"Our motto at the LPEA remains “Match talent with money”: Luxembourg has both, and Family Offices greatly contribute to making it happen.”
 

What are the challenges in creating a family office?

 

Rather than describing them as “challenges”, I would say that the process involves considering the reasons for creating a structure to manage the interests of the family concerned, and the costs associated with it, depending on the family’s needs. The rule of thumb is that the creation of a family office for a single family is economically justified when managing above $500m of assets but I believe that assessing needs and clarifying objectives should take precedence over the amounts involved. In general, a family considers setting up its own structure to manage its financial assets when it feels that external advisors are no longer qualified to meet their objectives in terms of performance and alignment of interests or when their specific needs require a fully personalised approach, which private banks and other independent asset managers cannot provide 100%. However, employing investment professionals comes at a significant fixed cost. Trust is important and must be earned; time must also be taken by shareholders to interact with the team and to set up the appropriate selection and reporting processes. Today, there are many possible options, including structures which allow a few families to share resources - and therefore fixed costs - while maintaining their independence in terms of investments. In more than 10 years of working with families investing in PE, I have seen models of all kinds and sizes and yet the level of wealth never influenced the effectiveness of the structure. Conversely, the clarity of the investment objectives and processes and the convictions deriving from those determine how good the family office performance is.

 

How do you see the PE sector developing in Luxembourg over the next five years?

 

Positively! The entire private markets industry represents about $5,000 billion today – a fraction of the size of the stock market whose total capitalization represents about $100,000 billion. We’re on a roll because companies are increasingly seeking to finance themselves outside the stock market and the traditional banking system, which continues to be overly cautious and restrictive. According to Preqin, the PE sector, which includes unlisted capital markets without hedge funds, will exceed $10 trillion by 2023. But it must remain agile and adaptable to guarantee performance, as demonstrated during the 2007-2008 crisis, because regulatory requirements are increasing. We must also be alert to a possible correction of the upward trend in the macroeconomic cycle of the past few years, especially if interest rates rise. This could have a negative impact on Leveraged Buyouts (LBOs), the largest segment within PE. Luxembourg, which represents around 10% of the total AuMs* in terms of structures domiciled here, continues to enjoy increased visibility as an international PE hub: foreign fund managers choose the Grand Duchy as a European centre, while international families invest increasingly in PE and appreciate Luxembourg's comprehensive, multilingual and sustainable ecosystem. In addition, the role of green finance continues to grow in Luxembourg, promising a favourable outlook for the future as ESG criteria become more widespread, in accordance with best practice – the subject of enthusiastic discussions at our LPEA INSIGHTS conference on 19 March 2019. Lastly, our diversification into FinTech/RegTech and space investing demonstrates the Grand Duchy's ability to build on its strengths to convince ambitious investors who are concerned about long-term stability.  All this greatly contributes to bringing more Single Family Offices to Luxembourg.

 

*Assets under Management