What are the challenges facing AIFM heads of finance in Luxembourg? Responsibilities and challenges linked to ensuring the financial stability of our organisation

SFF Magazine September 2024

Topics: Alternative Investment, Asset Management, Trends

There is no doubt that Luxembourg, located in the heart of Europe, has established itself as a leading financial centre, attracting a wide variety of financial institutions from all over the world and becoming an epicentre for Alternative Investment Fund managers such as our own.
This status brings with it a number of day-to-day challenges for asset managers in the Grand Duchy, and thus for the heads of finance who operate in this environment.
I set out below our finance department’s main concerns and challenges. We are aware of these challenges, and managing them gives us the stability and foresight we need to continue to grow in an increasingly complex and competitive financial environment.

Detailed knowledge of the regulatory environment is always critical for Luxembourg AIFM finance departments. The Alternative Investment Fund Managers Directive (AIFMD) and the specific rules of the Commission de Surveillance du Secteur Financier, the CSSF, impose an increasingly complex and fast-changing regulatory framework.

As the regulatory and tax environment is constantly evolving, a head of finance’s ability to adapt to these changes is crucial to the long-term sustainability and performance of our Luxembourg-based asset manager.

The dynamic culture at A&G Group has made us the first Spanish company to receive the AIFM license in Luxembourg and, since we always aim to be as versatile as possible for our clients, we have been managing Spanish funds as well as Luxembourg funds for several years now.

This means always taking into consideration the regulations governing funds in Spain, working in coordination with our group to keep us aligned and in compliance with these regulations.

“As the regulatory and tax environment is constantly evolving, a head of finance’s ability to adapt to these changes is crucial to the long-term sustainability and performance of our Luxembourg-based asset manager.”

The second point I would like to highlight is the importance of managing the company’s liquidity and cash flows, which is very important in the regulatory and economic environment in which we operate.

The AIFMD imposes strict liquidity management requirements and demands contingency plans and stress management procedures, making it essential to guarantee this liquidity. This allows us to meet our operational obligations, giving us sufficient financial capacity to deal with unforeseen events, launch new initiatives that require investment and maintain normal business operations.

By monitoring cash flows, we optimise the use of capital and improve the financial performance of the company that manages the Fund.

Full transparency in the management of these cash flows enables us to comply with our obligations to the local CSSF regulator and, if necessary, to the National Securities Market Commission (CNMV). In addition, good liquidity management is essential for the long-term our company’s and the A&G Group’s planning and strategy.

Closely related to this, I would like to underline the importance of knowing and complying with own funds requirements (requirements in the AIFMD and in specific circulars such as CSSF Circular 18/698).

“By monitoring cash flows, we optimise the use of capital and improve the financial performance of the company that manages the Fund.”

Close controls over own fund ratios allows us to anticipate and mitigate solvency problems, ensuring that AIFM can maintain its operations even in periods of market volatility or under financial pressure. These are also key controls for the A&G Group’s strategic planning; monitoring them allows us to project future scenarios and plan responses to different market situations. It not only helps us comply with regulatory requirements, but also enhances the perception of the AIFM as a well-managed and solvent entity, which is crucial in attracting new clients and investors.

Financial operational risk management is another point to consider. Luxembourg regulations require a rigorous approach to risk identification, measurement and management. Working closely with the Risk Management department gives us a thorough understanding of these regulatory requirements and allows us to implement effective internal controls and mitigation strategies.

Financial operational risk includes risks associated with system, process, people or external failures that can negatively impact AIFM’s liquidity. The finance department ensures that these risks are identified and mitigated, thus preserving the stability of A&G Luxembourg AM, S.A. and its reputation, which is paramount, especially in a highly competitive environment such as Luxembourg.

An issue that we are also focused on and that we want to highlight in this presentation is operational efficiency and cost control, which is a daily challenge that should never compromise the quality of service we offer to our clients in Luxembourg.

We rely on external services and outsourcing to fulfil our management functions, and the finance department closely monitors the costs of these services in order to maintain an efficient cost structure and to ensure shareholder returns. We like to be able to rely on the best partners to provide the best service while ensuring a competitive cost structure.

“Luxembourg regulations require a rigorous approach to risk identification, measurement and management. Working closely with the Risk Management department gives us a thorough understanding of these regulatory requirements and allows us to implement effective internal controls and mitigation strategies.”

A&G Luxembourg, AM, S.A. also relies on services provided by the group from Spain. To ensure that intra-group economic flows are market-based, the finance department, assisted by external tax consultants specialised in transfer pricing, identifies and documents the arm’s length nature of the various intra-group operations or transactions in which we are involved; this analysis is conducted in accordance with current regulations and OECD Guidelines.

The European DORA (Digital Operational Resilience Act) regulation and its transposition in recent months is proving to be a major challenge for financial departments, but more generally for the governance of all companies.

DORA focuses on managing the risk associated with digital infrastructure (e.g. IT system failures or cyber-attacks), and will be fully implemented in January 2025.

The finance department works closely with the IT department to continue to maintain best practice in cyber security and information protection and to continue to provide maximum protection for our clients’ and investors’ assets and data, while avoiding potential financial loss or reputational damage to the fund manager and the A&G Group as a whole, in the event of an attack on our IT systems.

DORA can also have significant implications for our operational costs, so we are focused on managing these costs and aligning them with our group in order to balance the need to invest in digital resilience with the overall profitability of our company.

Finally, I would like to end this presentation by underlining the importance we place on talent management and organisational development in the A&G Group. The finance department, and the entire A&G group more generally, is continuously committed to attracting and retaining the best professional talent, who are, without a doubt, our main and most important asset for continuing to grow and offering the best service possible.