Third party management companies (mancos) face significant staffing and margin pressures, and expect to encounter more regulatory scrutiny in 2023, KPMG said in a report that will be published on Thursday 17 November.

The report was based on a survey of 17 Luxembourg-based third party mancos, which collectively had €500bn in assets under management, managed nearly 1,500 Ucits and 1,500 alternative investment funds, and had roughly 1,000 employees.

Alan Picone, head of consulting, asset management & alternatives at KPMG in Luxembourg, gave an exclusive briefing to Paperjam+Delano Finance prior to the report’s release. Here are 5 takeaways from that briefing:

1. Multiplying strategies

Third party alternative investment fund managers are increasingly active across multiple strategies, with few specialised in a single segment, Picone stated during the briefing. Among survey respondents, 94% have a private equity license and 82% have a real estate license. Firms “cannot afford not to be” players in all the major strategies, he said.

Looking ahead, 31% of new license requests are for infrastructure and 15% are for private debt authorisations. Nearly 1 in 5 “intend--or have started--to acquire the virtual asset license in the short to mid-term. At the moment, no participants in the sample have the virtual asset license, but 18% are looking for it.”

Half of survey-takers considered “alternatives strength” as their top business opportunity for the coming year, with a further 20% classifying it in their top 2 or top 3 opportunities.

2. Increased regulatory scrutiny

A large number of participants pointed to an increase in ad hoc CSSF requests, such as emails and questionnaires. Survey-takers reported “continuous growth of CSSF inspection numbers since 2020.” Nearly half of mancos anticipate being the subject of a formal CSSF inspection next year.

The rise in inspections “does not suggest a compliance gap,” Picone told Paperjam+Delano Finance. Rather, it reflected a “mechanical increase” in the number of alternative funds and the greater role that private market funds play in Luxembourg’s financial sector. “It’s important for the CSSF to check processes and delivery” as the segment grows.

3. Margin pressure

Cost increases have been hitting margins hard, survey-takers said. “Operational fees are increasing, and participants cannot necessarily increase their own fees to remain competitive.”

Total operating costs varied widely. The cost-income ratio of respondents ranged from 41% to 120%, with a median ratio of 82%. Those with the highest ratios were “typically new entrants,” Picone commented. He observed that third party mancos with healthier margins were those with more substance in Luxembourg.

4. Talent war

Half (50%) of third party mancos in the study cited human resources as their number one business challenge. More than two-thirds (69%) said they “encounter issues in recruiting new employees due to resource constraints in the market.”

5. Market consolidation

“The spectrum of mergers & acquisitions is unanimously mentioned by all participants. The Luxembourg third party manco market is getting more and more concentrated, and this trend will continue to happen over the next 3-5 years.”

While there is a clear trend towards concentration, there will still be new mancos launching in Luxembourg, Picone said during the briefing. “Many will be in-house.”

This article was published for the Paperjam+Delano Finance newsletter, the weekly source for financial news in Luxembourg. .