Technology key to supporting retailisation in private markets in 2024

Having recently spoken on a panel at the ALFI Private Assets Conference exploring what keeps conducting officers up at night, Derek Russell, Funds Director at JTC in Luxembourg, reflects on some of the key compliance and due diligence issues faced by the jurisdiction’s funds sector, and what lies in store in 2024.

The international fundraising environment in 2023 was undoubtedly proven to be a challenge for the cross-border funds sector and that applied equally in Luxembourg – but speakers and panelists at ALFI’s recent Private Assets Conference, attended by some 550 delegates, argued that the jurisdiction continued to hold its position as Europe’s foremost centre for private asset funds.

Despite elevated levels of inflation and ongoing tight monetary policy, speakers indicated that there continued to be support for private equity and venture capital, real estate and infrastructure and debt funds, suggesting that not everything on the horizon is necessarily bleak.

When it comes specifically to compliance, KYC and due diligence – the focus of Derek’s panel – there were some key trends, particularly around ‘retailisation’ in the private markets, automation, talent and staffing, as Derek explains.

“Anti-money laundering controls continues to be a major focus,” says Derek. “And that’s being exacerbated by the onward trend of retailisation in the sector. With private equity and other alternative funds being marketed to what we would ordinarily describe as retail investors, that opens up the prospect of customer due diligence being extended from a small number of limited partners to hundreds or even thousands of individual investors. It’s a key issue for managers and the service providers that support them.”

Derek pointed to how that trend is resulting in a lot of first-time investors coming into alternative funds – which is hiking up workloads for conducting officers and their teams, but also creating AML surprises for investors themselves.

“Those investor types probably don’t expect AML and KYC processes to be as arduous as they are,” explains Derek. “But if they’re buying those kinds of products, that they possibly know little about, it’s absolutely necessary. This trend is going to see the investor base increase rapidly – an investor base that is going to require significant support.”

It follows that automation and technology is likely going to play an increasingly significant role in supporting and facilitating this trend, helping to alleviate the sheer volume of due diligence work coming down the track.

“It’s not just the initial process – there will clearly be a lot of reporting needed too, to ensure investors are all treated equally and fairly,” adds Derek. “That’s another challenge with risk attached, but where technology can play a role.”

More broadly, Derek cites further opportunities presented by automation within his team, in particular in ‘delegating’ more manual tasks to machines in order for people to be undertaking more value-added, fulfilling work:

“Technology is being used more and more to automate the more manual tasks and make due diligence processes more efficient and streamlined. The relationships between service providers and banks is a case in point – if the due diligence packs that form a critical part of those relationships could all be automated or if there was some central repository, it would be a huge benefit and speed up the process for managers and investors. There’s massive potential there.”

Human resources and staffing was also a key discussion point – with panelists being particularly  concerned about talent retention with a view to ensuring consistent service levels and long-term relationships with managers and investors.

“As a jurisdiction, I feel Luxembourg is very attractive to experienced professionals – and that’s down to how buoyant our centre is, and how we are embracing technology to so that people here can be doing the more rewarding, fulfilling parts of their job. It’s important because that helps build solid, driven, long-term teams – and we know that investors and managers appreciate that longevity and consistency of service.”

Derek pointed in particular to jurisdictional competition in this respect, highlighting how investors will only begin to question structures and the status quo when things begin to get overly complex.

“Competition in the market between fund domiciles is very real, and that means we need to continue to work hard to make sure processes, including from the initial due diligence and KYC experience, all the way through the lifecycle of a fund, are streamlined and hassle-free,” says Derek. “Only when that is not the case will you start to see managers questioning a certain set-up. It’s a definite challenge for 2024, but as long as we continue to embrace technology and focus on the high end analytical human element of our proposition, Luxembourg is well placed to maintain its upward trajectory.”