Key Takeaways
- • Deloitte Luxembourg partner Arnaud Bon says demand from high-net-worth individuals (defined as those with more than $1 million in investible assets) for alternative investments exceeds what the market can supply, leaving both sides frustrated.
- • Blackstone's Leon Volchyok estimates the HNWI market at $80 trillion, with only single-digit percentages currently flowing into alternatives.
- • Luxembourg's private banking market holds €466 billion in assets under management according to Luxembourg for Finance, and feeder vehicles of 70-80 high-net-worth investors are emerging to ease operational strain.
- • Valuation timelines of at least two months and know-your-customer and anti-money-laundering processes are cited as the main operating bottlenecks for opening alternative funds to retail-adjacent investors.
- • Distributed ledger technology and the European Long-term Investment Fund (ELTIF) are presented as partial solutions, though industry participants say the ELTIF structure's closed-ended limitation and low leverage caps remain obstacles.
Summary
Sophisticated individual investors are increasingly entering alternative asset classes, including private credit, real estate, infrastructure, private equity and venture capital, which have historically been dominated by pension and sovereign wealth funds. According to Arnaud Bon, Luxembourg-based partner at consultancy Deloitte, alternatives offer a combination of long-term performance and low correlation with public equity markets, along with a psychological appeal of direct involvement. Bon cited S&P Global data showing private credit yields reached 100 basis points above syndicated loans in 2020, and Invest Europe's Benchmark 2020 report showing European buy-outs delivered an annualised 15.06% return since inception to end-2020, versus 5.48% for the MSCI Europe index over the same period.
Demand is substantial but access remains constrained. Bon said high-net-worth individuals, defined as those with more than $1 million in investible assets, are seeking alternatives in volume that the industry cannot currently meet. Leon Volchyok, managing director in real estate at Blackstone, estimated the HNWI market at $80 trillion, with only single-digit percentages currently allocated to alternatives.
The operational burden is the central obstacle. Alternative funds have traditionally managed a small number of large institutional tickets, often totalling tens of millions and locked up for five years or more. Bon said onboarding hundreds or thousands of HNWI investors is fundamentally different, with know-your-customer and anti-money-laundering workloads rising sharply. Recruiting larger back-office teams is not a practical answer, Bon said, given existing talent shortages in Luxembourg.
Feeder vehicles are one response. Bon said wealth managers with private banking clients are partnering with fund managers to set up feeder structures holding 70-80 high-net-worth investors each. Peter Wilson, managing director at ScalingFunds, said Moonfare, a Germany-headquartered platform, channels private commitments into Luxembourg-based feeder funds with minimums as low as €100,000 according to its website. Wilson noted that historically 99% of alternative funds were institutionally owned, but individuals with over €1 million are now investing via feeders.
Valuation remains a further constraint. Bon said alternative assets lack a market price, and valuation cycles can take at least two months. This matters most for open-ended funds, which are increasingly used for private credit and require ongoing valuation for subscriptions and redemptions. Distributed ledger technology is being positioned to help, with Bon describing automation of processing and tokenisation of fund units to facilitate secondary trading, which is currently over-the-counter. Martin Engdal, chief commercial officer at ScalingFunds, said around 50% of general partners change fund administrators due to dissatisfaction, and average legal entity onboarding takes 90-100 days. Luxembourg's blockchain laws of 2019 and 2021 and a CSSF white paper from January 2022 support DLT use, and Engdal called Luxembourg the most progressive DLT jurisdiction.
Regulation is advancing but incomplete. Volchyok said Luxembourg's oversight and reporting framework is conducive to individual access but that this has not yet extended across Europe. He said the ELTIF, revised most recently in 2021, applies only to closed-ended funds, which limits liquidity for individual investors, and its leverage limits are too low for stabilised real estate. Bon said managers are developing fund-of-funds with vintage diversification and listed vehicles to provide liquidity, though listing requirements remain cumbersome. Most global managers, the article concludes, are currently launching open-ended funds or feeder vehicles to attract new investors.
Demand is substantial but access remains constrained. Bon said high-net-worth individuals, defined as those with more than $1 million in investible assets, are seeking alternatives in volume that the industry cannot currently meet. Leon Volchyok, managing director in real estate at Blackstone, estimated the HNWI market at $80 trillion, with only single-digit percentages currently allocated to alternatives.
The operational burden is the central obstacle. Alternative funds have traditionally managed a small number of large institutional tickets, often totalling tens of millions and locked up for five years or more. Bon said onboarding hundreds or thousands of HNWI investors is fundamentally different, with know-your-customer and anti-money-laundering workloads rising sharply. Recruiting larger back-office teams is not a practical answer, Bon said, given existing talent shortages in Luxembourg.
Feeder vehicles are one response. Bon said wealth managers with private banking clients are partnering with fund managers to set up feeder structures holding 70-80 high-net-worth investors each. Peter Wilson, managing director at ScalingFunds, said Moonfare, a Germany-headquartered platform, channels private commitments into Luxembourg-based feeder funds with minimums as low as €100,000 according to its website. Wilson noted that historically 99% of alternative funds were institutionally owned, but individuals with over €1 million are now investing via feeders.
Valuation remains a further constraint. Bon said alternative assets lack a market price, and valuation cycles can take at least two months. This matters most for open-ended funds, which are increasingly used for private credit and require ongoing valuation for subscriptions and redemptions. Distributed ledger technology is being positioned to help, with Bon describing automation of processing and tokenisation of fund units to facilitate secondary trading, which is currently over-the-counter. Martin Engdal, chief commercial officer at ScalingFunds, said around 50% of general partners change fund administrators due to dissatisfaction, and average legal entity onboarding takes 90-100 days. Luxembourg's blockchain laws of 2019 and 2021 and a CSSF white paper from January 2022 support DLT use, and Engdal called Luxembourg the most progressive DLT jurisdiction.
Regulation is advancing but incomplete. Volchyok said Luxembourg's oversight and reporting framework is conducive to individual access but that this has not yet extended across Europe. He said the ELTIF, revised most recently in 2021, applies only to closed-ended funds, which limits liquidity for individual investors, and its leverage limits are too low for stabilised real estate. Bon said managers are developing fund-of-funds with vintage diversification and listed vehicles to provide liquidity, though listing requirements remain cumbersome. Most global managers, the article concludes, are currently launching open-ended funds or feeder vehicles to attract new investors.
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