Preparing for potential hurdles from trade wars, non-governmental markets show resilience, as Luxembourg showcases its strategic advantage in the marketplace.
Luxembourg is navigating a challenging but resilient environment in the second half of 2025, with the private capital sector demonstrating cautious optimism and even growth. Despite the return of Trump-era tariffs and ongoing geopolitical volatility, the country's private capital sector is not only surviving but thriving through strategic adaptation.
A Strong Start to 2025
The private markets sector had a strong start to 2025, with private debt and private equity deal activity showing an uptick in the first half of the year. However, the second half is expected to be more difficult due to the impact of revived US tariffs on global trade and economic uncertainty.
Macroeconomic Challenges
Trade tensions and tariffs from the Trump-era remain a significant macroeconomic challenge, causing volatility in global markets. Yet, leading industry figures agree that despite these pressures, private markets anchored in Luxembourg are not only surviving this period but thriving through it with strategic adaptation.
European Macroeconomic Backdrop
The broader European macroeconomic backdrop has somewhat improved relative to the US, as Europe has benefitted from reduced inflation and more favorable monetary policies enabling rate cuts, which supports smaller companies often favored by private capital. This controlled inflation and supportive fiscal environment aid Luxembourg-based investors who often focus on European asset pools.
Growth and Regulatory Environment
Luxembourg's private capital industry continues to grow strongly, with investment fund assets surging from €2.5 trillion to €7.5 trillion, reflecting sustained inflows into UCITS, alternative funds, and active ETFs. The country's regulatory environment—transparent, robust, and conducive to both traditional and innovative fund structures—is a core factor in maintaining its leadership position.
Navigating Challenges
Although tariffs, a stronger euro, and geopolitical uncertainty have made firms hesitant to invest, stronger private consumption, real income growth, and low unemployment in Europe are underpinning economic activity. This creates a somewhat balanced environment where private capital can allocate strategically to resilient sectors and benefit from ongoing investment in defense and infrastructure driven by geopolitical responses.
The Future of Private Markets
The panel at the Funds Europe Private Markets High-Level Dialogue 2025, hosted in Luxembourg, agreed that the fundamentals of private markets remain intact, and Luxembourg's role continues to expand, despite challenges such as tariffs and trade tensions in the second half of 2025. The panel expressed a consensus that private markets should become more accessible, but with integrity, emphasizing the importance of investor education.
Education is seen as crucial for long-term financial resilience, with a call for financial literacy to start in schools. Smaller, targeted deals tied to sustainability, regional specialization, or tech innovation are rising in importance in private markets. Private assets are seen as a hedge during volatile periods, with their long-term nature providing strategic focus and economic ballast.
Private markets are seeing increased interest in new sectors like climate and energy transition, defence tech, healthcare, AI, and data infrastructure. Many of the ecosystem's newest entrants, such as defence tech venture funds and dual-use security firms, are choosing Luxembourg as their launchpad.
The illiquidity of private capital is becoming a strength, dampening market noise and providing psychological comfort. Luxembourg has grown from a booking center to a true headquarters in private markets. Brexit has led to a significant shift, with many fund managers relocating and M&G Europe managing €138 billion out of Luxembourg, nearly half of it in private markets.
Luxembourg's hybrid role as both a traditional asset management center and a private capital leader gives it a competitive edge in Europe's evolving financial landscape. M&G launched its inaugural ELTIF under the new ELTIF 2.0 regime in late 2023, with promising but modest results. There is a call for a 3.0 version of ELTIF to tackle unresolved cross-border inconsistencies.
William Gilson highlighted the operational challenges in making private markets more accessible, including the need for real-time data, robust distribution networks, and a different mindset. Fundraising in private markets is undergoing a complex recalibration, with more M&A activity leading to more capital recycling but creating a logjam in new commitments. The challenge, as the panel concluded, is not one of demand but delivery, with the right education, governance, and distribution frameworks needed to make private markets deliver not just returns, but resilience.
Stephane Pesch emphasized that if private markets are to be democratized, it must be done with quality, ensuring the right performance, transparency, governance, and education. There is a debate on whether the democratisation of private markets is reality or rhetoric. ELTIF 2.0 still faces friction across EU jurisdictions, with some countries insisting on local structures or wrappers. Micaela Forelli stated that the shift towards making private markets accessible to high-net-worth and affluent investors is already happening.
In summary, Luxembourg's private capital sector in H2 2025 is marked by cautious optimism amid macroeconomic challenges, including revived US tariffs and geopolitical instability. Its strong regulatory framework, diverse investment options (including alternative funds and active ETFs), and strategic position in the European economy are enabling it to adapt and even thrive despite external headwinds.
- Despite the return of Trump-era tariffs and ongoing geopolitical volatility, Luxembourg's private capital sector is thriving through strategic adaptation, demonstrating a strong start to 2025 with increased deal activity in private debt and private equity.
- The country's regulatory environment, known for being transparent, robust, and conducive to innovative fund structures, has been a core factor in maintaining Luxembourg's leadership position in private markets.
- In response to macroeconomic challenges, private capital is strategically allocating to resilient sectors like defense and infrastructure, driven by geopolitical responses, and exhibiting a growing interest in new sectors such as climate and energy transition, defence tech, healthcare, AI, and data infrastructure.
- Education is viewed as essential for financial literacy, with a call for financial literacy to start in schools, as smaller, targeted deals tied to sustainability, regional specialization, or tech innovation become more prevalent in private markets.
- The hybrid role of Luxembourg as a traditional asset management center and a private capital leader gives it a competitive edge in Europe's evolving financial landscape, attracting newer entrants in private markets such as defence tech venture funds and dual-use security firms.
