AGEFI Luxembourg - septembre 2025

AGEFI Luxembourg 22 Septembre 2025 Fonds d’investissement T he private-fundmodel is built on a simple promise: deploy capital, cre- ate value, dispose of assets, and re- turnproceeds to investors. Yet, when the final asset is sold,most funds discover a stubbornobstacle to closure—residual lia- bilities thatmust be ring-fenced for years before a final distribution canbe made. Recent innovations in the warranty and indemnity (W&I)market offer an ele- gant solution. “FundWrap Up Insurance”, also called “End-of-Fund-Life” or “Fund Liquidation” insurance, al- lowsmanagers to transfer those contingent exposures to an A-rated insurer, acceleratingwind-up and freeing trapped capital. What is FundWrapUp Insurance? A FundWrapUp policy is a bespoke, one-off insur- ance contract written for a maturing fund (or its liq- uidator)aftertheunderlyingportfoliohasbeenexited. The policy quite literally “steps into the shoes” of the fund and indemnifies it against future claims that might arise under historic sale agreements or other legacyobligations. Rather than reserving cash,main- taining entities and risking LP clawbacks, the fund pays a single premiumand passes the tail risk to the insurerfortheremainderoftheliabilityperiod—typ- icallyup to sevenyears. Howdoes itwork? 1.Scoping : Thebrokerandcounselmapeveryresid- ualexposure:warrantiesgivenonpastdisposals,spe- cific indemnities, identified tax risks, environmental undertakings and any contingent litigation. 2. Underwriting : Whereas traditional sell-side W&I insurance requires fulsome vendor or buy-side dili- gence, wrap up underwriting is lighter. Insurers will review the historic SPAs, disclosure letters and any available data-roommaterials. Full vendor due-dili- gence reports are helpful but not essential provided that a continuedaccess to thedata roomanda robust disclosureprocessareensuredandtransparentlydis- closed to the insurers. 3. Policy Structuring : The policy limit is calibrated to the capital theGPwishes to release. Financial thresh- olds, survival periods and lossdefinitions aredrafted tomatch the language of each covered SPAensuring seamlessback-to-backprotection.Thefund,theman- ager and/or the liquidator can be named as insureds; the liquidatormaybe addedas a loss payee for addi- tional comfort. 4. Placement and Closing : Once bound, the insurer bears the covered legacy risks, permitting the fund to make final cash distributions, dissolve blocker entities and complete liquidation withoutmaintaining costly reserves. Which risks canbe covered? -Fundamental,general,andtaxwarranties stillopenunderhistoricsaleagreements. - Specific indemnities—tax gross- up clauses, environmental guarantees, title or capacity undertakings—wherethein- surer canunderwrite theun- derlying risk. - Identified or unknown tax exposures,suchaswithhold- ing-tax challenges or trans- fer-pricingdisputes. -Contingent liabilities stem- ming from litigation, regulatory investigations or con- tractual claims. - Residual operational risks for complex divest- ments, includingenvironmental impairment or real- estate title. -Coveragecanextendtobothshareandassetdispos- als across multiple jurisdictions, providing a “catch- all” wrapper for virtually any tail liability that might delay a fund’s clean exit. Why is it attractive? -Accelerateddistributions and enhanced IRR : cap- ital otherwise trapped inescrow, hold-backs or claw- back reserves can be released to investors immediately, boosting reportedperformance. - Cost savings : avoiding several years of audit, legal, director and domiciliation fees on an otherwise dor- mant structure. - Clean exits : buyers no longer need escrow protec- tion, at least not for the residual liabilities as the insur- anceprovide analternative recourse andvendors are not leftwith anuncertain tail of liability. - Voluntary liquidation facilitated : liquidators gain comfort that contingent claims are ring-fenced. What does it cost? Premiums are non-renewable and paid once at in- ception. Market pricing ranges between 2 % and 10 %oftheinsuredlimit,dependingon(a)thequantum and complexity of the exposures, (b) availability and quality of historic diligence, (c) number of jurisdic- tions andgoverning laws involved, and (d) lengthof the policy term (often three to