committed institutional investor before launch is very useful to demonstrate the fund’s credibility and fundraising potential.

Karim Bara, Partner, Clients & Markets Leader for Private Equity, Private Debt and Venture Capital, PwC Luxembourg

Lastly, many alternative asset managers in Europe struggle to scale their offerings due to distribution constraints and lack of established networks to reach a broader investor base. Their American counterparts have a head start over them, partly helped by a regulatory environment that is evolving to accommodate more retail-focused alternative funds. As a matter of fact, many US alternative managers have already started aggressively targeting mass affluent investors, helped by tokenisation and secondary trading platforms – two areas where Europe is still a laggard.

Capitalising on Luxembourg’s assets

The lines between “traditional” and “alternative” asset management are getting increasingly blurred. Many asset managers long focused on public markets have started expanding their footprints in private markets, while investors of all shapes and strides have increasingly sought to pour their capital in the latter.

In tandem, asset managers are increasingly looking at broader European distribution strategies to tap into growing investor demand for alternative products, and ELTIF 2.0 is expected to drive further fund launches.

Given European policymakers’ focus on improving the competitiveness of the European economy while pursuing its decarbonisation, the democratisation of alternatives will be a crucial piece of the financing puzzle.

While challenges around liquidity, valuation, and distribution persist, Luxembourg’s established alternative investment toolbox and its growing ELTIF market make it an ideal ground to push forward the democratisation of alternatives. The next frontier for the industry will be the seamless integration of technology, regulatory refinements, and broader retail investor engagement.