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Article by Ronny Alf, Product Manager at the Luxembourg Stock Exchange, as published in Insight/Out magazine #34.
As the second biggest fund centre in the world, Luxembourg is well known for its expertise and the benefits it offers when it comes to fund domiciliation and fund management services. What is much less known, however, is that it is also possible to list different fund types in Luxembourg, and that a listing can unlock multiple advantages for fund managers and investors alike.
With their flexible and diverse investment strategies, Alternative Investment Funds (AIFs) have gained traction over the past years as investors seek to diversify their portfolios and enhance returns. While AIFs often target institutional and professional investors with long-term investment horizons, there are clear benefits for fund managers in broadening their traditional investor base. As uncertainty affects investor confidence and drives up market volatility across financial markets, this may be an opportunity for fund managers to revisit their investor strategy and explore how a listing can help boost their fund and broaden their investor base.
An untapped potential for AIFs?
At the Luxembourg Stock Exchange (LuxSE), we have more than 60 years of experience in fund listings. We cover a broad range of funds, including UCITS, ETFs, and importantly, AIFs. Over the past 20 years alone, we have admitted a total of 24,000 fund share classes on LuxSE. Today, 3,200 fund share classes issued under 170+ funds are listed on our markets and around 45% of these funds are AIFs. Still, I am often surprised to learn in my conversations with fund professionals that they are not aware that a listing is possible for certain funds, let alone informed about the many advantages that come with a listing.
When fund managers seek a listing for their AIFs, it is generally motivated by regulatory considerations, and to address investors’ policy mandates of investing a set proportion of their assets in listed securities. But the benefits do not stop there. When a fund is listed on a stock exchange, the visibility of both the issuer and the product is enhanced. In other words, a listing helps bring the fund to the attention of a broader and more international investor community. It can ease the cross-border distribution of the fund, and it provides fiscal benefitsto investors in many jurisdictions, in full compliance with legal and regulatory requirements. A fund listing can also serve to facilitate data disclosure and dissemination through digital solutions and thereby enhance investors’ access to information. For centuries, stock exchanges have provided a trusted and resilient environment for issuers and investors to raise and invest capital, offering unique benefits for both parties.
I would argue that many fund managers are missing out on the advantages that a listing brings today. Because there is also another important reason why a listing could bring unique advantages to AIF fund managers, and this is key for future developments – a listing could pave the way to secondary market liquidity.
Launch of EM3S
Some managers of AIFs have so far not considered a listing due to the disclosure requirements that apply to listed financial instruments. To address this specific need, LuxSE developed a listing option earlier this year, which is particularly relevant for AIFs with sophisticated investment strategies. Euro MTF Specialist Securities Segment, or EM3S for short, is a new professional segment on LuxSE’s Euro MTF that allows issuers to unlock the benefits of a listing while protecting their commercially sensitive information. The main features of EM3S are that limited disclosure rules apply in the listing process, and no documents will be published by LuxSE. To simplify the listing process even further, a prospectus is not required, and no formal approval will be given by LuxSE.
We developed EM3S to address the specific needs of issuers of sophisticated financial instruments tailormade for a limited circle of professional investors, and where confidentiality around investment strategies is key to staying ahead of the curve. With EM3S, issuers of highly specialised securities can obtain a listing and admission to trading at LuxSE while protecting their signature investment strategies as well as the structure, conditions and characteristics of their bespoke financial instruments.
Based on our first discussions with different fund managers, there is clearly a need in the market for this type of listing option. We therefore expect EM3S to attract AIF listings to Luxembourg, further strengthening Luxembourg’s overall offering as a fund centre and the flourishing ecosystem surrounding the fund industry.
Retailisation of long-term investment
The European Commission is carrying out efforts to boost investment in long-term projects across Europe through the retail investment strategy and Savings and Investments Union, among other initiatives. AIFs are playing a vital role in advancing the European financial landscape resulting, among others, in a revival of Luxembourg Part II funds, sometimes combined with an ELTIF 2.0 wrapper. These funds, along with other AIFs, are now exploring how to unlock the new pool of capital and meet the liquidity needs of new investor groups, including retail investors, high-net-worth individuals (HNWI), and family offices. Current regulations impose the use of liquidity management tools (LMTs) for investor protection purposes, causing many AIFs to transition from closed-end structures without LMTs to evergreen semi-liquid models. Looking ahead over the next 5-10 years, there is a potential alternative for this shift, made possible by the creation of a liquid secondary market.
By listing on a stock exchange, AIFs can gain significant advantages from improved liquidity, offering investors dissatisfied with long notification periods, limited redemption gates, lockups, and restrictions on the proportion of assets available for redemption requests, the opportunity to exit through the secondary market. Collaborating with market makers to facilitate liquidity can therefore result in mutual benefits for both asset managers and investors, removing the necessity for today’s conventional move to semi-liquid models with LMTs. Asset managers might prioritise effective portfolio management of illiquid assets to boost performance, while placing less emphasis on LMTs, with the likely outcome that more investors would consider long-term investment funds.
For this vision to be realised, it is crucial for policy makers to recognise secondary markets as an efficient means for investors to exit their investments. Achieving this requires a collaborative effort among all stakeholders. AIF managers need to engage in open discussions with market makers about portfolio disclosure to ensure transparency and facilitate liquidity. Additionally, there is a general need for enhanced investor education to help investors understand the benefits and mechanics of secondary markets. By working together, policy makers, fund managers, market makers, and investors can create a robust ecosystem that supports the growth and sustainability of the European economy and societies.
