The introduction of the AIFMD has fuelled strong growth in European fund domiciles, with the number of alternative investment funds increasing by 10% since 2010, and assets under management increasing by 13%. That’s according to a report published by the Association of the Luxembourg Fund Industry, carried out by Oliver Wyman. “The introduction of the AIFMD increased the attractiveness of European onshore domiciles,” comments Marc Saluzzi, Chairman of ALFI. “Whilst many were against it when it was first introduced because of the fear of high compliance costs and additional complexity, this piece of regulation has brought significant benefits, allowing EU domiciled managers to market authorised funds across the EU.”
The study identifies four main trends in the choice of domicile for alternative investment funds (AIFs): Strong growth in European domiciles:
• Luxembourg, the largest EU domicile corresponding to 60% of analysed EU alternative funds, grew by 11% between 2010 and 2013, with an addition of 169 funds. The strongest growth came from private equity and real estate funds, with approximately 30-35% growth in funds and AuM.
• Ireland, the second largest EU domicile with around 21% of all the alternative funds analysed, grew by 58%, mainly due to an increase in the number of hedge funds. Besides, it is estimated that around 40% of hedge funds globally are administered in Ireland.
• Malta shows the strongest growth amongst the EU domiciles analysed, explained by its relative small size and “newcomer” status. It attracts niche markets within the hedge fund industry, with an average fund size below EUR 20 million.
Demand for alternative investment funds under mutual fund structures: The usage of UCITS compliant structures for alternative investment strategies is estimated to have more than doubled since 2009 on a global basis. Demand for transparency and regulation post-crisis increased the attractiveness of UCITS structures. The number of alternative investment funds is estimated to have increased by 17% since 2010. Domiciles offering “one-stop-shop” solutions attract funds at the expense of domiciles with less well-developed fund infrastructure: With the introduction of AIFMD fund, the quality of fund administration services has become a crucial element, together with the need for an independent depository.
Overall the study therefore expects large domiciles to win over smaller domiciles with less developed fund structures. Between 2010 and 2013 traditional offshore domiciles confirmed their dominant role within respective AIF asset classes, but there is no clear winner across all asset classes: • For hedge funds, Cayman Islands, traditionally the global home of hedge funds, is estimated to have increased its AuM share from 55% to 60% during the period of 2010 and 2013.
Luxembourg and Ireland are popular among UK and European fund managers, however Ireland is experiencing a growing number of registrations from US fund managers • For private equity, Delaware, which is by far the most important domicile for this alternative asset class, is estimated to account for around 57% of the analysed 5,500 funds or 69% of the EUR 1.2 trillion assets invested in private equity.
In the EU, Luxembourg holds the dominant position in private equity with 90% of the analysed EU funds domiciled in the Grand Duchy. Guernsey is the third largest domicile for private equity funds by AuM, seeing high growth in the last four years and today private equity funds account for nearly three quarters of all Guernsey domiciled funds. • Delaware is also the domicile of choice for the majority of real estate funds, with 67% of the analysed assets estimated to be domiciled in the US state, up from 60% in 2010. In Europe, Luxembourg has the highest share of real estate funds amongst the European locations analysed, with an estimated 15% of local AIF assets in real estate. Looking forward, the report expects most of the existing trends to continue or strengthen over the coming years, fuelled by regulatory developments and investor demand.
Saluzzi says: “It’s clear from this that investors want the safety of regulation and we expect to see more offshore funds taking advantage of the AIFMD. After having attracted a high number of AIFM applications over the last 12 months (240), the challenge for us will be to attract more AIFs in Luxembourg. Cayman and Delaware are strong competitors but we believe our fund centre has what it takes to become the "alternative" product domicile for more and more fund managers and institutional investors.”