LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
Since the mid-2010s, Luxembourg has emerged as the leading European jurisdiction for the dom - icile and servicing of private credit funds, draw - ing on the legal base of the European Union’s Alternative Investment Fund Managers Directive (AIFMD), the evolution of the country’s range of structuring options for funds and the revamp of its limited partnership legislation in 2013. Very early on, the Luxembourg regulator embraced private credit funds as an important source of financing of the economy, and it has set rules on governance and investor safeguards that have helped the sector develop on solid ground. The growth of private credit as a key element of the European financial industry has been driven by a combination of regulatory change, investor demand and market dynamics. Follow - ing the 2007–09 global financial crisis, banks in Europe and elsewhere have become subject to increased capital requirements, notably through the Basel III standards, as well as heightened risk management rules that have curbed their ability to lend to companies, especially small and medium-sized businesses or those with lower credit ratings. As a result, private credit funds, including loan participation funds and, increasingly, direct lend - ing vehicles, stepped in to fill the gap with tai - lored financing offerings to companies that found their access to credit curtailed. At the same time, institutional investors including pension funds, insurance companies and family offices start - ed to allocate more capital to private credit to obtain higher returns as historically low interest rates diminished the appeal of traditional fixed- income instruments. As the private debt market has grown, it has become more diversified and sophisticated, moving beyond direct lending to include all
types of financings, distressed debt, mezzanine financing, asset-based lending and special situ - ations. Meanwhile, the market has matured and become more institutionalised, with the involve - ment of major US players which have estab - lished operations in Luxembourg. COVID-19, Inflation and Interest Rates The expansion of the sector was boosted by liquidity issues encountered by companies dur - ing the COVID-19 pandemic, which prompted scarcity of public financing and a more intense search for alternative financing solutions. Credit fund managers also capitalised on the increase in non-performing loans and distressed debt opportunities to expand into new areas of the market. Subsequently, the rise in interest rates prompted by a surge in inflation in 2021 and 2022, which made traditional bank lending more expensive, has reinforced the role in the market of private credit funds. With an increase in firms entering the private credit market, regulatory scrutiny has grown, in particular regarding transparency, lev - erage and implications for systemic risk. Although progress over the past decade has been slow, increasing the role of non-bank lend - ing is one of the central goals of the EU’s long- planned Capital Markets Union initiative. Now, the revised AIFMD II legislation sets out com - mon rules for a single market to enable funds to originate loans in all EU countries. Meanwhile, revisions to the European Long-Term Invest - ment Fund Regime have enhanced the possi - bility of democratising private credit investments through closed-ended and semi-liquid funds open to individual investors, subject to investor protection requirements.
209 CHAMBERS.COM
Powered by FlippingBook