During the golden age of private equity (PE), between 2016 and 2022, the financial centre became accustomed to double-digit growth rates. With the , “we are returning to more realistic growth,” says , CEO of the Luxembourg Private Equity & Venture Capital Association (LPEA).
While the ecosystem hopes to gradually regain the momentum of the past, Pesch also sees benefits in the current situation: “This allows us to focus on other essential aspects of our business (operations, digitalisation, investor relations and team building), instead of constantly having to run to relaunch the next fund.”
Guillaume Meyer: Despite the economic climate, alternative investment funds (in general) and PE funds (in particular) grew in 2023 in terms of value. Is everything really going very well?
Stéphane Pesch: We obviously have to remain realistic, but yes, despite the headwinds, the Luxembourg market is showing strong vitality. Alternative funds have passed the €2trn mark, which is a significant achievement. We are convinced that, in a few years’ time, alternative investments will account for more than half the value of assets in Luxembourg funds.
With private markets driving this growth?
It’s a fact that PE continues to be the dominant strategy among alternative funds in Luxembourg. If we take a broad definition of PE, including infrastructure funds, funds of funds, venture capital, secondary funds, private debt and distressed assets, we are approaching two-thirds of alternative funds. The more effectively we work together within the ecosystem, the faster we will be able to achieve this balance. Of course, the aim is not to win a medal: ideally, all categories should grow at the same rate.
What is the practical impact of the slowdown in PE in Luxembourg?
The consequences are relatively limited. They are nothing like the much more massive effects seen in the world of liquid funds after the 2008 crisis, where we saw severe corrections, devalued or even unmarketable assets and fund closures. At present, although we are experiencing a slowdown, this is mainly affecting the pace of fundraising and new fund creation, the volume of transactions and the indirect revenues generated by these activities. But all existing funds continue to generate income.
This slowdown is hitting fund managers at a time when they also have to invest in talent and technology...
That’s right. We have to keep moving forward, otherwise we risk falling behind. If we’re not ready when the market picks up again, we won’t be in a strong position to take full advantage of the new opportunities.
How is the LPEA dealing with this slowdown?
In times like these, certain expenses such as marketing and business travel are often cut back, which is a bit of a shame. At the LPEA, on the other hand, we have chosen to step up our efforts, in particular by increasing the number of roadshows to promote Luxembourg more actively. We said to ourselves: this is a less buoyant period, so we need to push harder and be even more visible.
Consolidation is mainly a trend among service providers.
What do we know about the number of active funds in Luxembourg?
The number continues to grow, albeit more slowly than before. We don’t have an exact overall figure at any given time, but the monthly reports from financial information providers regularly indicate that new funds are being launched. There is also a correlation between assets under management and the number of structures.
Can we talk about consolidation in PE in Luxembourg?
Consolidation has been a trend among service providers for several years now. Often, this consolidation is positive, with large service providers acquiring smaller ones to broaden their offering and improve their quality of service, or even to conquer new markets. Notable examples include IQ-EQ, Alter Domus and Apex, which have grown stronger through these acquisitions.
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Among managers, consolidation is less common, but we have seen cases where a manager with no historical expertise in PE acquires another in order to strengthen rapidly in this area. What we don’t see much of in Luxembourg, but are trying to highlight, are ‘GP stakes,’ where one manager invests in another with a view to long-term cooperation and development.
What is the outlook for PE in Luxembourg?
It’s positive: growth is continuing despite the slowdown, and enthusiasm remains very strong. We can only be optimistic.
How can we maintain this momentum?
The key is to work on our competitiveness. We are encouraged by the energy and desire for change of the new government, which wants to make positive improvements. Crucially, there is also excellent cooperation between the financial associations and the supervisory authority to align our objectives and remain competitive.
It’s not just the number of people that counts, it’s what they do in Luxembourg
What about attracting and retaining talent?
This is a recurring and crucial issue. If we want to continue to evolve in Luxembourg, we need not only to maintain our reputation as a back and middle office, but also to attract managers and fundraisers--specialists who collect funds from investors. We need to discuss opening up these roles in Luxembourg. Even if it won’t be suitable for all large groups, especially those that carry out most of their transactions in other countries around the world, increasing the number of functions linked to management and fundraising is within our reach and will enrich our financial ecosystem.
How can Luxembourg evolve into a complete PE centre of competence, covering all aspects of the industry from A to Z?
We need to raise the level of our education and training offering to include not just management, but also skills in valuation, risk management, negotiation and other key areas of PE. That’s why we've set up our own digital academy and are working with institutions such as the House of Training and HEC Liège to develop tailored programmes.
Let me stress: it’s not just the number of people that counts, it’s what they do in Luxembourg. For example, we have created a private event called Investment Circle, dedicated to fund managers, so that they can present their latest products to Luxembourg investors. To attract new managers, it’s essential that they see Luxembourg not just as a place to create funds, but also as a hub where they can develop a relationship with new investors.
In the context of PE in Luxembourg, what role does technology play today?
Automation is essential to optimise our ecosystem. Other questions remain open, such as tokenisation, an interesting concept but one that has taken some time to implement in practice. AI is a subject that we are following closely. We are going to create a dedicated club within the LPEA to explore its practical applications, particularly in pre-deal processes such as due diligence and deal analysis. Some players are already using IT assistance tools to manage risk and stress scenarios.
Investment decisions do not depend solely on local entities.
With regard to decision-making in PE in Luxembourg, how do you respond to the criticism that the large global entities present here have no real local decision-making structures?
Personally, I don’t agree with this kind of backward-looking criticism. It’s important first of all to define what ‘real local decision-making structure’ means. If we are talking here only about pure portfolio management, selection of target companies, negotiation and acquisition, it is quite true that these tasks, in the vast majority of cases, are carried out by group teams that are not necessarily in Luxembourg (headquarters or country of investment, for example). That said, the list of entities that deliver these services locally continues to grow year on year.
So how are these criticisms ‘old-fashioned’?
They are from the point of view of an increase in tasks that are increasingly close to or even at the heart of fund structures, management companies or investments. Recent years have seen a marked increase in the number of new profiles specialising in Luxembourg in a variety of areas such as valuation, risk management, compliance and even investor relations management and fundraising, not to mention a keen interest these days in the transactional side (M&A) and financing.
Rome and Luxembourg weren’t built in a day, but we’re working tirelessly with the community and other partners to make the country even more attractive to these kinds of profiles in the near future.
Why does there seem to be so little investment by PE funds in Luxembourg companies?
This question comes up a lot. First, investment decisions unfortunately don’t depend on us and local entities alone. Secondly, the question of the presence of a sufficient number of suitable targets, such as startups and SMEs, is and remains central. Investors are not going to change their overall strategy simply to suit the local market, unless there is a specific mandate like that of the Digital Tech Fund. In this case, the Luxembourg government, along with other shareholders, has explicitly mandated one of our managers to invest in local startups and facilitate their growth and expansion.
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We should add that we have also seen some major transactions in Luxembourg companies--I mentioned IQ-EQ and Alter Domus--not forgetting other managers who have not hesitated to invest in local small-scale production companies. That’s why it’s so important to connect the worlds of SMEs and PE so as to increase the potential for interaction and opportunities.
How can we capture wealthy customers more effectively? This is one of the major objectives of Luxembourg private equity. Find out more in Wednesday’s article.
This article was originally published in .