Luxembourg: A new hub for private credit funds?

Understanding private debt funds

Private debt funds provide financing solutions to companies that may not have access to traditional bank lending or capital markets, such as start-ups or early-stage companies having uncertain cash flows and a lack of track records, companies active in volatile or cyclical sectors, or with unconventional business models, distressed companies facing financial difficulties or a history of defaults or a low credit rating for instance as well as highly leveraged companies with an existing high level of  debt or bank loans with restrictive covenants.

Private debt funds typically invest in a variety of debt instruments, including senior secured loans, mezzanine debt and distressed debt.  Unlike traditional banking institutions, private debt funds can be more flexible in their lending terms and structures (floating rates, shorter maturities), making them an appealing option for borrowers seeking tailored financing solutions.

Private credit has become a trendy investment area as the volume of M&A transactions is still running at a low intensity and exit opportunities are not an obvious option for the moment.

Market trends and recent figures

The private credit market has experienced significant growth in recent years, fuelled by increasing demand from borrowers and a growing appetite from investors seeking yield in a low-interest-rate environment.

The global market size jumped from around US$250bn in 2010 to US$1,4tn early 2023, and the trend remains upwards.

Luxembourg: An ideal destination for private credit funds

As an already prominent alternative investment jurisdiction, Luxembourg is very well placed to benefit from this current economic climate and solidify its position as a leading hub for private debt funds.

The jurisdiction boasts a well-established legal and regulatory framework, financial and political stability (the country is rated AAA by the three main rating agencies), and a skilled workforce, making it an attractive location for fund managers and investors alike.¹

Over 90% of the top 30 global debt fund managers are already present in Luxembourg.

According to a report by ALFI (the association of Luxembourg’s funds industry), the assets under management in Luxembourg private debt funds reached a record of over €267bn in 2023, reflecting a substantial increase from previous years (this figure reflects only assets reported by depositaries, covering only regulated funds and indirectly supervised investment funds).

Luxembourg's success in attracting private debt funds can be attributed to several factors, including:

• Regulatory environment: Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), maintains a proactive approach to fund regulation, ensuring investor protection while promoting innovation and competitiveness.

• Legal environment: Luxembourg’s corporate and LP structures and its legal framework in general make the country well placed to propose a range of possibilities, tailor-made to the specific needs of debt fund managers, such as for instance, RAIFs² which cover 45% of the private debt funds, or ELTIFs whose legal framework has being recently revamped.³

• Broad spectrum of possible investment strategies: loan originating or participating in loans (including distressed or opportunistic loans, and non-performing loans), mezzanine finance, securitisation transactions, etc.

• Tax engineering: Luxembourg offers efficient tax structuring possibilities for investment funds, with no withholding tax on interest payments and a wide network of double tax treaties⁴, providing clarity and certainty to sponsors and investors.

• International hub: Luxembourg is the global gateway for private debt funds invest [in the European Union] as these funds are distributed in over 70 countries.

Conclusion

As the private credit market continues to expand globally, Luxembourg remains a strategic choice for fund managers looking to establish and manage private debt funds.

Moreover, Luxembourg offers a compelling proposition for investors seeking to capitalise on the opportunities presented by private credit investments.

By leveraging the benefits of Luxembourg's investment-friendly ecosystem, fund managers can navigate the complexities of the private debt market with confidence, driving growth and delivering value to their investors.

Should you need more insight, get in touch with our investment funds team (Pierre Reuter, Simon Recher and Mathilde Soetens)