Despite the grand duchy still being an attractive market, “other competitors have woken up,” argues Atoz Tax Advisers founding and managing partner, Keith O'Donnell Guy Wolff/Maison Moderne

Despite the grand duchy still being an attractive market, “other competitors have woken up,” argues Atoz Tax Advisers founding and managing partner, Keith O'Donnell Guy Wolff/Maison Moderne

Although Luxembourg’s alternative investment fund market is still going strong, it’s a space that’s growing more competitive, argues Atoz’ Keith O’Donnell.

In the alternative investment areas in which the grand duchy plays, the market is still attractive. The country managed to really establish itself and gain a good market share, especially in mid- and back-office specialisations. Keith O’Donnell, founding and managing partner of Atoz Tax Advisers, adds that the market share was “relatively unimpeded by other jurisdictions” for some time, and Luxembourg’s market  will see “growing double digits at least for the next probably three to five years.”

But O’Donnell adds that over the last few years, things have shifted. “Other competitors have woken up to the opportunity and stated to compete more in this space, with differing degrees of success.”

Increasing competition

Following Brexit, questions circled as to whether financial firms that had shifted to the EU in the run-up would return to London. Concerns arose as to whether the “Unshell Directive”, or Atad 3, would cause unnecessary burdens for the alternative investment industry, thereby making jurisdictions like the UK more attractive.

“The UK is a competitor, has deep expertise in the front office,” O’Donnell explains. “We do have to be careful that European regulation doesn’t penalise the competitive position of Luxembourg--and all European vehicles.”

Atad 3 has gone through iterations, but O’Donnell hopes “the Commission will take [such concerns] on board and try to make [the directive] a bit more targeted because, at the moment, it’s a very shotgun approach whereas, in fact, it’s probably targeting a very small subsegment of companies--arguably not at all the alternative investment fund sector.” His view is that part be cut out or focus on the real target--not institutional investors using legal vehicles for normal business reasons.

Another traditional competitor is Ireland, where O’Donnell says not only are “clients very happy” there for historical reasons, but the country is improving its competitive positioning, with its regulator adapting its position in the alternative sector better than five years ago.

“Luxembourg doesn’t have, in any sense, a monopoly on this business,” O’Donnell explains, adding that Germany and France are doing more to make their markets attractive.

But there are also non-traditional competitors, he adds. “Some of the offshore jurisdictions are trying to kind of re-create a space for themselves in the market, partly because they’ve been forced to align governance standards on more OECD standards or European standards.”

Boost for the grand duchy

O’Donnell sees potential in faster growing areas, for example, like infrastructure and private debt. Eltif 2.0, which was adopted by the European Parliament on 15 February 2023, could provide a further boost for the grand duchy, he adds.

“Infrastructure would be the kind of asset class that would go into that vehicle, and then potentially, it’s available to a broader selection of investors,” O’Donnell explains. “So it’s kind of, to some extent, completing the capital markets union.

And, if that works out well, things could get interesting, “because it opens up a second pool of capital in Europe--besides all the institutions, we now have individuals being able to invest in this asset class,” O’Donnell adds. “I think that could be very attractive, and Luxembourg would be a great place for that.”