Direct lending funds most used strategy in Luxembourg – report

Luxembourg debt funds continue to grow, albeit at a slower pace, in 2019 as direct lending popularity surges.

The proportion of direct lending strategies among Luxembourg private debt funds has almost doubled in the past year, according to research by KPMG and the Association of the Luxembourg Fund Industry.

An analysis of Luxembourg-domiciled private credit vehicles also found combined AUM of the funds increased 14.5 percent to €56 billion. This is slower growth than seen between 2017 and 2018, when fund AUM grew by 23.5 percent.

The proportion of funds focused on direct lending increased from 18 percent in 2018 to 32 percent, making it the most popular strategy, while the proportion of senior debt vehicles fell from 35 percent to 22 percent in the same period, making it the second most used strategy. High yield bond vehicles ranked third and held stable at 22 percent of funds.

The most popular fund structure was Specialised Investment Funds, representing 71 percent of Luxembourg private debt vehicles. However, the Reserved Alternative Investment Fund structure has rapidly increased its popularity, growing from 13 percent of funds in 2018 to 20 percent in 2019, with ALFI expecting this growth trend to continue into 2020.

Management fees were found to be largely between 1 and 1.5 percent. Almost half of funds charged a management fee of 1 percent, while 36 percent charged between 1 percent and 1.5 percent, and just 3 percent charged between 1.5 percent and 1.75 percent. An overwhelming majority of 79 percent of funds did not charge any performance fees. Among those that do, 18 percent charged less than 20 percent and just 3 percent charged 20 percent with none above that level.

Camille Thommes, director-general of ALFI, said: “Non-bank intermediation, such as financing through private debt funds, is gaining further momentum. Private debt funds are a growth stimulator and important source of financing for the real economy. Along with the banking industry, they can help businesses raise capital and address the imbalance of liquidity supply and demand. This survey shows that Luxembourg private debt funds are more sought-after than ever.”