Should private banks double down on asset servicing, or step back?

Introduction  

In the early 2010s, many Luxembourg private banks expanded into asset servicing as a stable, fee-based business, leveraging the country’s role as a fund hub.

From 2018 to 2024, assets under management grew by nearly 80%¹ while the number of asset servicers stayed broadly stable. At the same time, banks faced rising costs from regulation, digitalisation, client demands, and the shift to alternatives.

In this context, many private banks are reassessing their product offerings and business models and strategically refocusing on core activities. While asset management is generally regarded as a central element of their core value proposition, the strategic role and future positioning of asset servicing are not clearly defined.

This situation places banking groups at a crossroads: reinforce and scale asset servicing to capture future growth, or pursue strategic divestment. There is no single answer; the decision requires a thorough, multi-factor strategic review.

Some institutions have chosen to further develop asset servicing. Others have opted to divest. For example, Banque International à Luxembourg (BIL) sold BIL Manage Invest to Waystone in May 2025, while Mizuho sold JFML to Carne Group in July 2025.

In the following sections, we outline the decision-making framework private banks need to consider and explore the strategic rationale behind both paths.

Case for change in an evolving market

The Luxembourg fund industry is undergoing profound transformations, with certain segments experiencing substantially higher growth rates than others. 

Growth is particularly strong in Alternative Investments, notably in specific sub-segments.

Net assets in regulated alternative funds, structured as specialised investment funds (SIFs), grew at a compound annual growth rate (CAGR) of 5,7% from FY2020 to FY2024.

However, the dedicated segment structured as a reserved alternative investment fund (RAIF), and the non-regulated one (limited partnerships) expanded at CAGRs of 46,5% and 48,5%, respectively.

Moreover, private equity constituted roughly 56% of Alternative assets as of December 2024, achieving a remarkable 35,25% CAGR from FY2020 to FY2024¹.

Taken at face value, this trend is positive for fund managers able to diversify towards higher-margin products. But many private banks and their in-house asset servicing functions are not fully prepared for this transition, as alternative asset classes demand specialised expertise and infrastructure. Asset servicing for alternatives is also less automated, limiting scalability and placing additional strain on existing resources.

In this evolving context, private banking groups face a strategic choice: invest in their own future growth and independence or divest their business to a consolidator or a strategic collaborator.

They need to build a long-term strategy that clarifies how the different pieces of the puzzle fit together to create a competitive advantage, guided by a series of critical questions:

• Is asset servicing core to the group’s growth strategy, or could capital be better deployed elsewhere?
• Is it operating in a commoditised market segment, or can it achieve meaningful differentiation?
• Can it attract enough new clients to justify development costs?
• Is the investment plan credible and compatible with the group's broader priorities?
• Are there actionable buyers or partners in a divest scenario?
• What risks arise for asset servicing if the bank divests?
• Will the product range offered to private banking clients change in a divest scenario?

Investing for growth: Strengthening strategic independence and unlocking cross-selling opportunities

To succeed in such a competitive market, private banks need to rethink asset servicing across the organisation, streamlining processes and clarifying responsibilities without duplication.

Technological transformation yields the greatest benefits but also entails the largest costs. As a rule of thumb, asset servicers active in alternatives should invest 5-10% of their annual revenues in IT infrastructure and tools to remain competitive.

Banks must also establish unique selling propositions. Key strategic options include:

• Migrating to cloud solutions to access a broad range of tools without local hosting.
• Deploying advanced delegate oversight solutions to collect, standardise, and process multi-provider data.
• Leveraging RegTech to enhance efficiency in compliance and risk management.
• Using AI for tasks such as automated Board minute-taking and faster contract drafting and review.
• Unified data platforms and efficient client portals for information exchange have also become standard expectations across the market.

However, technological transformation can be costly and is particularly challenging for smaller or mid-sized firms, especially those focused on less dynamic UCITS segments. For example, implementing a revised data strategy for a mid-size investment fund manager (IFM) can exceed €1.5 million. Market participants therefore need confidence that they can capture a sufficiently large share of the addressable market over the next three to five years to justify such upfront investment.

In parallel, attracting and retaining skilled staff remains challenging amid talent shortages and high labour costs, particularly in domiciliation, compliance, and risk management.

Before launching major transformation programmes, private banks and their in-house servicing functions need to develop detailed business cases that compare investment requirements against anticipated growth outcomes and confirm a distinctive market advantage. They also need confidence that they can build a unique selling proposition and realise tangible cross-selling opportunities with their banking offering.

Multiple exit options: From commercial alliances to full share capital sales

Faced with significant investment requirements, some institutions regard divestment to a consolidator or a strategic collaborator as a more relevant solution. For example, a private bank considering the divestment of its in-house IFM has many options. Luxembourg currently hosts more than 45 IFMs serving predominantly third-party funds with over €2,000 million RGA¹. These players differ in terms of entrepreneurial versus institutional focus and third-party asset proportions.

Exit options can take various forms, from commercial deal to share or asset deal, and need to be negotiated on a case-by-case basis taking into consideration seller’s objectives.

An exit strategy can be compelling for multiple reasons:

• Sale proceeds can be significant in a strong-demand market.
• The seller avoids substantial investment requirements needed to remain competitive (although targeted operational improvements may be required to enhance attractiveness).
• The parent group can refocus on core banking activities.
• The acquirer may strengthen the seller’s commercial offer, for example by strengthening depositary banking services if excluded from the deal scope.

On the other hand, third-party asset servicers aim to grow their assets under management and administration to spread their investments across a broader client base. Integrating additional clients may increase their exposure to fund types, asset classes, or geographies seen as beneficial.

Divesting brings its own challenges that must be understood and mitigated:

• Client attrition risk, requiring tailored and transparent communication and consistent service quality.
• IT integration risks if the collaborator uses very different systems, calling for feasibility checks and a strong project management office (PMO) approach to prevent unwanted surprises.
• Cultural misfit risks, including language barriers, different organisational backgrounds (e.g., private bank versus large-scale fund manager or pure player), or misaligned growth trajectories.

Overall, divestment can be strategically and economically attractive, provided that execution risks are properly understood and proactively mitigated.

What are the next steps?

The Luxembourg fund ecosystem is approaching an inflection point. What was once a tactical side-business for private banks has become a strategic question with far-reaching implications. Upcoming years will likely redraw the boundaries between banking and asset servicing, distinguishing institutions that lead the transformation from those that opt to step back.

For private banks with the conviction and scale to invest, this is a moment to redefine their role in the value chain. Differentiated capabilities in alternatives, technology, and client servicing can turn asset servicing into a growth engine that strengthens client relationships and generates recurring revenues.

For others, divestment may bring clarity. As transformation costs may rise faster than revenues, exiting at the right time can release capital, sharpen strategic focus, and create long-term value through collaborations with specialised players.

There is no universal answer, only the need for a clear strategic vision. Each institution must look beyond short-term pressures to assess where it can truly create advantage: through ownership, collaboration, or redeployment of resources.