seven years). When weighed against the opportunity cost of retaining capitalinescrow,ongoingauditanddirectorfeesand the drag on IRR fromdelayed distributions, the pre- miumis oftenoffsetbythesavingsonadministrative costs and the benefits of earlier distributions, which can improve net returns. Conclusion FundWrap Up Insurance is a strategic tool for fund managersseekingtomaximizereturns,ensurecleaner exits, and provide certainty to investors. It offers a pragmaticsolutiontocrystallizeresidualliabilities,un- lock trapped capital and deliver a cleaner, faster and morecost-efficientliquidation.Thisinturnallowsfor earlierfinaldistributionsandthepromptwindingup offundentities—withoutwaitingforallwarranty,in- demnity, or tax claim periods to lapse. In a market where limited partners closely scrutinise liquidity timelinesascloselyasgrossmultiples,FundWrapUp Insuranceoffersacompellingwaytosquarethecircle betweenfiduciary caution and capital efficiency. Jean-PhilippeSMEETS,Partner Ashurst jean-philippe.smeets@ashurst.com LeïlaKEHIHA,JuniorAssociate Ashurst leila.kehiha@ashurst.com End-of-Fund-Life Insurance: AStrategic Tool to Unlock Capital andAccelerate Fund Liquidations T he growing interest in semi- liquid funds presents unique challenges for alternative in- vestment fundmanagers (AIFMs). These challenges formed the foun- dationof discussions at the recent roundtable organizedbyEYPar- thenonLuxembourg, which brought together a distinguished groupof 20 professionals represen- tingAIFMs anddepositarybanks. In a deepdive into the critical topic of valuationoversight forAIFs, best practices, emerging trends and the challenges that lie ahead, industry thought leaders offered a richpers- pective that could shape the future of valuation in this dynamic sector. Current Challenges in Semi-LiquidFunds Deploying capital in the alternatives in- dustry is fraught with difficulties, partic- ularly concerning liquidity management, as mentioned by participants at the roundtable. The complexity of managing investments thatmaynot be readily liqui- dated requires robust operational frame- works and innovative solutions. One key instrument for liquidity management is the lock-up period, however implement- ingsuchmeasurescanbecostlyandcom- plex, especially when considering the diverse interests of different clients. Investorsinsemi-liquidfundsarediverse, ranging from retail investors to high-net- worthindividualsandinstitutionalclients. This diversity increases competition among funds, making it imperative for AIFMs to develop clear and transparent valuationframeworksthatbuildtrustwith investors.Aprimaryconcern is thevalua- tionof illiquidassets. Participants empha- sized the significant risks associated with valuationmisstatements and the need for accuratenetassetvalues(NAVs).Investors are demanding greater transparency and frequency in valuations, necessitating a shift from traditional annual assessments tomore regularupdates. This evolution is particularlypertinentforopen-endedilliq- uid strategies, where discrepancies can lead to investor dissatisfaction. ValuationFunctionChallenges Valuation functions face numerous chal- lenges,includingtheinherentilliquidityof assets, which complicates the establish- ment of accuratevaluations.According to theparticipants, themost significant chal- lenge in valuing illiquid assets is the illiq- uidityitself,asindicatedbythemajorityof participants. This complexity is com- pounded by requests for greater fre- quency of valuations, which can lead to operationalchallengesandpotentialerrors asfundmanagersstrivetokeeppacewith investordemands,particularlygivendiffi- culties with access to reliable information in a timelymanner. The challenge lies in balancing the fre- quencyofvaluationswiththeirassociated costs. Fund managers must evaluate whetherthebenefitsofmorefrequentval- uations justify the expenses incurred, es- peciallywhendealingwith illiquidassets. The participants highlighted that limited access to reliable data can lead to inaccu- ratevaluationsandincreasedrisk,empha- sizing the need for improved data management practices. Moreover, the in- creased volatility of public markets poses additionalrisksforassetmanagers.Oneof the primary reasons for the existence of privatemarketsistoprotectinvestorsfrom the volatility associated