Despite challenging market conditions, Luxembourg’s private debt industry has continued to show resilience, with assets under management surging to €510 billion (US$568.56 billion) at the end of 2023, a growth of 21.5% in just six months, a new report finds.
While North America continues to be an area of strong investment focus (16%), investments in Europe continue to dominate, with EU member states accounting for 35% of investments and the rest of Europe 25%, according to the KPMG Private Debt Fund Survey 2024, commissioned by the Association of the Luxembourg Fund Industry (Alfi). Asia-Pacific makes up 3% while the Middle East accounts for 4%.
“Luxembourg is now recognized as one of the most attractive domiciles for private debt funds, reflected in the impressive growth of assets under management,” says Julien Bieber, partner tax, alternative investments and co-head of private debt at KPMG in Luxembourg. “A confluence of favourable factors such as high interest rates, growing appeal among investors, demand for tailored solutions by borrowers, and a shift away from traditional bank lending has shaped a dynamic landscape.”
Of the sectors in which private debt funds are invested, the top four are chemicals, information technology, telecoms, media and communications (18%), infrastructure and transportation (17%), energy and environment (16%), and healthcare and life science (16%).
Meanwhile, the gap has narrowed between debt-originating funds (49.3%) and debt-participating funds (49.5%), compared with last year’s division (42% and 57%, respectively). The share of open-ended funds has nearly doubled, from 14% to 26%. Closed-ended funds continue to dominate, however, representing 74% of all funds.
According to the report, 86% of indirectly supervised AIF (alternative investment fund) fund vehicles are special limited partnerships. Where a specific regulatory regime is opted for, 62% are structured as reserved alternative investment funds (RAIFs), up 9% since June 2023. Conversely, specialized investment funds have fallen from 38% to 32%.
In terms of strategy, the majority of Luxembourg private debt funds (62%) use direct lending, a 2% decrease from the previous year. Mezzanine accounts for 16% of strategies, an increase of 3%, supplanting distressed debt (8%) as the second most popular strategy.
The majority of investors in private debt funds are institutional investors (80%), followed by retail investors (6%), sovereign wealth funds (5%), and private banks (4%). About 68% of the investors are from EU countries. Management fees typically lie between 0% and 1.5%, with a small proportion above 1.5%.
“The private debt market has shown remarkable resilience and consistent growth amid several years of global market challenges,” says Alfi chief executive officer Serge Weyland. “This survey highlights the sustained appetite for private debt, with Luxembourg emerging as the domicile of choice, supported by its robust regulatory environment, political stability, and highly skilled workforce. Looking ahead, we expect the growing momentum for retailization to bring further sophistication and opportunities to the Luxembourg private debt market.”
The KPMG study was based on a survey of 13 active depositaries representing over 1,300 funds investing in private debt.
