Alternative investment funds’ popularity curbed by operating inefficiencies - Paperjam

Alternative assets, including private credit, real estate, infrastructure, private equity and venture capital, have traditionally been dominated by institutions such as pension funds and sovereign wealth funds. According to Paperjam, sophisticated retail investors are increasingly entering the segment in search of yield and diversification. Deloitte's Luxembourg-based partner Arnaud Bon said alternatives combine long-term performance with low correlation to public equity markets, and noted a psychological appeal in direct involvement with smaller companies and private equity. Supporting data cited in the article includes S&P Global's finding that private credit yields reached 100 basis points above syndicated loans in 2020, and Invest Europe's Benchmark 2020 report, which put European buy-outs at a 15.06% annualised return since inception to end-2020, against 5.48% for the MSCI Europe index over the same period.

Access remains the constraint. Bon described high-net-worth demand as strong but unmet. Blackstone real estate managing director Leon Volchyok estimated the HNWI market at $80 trillion, with only single-digit percentages currently allocated to alternatives. The European Long-term Investment Fund (ELTIF) allows professional and retail investors in the EU to access illiquid assets, but according to market participants, fund managers and their service providers must first overhaul operating procedures. Bon noted that institutional mandates typically involve 15-20 large investors locked up for at least five years, whereas serving hundreds or thousands of HNWI multiplies know-your-customer and anti-money-laundering workloads. Recruiting additional back-office staff is not a practical answer, he said, given talent constraints in Luxembourg.

Several operational solutions are emerging. Wealth managers are forming feeder vehicles with fund managers, each capable of holding 70-80 high-net-worth investors, which reduces processing burden. Peter Wilson of ScalingFunds said that historically 99% of alternative funds were owned by institutions, but many individuals with over EUR 1 million now invest through feeder funds. Moonfare, a Germany-headquartered platform, channels private-investor commitments into Luxembourg-based feeder funds with minimums of EUR 100,000, according to its website. Luxembourg for Finance puts the country's private banking assets under management at EUR 466 billion. Valuation remains a further hurdle: Bon said the valuation cycle can take at least two months, which is more demanding for open-ended funds that require ongoing valuation for subscriptions and redemptions. Distributed ledger technology is being positioned to address these issues by automating processes, enabling digital shareholder registries, and tokenising fund units to support secondary trading, which is currently conducted over the counter. Martin Engdal of ScalingFunds said research shows around 50% of general partners rotate administrators due to dissatisfaction, and that average legal-entity onboarding takes 90-100 days.

Regulation is a further factor. Luxembourg's blockchain laws of 2019 and 2021 recognise DLT in financial services, and the CSSF issued a DLT white paper in January 2022. Volchyok said Luxembourg's oversight framework is conducive to retail access but that it does not yet extend across Europe. He also argued that ELTIF limits closed-ended structures and sets leverage requirements too low for stabilised real estate. Bon said some managers in private equity, infrastructure and debt are developing funds of funds diversified by vintage to generate liquidity. Listed alternative funds remain an option, though listing requirements and reporting obligations are cumbersome. As a result, most global managers are launching open-ended funds or feeder vehicles to attract new investors.