KPMG Large-scale ManCo & AIFM Survey 2023

The ManCo operating model transformation is in full swing

Motivated by the aim of optimizing processes and scaling operations, we observe that the ManCo operating model transformation is widespread, despite the macroeconomic uncertainties.

According to the survey, 97% of ManCos & AIFMs seek to review their current operations, while 31% consider their operating model in full transformation and 66% see a need for an incremental evolution of the existing operations.

Next to increasing margin and cost pressure, we observe that product innovation is at the core of the operating model evolution.

Expansion towards a Luxembourg ManCo Hub Model

A majority of ManCos and AIFMs are increasing their footprint vis-a-vis their Group towards an EMEA Product and Distribution Hub. This is accompanied by an increasing adoption of branches (73% of participants have branches, located across 18 different countries and 1016 total FTEs in branches), the acquisition of additional licenses, as well as the appointment of executives with global roles located in Luxembourg. Consequently, ManCos are not only limited to the borders of Luxembourg but are increasingly moving towards a global footprint.

Flat FTEs in Lux offices, but accelerated growth of staff in branches

While 2021 was marked by an increase of +14% in FTEs (full-time employees) from 2020, in 2022 the evolution of the headcount of ManCos was largely flat. In total, over the last 12 months, we observe a 1% increase of staff employed by ManCos , which can be broken down into a 3% increase in FTE core substance functions, a 1% increase in FTE in support functions and 1% decrease in FTE in operations functions.

Conversely, business activity in the branches has increased significantly since last year. The number of FTEs located in branches of Luxembourg ManCos grew by more than 20% compared to previous years.

Building safeguards towards increasing regulatory scrutiny

Due to the increasing CSSF regulatory scrutiny, ManCos & AIFMs recognized the need to monitor and mitigate their regulatory risk exposure by establishing a series of regulatory risk mitigation initiatives.

So, how are ManCos & AIFMs getting prepared? In our survey we noted that 96% of participants have a regulatory watch solution in place, 70% proactively meet with the regulator on a periodic basis and 41% have performed a regulatory health check and/or mock inspection over the past two years.

While only 25% of ManCos feel fully prepared for an upcoming regulatory on-site inspection, we observe that ManCos which performed a regulatory mock inspection in the past two years feel, on average, almost twice as prepared for an upcoming inspection than ManCos that did not perform a regulatory mock inspection recently.

Product innovation at the core of the ManCo value creation

76% of respondents stated that the observed ManCo operating model evolution is mainly motivated by the strategic decision to expand the existing licenses and product offering in order to respond to the pertinent margin fee pressure and to target new client segments.

More concretely, we noted that the strategic decision to expand the existing licenses and product offering materializes by:

• the increase in alternative licenses: we noted a 17% increase in the MiFID top up license acquisition, followed by an 11% increase in Private Equity licenses and a 6% increase in infrastructure licenses
• the interest in increasing the target market: 45% of participants were looking into the AIF offering to retail investors and 34% were looking into the marketing of the third party funds under the MiFID top-up.

The “paradox” of the ESG revolution

While ESG is considered a key regulatory focus area for the large majority of ManCos & AIFMs, we observe a high degree of dispersion in ESG operating models. While ESG adoption increased compared to the previous year from 45% to 52% in AuM, we see a high degree of diversity among survey participants: some have barely any ESG funds while there are others with a systematic roll-out of an ESG objective for funds managed.

While ESG continues to be rapidly integrated in the fund's investment strategy, the majority of ManCos do not consider their framework to be overall mature: only 36% of ManCos & AIFMs consider their ESG control framework to be either mostly or fully mature.