with public mar- kets.Consequently,itisbecomingincreas- ingly difficult to tag the value of illiquid assets directly to indexes. Atthesametime,participantsemphasized theimportanceofbacktestingtheprevious forecastsandvaluationsagainsttheactual figures and transaction prices when exits occur,asthispracticecanbeavaluabletool for valuationprofessionals. Some participants raised questions about thenecessityof increasedNAVfrequency for investors.While it’s evident thatmany investors favor more frequent valuations, there remains uncertainty about whether allinvestorsfullyunderstandthecostsand risks associated with this higher fre- quency. This lack of awareness may lead themtoreconsidertheirdemandformore frequent valuations. The Importance of LiquidityManagement Liquidity management is a critical aspect of operating semi-liquid funds. Discus- sionshighlightedtheneedforeffectiveliq- uidity management tools and liquidity stress testing to navigate the complexities of illiquid investments. Fund managers must carefully consider lock-up periods andothermechanismstomanageinvestor expectationswhile balancing the costs as- sociated with these strategies. Polling re- sults indicated that liquidity constraints mayhindertimelyexits,affectinginvestor satisfaction. This underscores the impor- tance of developing clear liquidity man- agementstrategiesthatalignwithinvestor needs. Additionally, in poor market con- ditions, if an exit is necessary, the invest- mentmayneedtobeheldlongertorealize its full value potential. Key Success Criteria for Semi-Liquid Funds As a result, the following keypoints that are critical to successfully navigate the challenges associated with the topics discussed during the roundtable can be mentioned. 1. ValuationFramework A clear and transparent valuation frame- work that includes, among others, avail- ability of proper data in a timelymanner, backtesting, consistent application of val- uationmethodsandefficientcommunica- tion with all stakeholders is essential for building trustwith investors. 2. LiquidityManagement A well-defined liquidity management framework is critical for addressing the complexities of semi-liquid structures. This may involve implementing lock-up periods and conducting liquidity stress testing as essential tools to navigate the complexities of illiquid investments and manage investor expectations.Also, qual- itative analysis shouldnot bedisregarded as part of liquiditymanagement. 3. Governance and Investor Reporting Implementing strong governance prac- tices ensures that valuation functions are aligned with industry best practices and regulatory requirements. The implemen- tation of a risk-based approach to moni- toring assets, based on their complexity and materiality, is essential for ensuring compliance and effective risk manage- ment.Moreover,followingrecommenda- tions from the regulator, interaction with depositorieshasbecomemoreformalized for asset managers. As a result, deposito- ries are more involved in review and ap- proval of valuation relatedprocesses. In conclusion, the roundtable hosted by EY Parthenon Luxembourg has illumi- natedthecomplexitiesandnuancesofval- uation oversight within the alternative asset management industry. The insights sharedby industryexperts not onlyhigh- light the pressing need for enhanced val- uation practices but also underscore the importance of balancing investor de- mandswiththeassociatedcostsandrisks. As the industry continues to evolve, it is imperative for stakeholders to remain agileandinformed,adaptingtoemerging trends and best practices. By fostering opendialogueandcollaboration,thealter- native assetmanagement sector cannavi- gatethechallengesahead,ensuringrobust valuationframeworksthatultimatelyben- efit both investors and the broader finan- cial ecosystem. The discussions fromthis gathering serve as a vital roadmap for the future, guiding the industry toward greater transparency and accountability invaluationoversight. ChristopheVANDENDORPE, EY-ParthenonLuxembourg, Partner,StrategyandTransactionsLeader PavloKOLESNYK, EY-ParthenonLuxembourg, SeniorManager,Valuation,ModellingandEconomics NormanFINSTER, EYLuxembourgConsulting, Partner,AlternativeInvestmentsLeader Navigating Challenges in the Valuation of Semi-Liquid Funds: Insights from Industry Experts