LUXEMBOURG Trends and Developments Contributed by: Silke Bernard, Melinda Perera and Adrien Timmermans, Linklaters LLP
As Europe’s largest centre for retail and alterna - tive investment funds, second worldwide only to the United States, Luxembourg has become a major hub for private credit during its emer - gence from a niche alternative to bank lending and public market bond issuance to an integral and seemingly permanent element of Europe’s financing ecosystem. Rapid Growth Since 2015 Since 2015, the number of debt funds estab - lished in Luxembourg has soared, in tandem with a global trend in which debt funds have become a key strategy for private market fund sponsors. The Grand Duchy of Luxembourg has become a go-to jurisdiction for establishing debt funds, and the variety of strategies has expand - ed steadily over the years, including direct lend - ing, distressed debt and special situations. According to the 2024 KPMG Private Debt Fund Survey, produced in conjunction with the Asso - ciation of the Luxembourg Fund Industry (ALFI), the sector’s aggregate assets under manage - ment in regulated or indirectly supervised funds amounted to EUR511 billion at the end of 2023, as reported by depositaries, an increase of 21.9% over the previous six months. The survey found that investments were primari - ly focused on other EU member states, account - ing for 35% of the total, ahead of other European countries at 25% and North America at 15%. Direct lending was the investment strategy fol - lowed by 62% of the market, followed by mezza - nine lending with 16%. Just over one-fifth of the funds surveyed were classified under Article 8 of the EU’s Sustainable Finance Disclosure Regu - lation as having environmental or social impact characteristics, or a combination of the two.
The Luxembourg market was almost equally split between loan origination funds and those investing in the secondary market; almost three- quarters were closed-ended; the remaining 26% open-ended. Emergence of Special Limited Partnerships Loan funds subject to regulation in Luxembourg were dominated by reserved alternative invest- ment fund (RAIF) vehicles, indirectly regulated funds accounting for 62% of the total. In 2022, RAIFs overtook the older specialised investment fund (SIF) structure, which is directly regulated by the country’s financial regulator, the Com- mission de Surveillance du Secteur Financier (CSSF), and now accounts for just 32% of the total. Non-UCITS funds established under Part II of Luxembourg’s investment fund legislation made up 5% of the total, while investment companies in risk capital (SICARs) were less common due to their restrictive investment policy requirements and represented just 1%. For the first time in the 2024 Debt Fund Survey, indirectly supervised funds overtook regulated vehicles for credit investment, accounting for nearly two-thirds of the total (63%). The vast majority of these (86.2%) were special limited partnerships, which are increasingly the choice of international fund sponsors due not only to the flexibility of the structure, but also to the familiarity of its design to private markets man - agers accustomed to Anglo-Saxon limited part - nerships. The survey also found that just over half of all private debt funds (51%) were single-compart - ment vehicles, with another 28% containing sub-funds dedicated to separate investment strategies. While 45% of the sector had less than
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