2 minute read 18 Oct 2021
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Fund Distribution in Europe - Considerations for Asian and Chinese asset managers

By Amanda Yeung

EY Luxembourg Chinese Business Services Business Development Director

Global executive for cross-border business, especially between Greater China and Europe. Connecting clients with EY services, assets and experience

2 minute read 18 Oct 2021

In 2019, despite growth in asset under management (AuM), global investment fund industry faced significant pressure on profitability due to fee pressures and rising costs. During the COVID-19 pandemic, asset managers have been experiencing a decline in AuM. Distribution has thus become critical to succeed in this unprecedent time. Some Asian fund managers are considered venturing into Europe to cater for European investors’ interest in China assets.

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In the third article of our Luxembourg fund series1,2, we would like to provide an overview of fund distribution in Europe and considerations that Asian asset managers should take into account when tapping into the European market. 

1. What is the trend of investment fund distribution in Europe for regulated and alternative investment funds respectively?

Being regulated funds mainly for investment in securities in secondary market, Undertakings Collective Investment in Transferable Securities (UCITS) can be marketed to both institutional and retail investors in the European Union (EU) and outside of EU, providing UCITS with a large potential investor pool. Given the current low interest rate environment, there are steady inflows of funds from both retail and institutional investors (especially for pension funds) which aim to seek stable investment returns in this volatile investment environment. UCITS remain to be popular amongst investors even during pandemic time.There is also a demand for investment in alternative investment funds (AIFs) which are mainly distributed to qualified investors (e.g. (ultra)-high-net-worth individuals and institutional investors) globally. We observed that real estate is a particularly popular asset class at present, especially in Europe, the UK and Middle East. 

Investors are interested in AIFs investing in private equity since they are willing to bear higher risk for higher investment returns over a longer investment horizon. Nevertheless, private equity funds have been affected to some extent by the pandemic due to postponement of deals.

2. According to the International Statistics Release by European Fund and Asset Management Association in June 2020, Luxembourg is the second largest fund domicile in the world after the US. Why Luxembourg is a popular fund jurisdiction compared with other jurisdictions?

Luxembourg has a very stable political and economic environment. The Luxembourg regulatory authorities are very pragmatic and business friendly, focusing on promoting healthy growth of its fund, fintech and other financial services industries. It is one of the jurisdictions which has triple A credit rating, which is one of the key aspects when fund managers and institutional investors screen and select their investment targets. For instance, some pension funds such as those in Latin America put a heavy weight on the credit rating of the fund domicile in their investment decision process. 

International investors generally associate Luxembourg funds (including UCITS and AIFs) with strong investor protection and stringent regulatory supervision. They are more confident investing in Luxembourg funds than other offshore fund jurisdictions. This makes Luxembourg a natural choice of fund domicile when fund manager desires to raise capital from international investors for global investments.  

Luxembourg’s tax regime and wide treaty network are also conducive to the development of the onshore fund and fund management industry, encouraging global fund managers to setting up both the fund and fund management vehicles in Luxembourg for global investments. 

3. Both Luxembourg UCITS and AIFs have proven track record in Europe. How do they perform when they are marketed to Asian investors?

We observed that Asian investors seem to be more interested in AIFs than UCITS, driven by the expected higher investment returns offered by AIF products with focus on real estate, infrastructure and credit assets. Nevertheless, the size of AuM of AIFs invested by Asian investors is comparatively small versus the amount invested in UCITS at present.

4. What are the opportunities for China fund managers?

There is a demand amongst global investors for a diversified investment portfolio, including gaining exposure to China assets.  China fund managers can utilize their rich experience and local expertise to participate in the portfolio management of China-focused funds. Proper structuring of fund products and fund management vehicles is one of the key elements for gaining international investors’ confidence. Despite of investors’ growing interest, institutional investors may have practical difficulty investing in China focus funds as such funds may not meet the internal investment parameters predetermined by institutional investors, in terms of proven track records, size of AuM, and the use of appropriate form of fund vehicle. In addition to fund performance, these investors usually demand adequate level of transparency and disclosure of fund-level information, as well as equal investors’ rights.  

Targeting at EU investors, using Luxembourg funds and Luxembourg fund vehicles, which are well-known amongst global investors, can be a model that fund managers can consider when the underlying investments are in China. Under a strong regulatory framework, Luxembourg funds offer the investor protection desired by sophisticated investors.

5. When Asian fund managers desire to establish their presence in Luxembourg to distribute fund products, what would be the advice to be successful in Europe?

We recommend Asian fund managers to gain local knowledge about the diverse distribution channels and investor behaviors in Europe, which can vary between different European countries. It is always important to engage with local sales force to obtain local market intelligence. Distribution is often the first line of investor interaction. It has a critical role to play in introducing the investor to the full potential of the asset manager and embedding the more client-centric, relationship-driven model. A client-centric model can only be achieved by creating a closer, deeper client relationship.In addition, branding, proven track record, local presence and substance are very key elements to running a successful fund management business in Europe.  

If the fund manager is thinking of raising funds from global investors or pursuing global investment strategy, Luxembourg is one of the jurisdictions which fund manager can consider setting up the fund and fund management vehicle.  Our fund team has a combination of audit, tax and advisory expertise from EY Luxembourg and EY China. We would be very happy to assist you on your Luxembourg fund journey.  

Our fund team has a combination of audit, tax and advisory expertise from EY Luxembourg and EY China. We would be very happy to assist you on your Luxembourg fund journey.


1 Understanding Luxembourg Fund in 10 minutes

          https://www.ey.com/en_lu/financial-services/understanding-luxembourg-fund-in-10-minutes

2 The new favorite of the Luxembourg fund toolbox - RAIF

          https://www.ey.com/en_lu/financial-services/the-new-favorite-of-the-luxembourg-fund-toolbox---reserved-alter

Summary

In the third article of our Luxembourg fund series we would like to provide an overview of fund distribution in Europe and considerations that Asian asset managers should take into account when tapping into the European market. 

About this article

By Amanda Yeung

EY Luxembourg Chinese Business Services Business Development Director

Global executive for cross-border business, especially between Greater China and Europe. Connecting clients with EY services, assets and experience