A snapshot of the private debt fund market

Fund structures

Debt fund categories

Depending on their investment strategy, debt funds can either be debt-originating or debt-participating:

• A debt-originating fund is, according to its investment strategy, allowed to grant (so-called “loan origination or primary market”) and restructure debts. In other words, it can amend debt conditions such as prolongation or deferral.
• A debt-participating fund is allowed to partially or fully acquire and restructure existing debts from third parties (i.e. banks and other institutions), either directly from the lender or in secondary markets where these debts are traded. According to its investment strategy, a debt-participating fund is not allowed to grant debts.

Debt funds can be open- or closed-ended, depending on the type of investors and the underlying asset type. Similar to last year, the vast majority (86%) of Luxembourg debt funds are closed-ended (Figure 2).

Regulatory framework

Regulated fund vehicles are authorized and supervised by Luxembourg’s supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF), and also have an authorized AIFM. RAIFs are not authorized and supervised by the CSSF; however, they are considered indirectly supervised because they must be managed by an authorized AIFM, which is subject to direct supervision and reporting requirements to its local regulator.

Unregulated investment vehicles are also neither authorized nor supervised by the CSSF, and are either exempted from the AIFM requirement as per Article 3 (1) of the AIFM law or have a registered AIFM as per Article 3 (2) of the AIFM law.

Regulated fund vehicles ¹

Ordered from least regulated to most, regulated debt fund vehicles (including RAIFs) can be structured as:

• Reserved alternative investment funds (RAIFs): funds subject to the law of 16 July 2019², as amended.
• Investment companies in risk capital (SICARs): funds subject to the law of 15 June 2004, as amended.
• Specialized investment funds (SIFs): funds subject to the law of 13 February 2007, as amended.
• Part II funds: funds subject to part two of the law of 17 December 2010, as amended.

While Part II funds are available to all investor types, SIFs, SICARs and RAIFs are reserved for “well-informed investors”. These are institutional investors, professional investors or others who can confirm they qualify for this status and either

• invest a minimum of EUR125,000 or
• were assessed by a credit institution, investment firm or management company and certified of their ability to understand the risks of investing in the fund.

As seen in Figure 3⁴, RAIFs now dominate Luxembourg’s debt fund market at 53%, followed by SIFs (38%), Part II funds (6%) and SICARs (3%).

Similar to last year, the percentage of debt funds set up using RAIFs continues to grow (+8%), while the percentage of funds set up as SIFs continues to fall (-11%). We expect RAIFs to continue this level of growth in the future.

Launched in 2016, the RAIF is an attractive alternative to the SIF. It has the same features and flexibility as the SIF but is less regulated: only the RAIF’s AIFM is subject to supervision and reporting requirements, removing the double regulation layer and allowing a quicker time to market.

SIFs remain popular with debt fund managers due to their flexible investment policy and regulatory regime. In addition, these vehicles are well known as they have been available for a decade.

Debt fund promoters rarely use SICARs, due to their restricted investment policy — they can only be used to invest in risk-bearing securities, such as mezzanine bonds/notes.

Unregulated (and indirectly supervised) investment vehicles

Another important element of the debt fund market is unregulated investment vehicles.

Absence of CSSF authorization and supervision

Contrary to regulated fund vehicles, unregulated investment vehicles are neither subject to any specific legal regime (e.g. UCITS, Part II, SIF and SICAR), nor subject to any CSSF prior authorization, reporting or direct supervision.

Alternative investment funds (AIFs)

Nonetheless, unregulated Luxembourg investment vehicles considered as AIFs (and thus falling within the scope of the AIFM Directive) must be managed by an EU AIFM and be subject to indirect CSSF supervision if they are managed by a Luxembourg AIFM (through their AIFM’s direct authorization and supervision).

AIFMs falling within specific thresholds are only obliged to register with the CSSF and have lighter reporting requirements.⁵

Legal forms

Unregulated investment vehicles can be set up as:

• limited partnerships — sociétés en commandite simple (SCSs)
• special limited partnerships — sociétés en commandite spéciale (SCSps)
• partnerships limited by shares — sociétés en commandite par actions (SCA)
• public limited companies — société anonyme (SA) or
• private limited companies — société à responsabilité limitée (S.à r.l.).

Securitization vehicles (SVs)

Unregulated investment vehicles can also be structured as SVs, subject to the law of 22 March 2004 or EU Regulation 2017/2402 of 12 December 2017 (as amended).

Advantages of unregulated/indirectly supervised investment vehicles

Compared to regulated fund vehicles, these are highly flexible and cost less to set up and operate as they do not require direct CSSF approval, reporting or supervision. In addition, they are not subject to registration duty, but are subject to limited minimum taxation if set up as SCS/SCSp or SV.

Loan origination, to the extent debt is granted to a limited number of identified persons, can be done without any CSSF authorization and supervision (provided the fund does not qualify as an AIF, for example).⁶ This makes the Luxembourg market extremely attractive to the debt industry, as unregulated investment vehicles may be used in the framework of specific projects — for example, to acquire a single portfolio or several portfolios in the same industry.

Unregulated AIFs set up as SCSs, SCSps or SOPARFIs can also invest in any type of asset. If they are managed by an EU AIFM, they can market their partnership interests to EU-wide professional investors with a specific passport.

It’s challenging to collect data regarding the unregulated segment of the debt fund market. These vehicles are neither authorized nor supervised by the CSSF, and no detailed information or listing currently exists on the market.

Like last year’s survey, we extended the data collection within depositary banks to unregulated AIFs investing in debts. Thanks to the various depositaries who collaborated with us on this year’s survey, we could get a broader view of the debt fund market’s unregulated segment.

Based on the data collected, the favored vehicle of debt fund managers in the unregulated market⁷ remains the SCSp (85%), who tend to prefer it to the S.à r.l. (5.5%) and SCS (6%). SCSps are widely used mainly due to their accessibility and flexibility — and also because they are well-known to investors and promoters.

Figure 5 shows that, similar to last year, most Luxembourg debt funds are regulated, while 45% are unregulated (but indirectly supervised) investment vehicles. However, regulated fund vehicles have slightly fallen (-2%).

Regarding debt fund structuring, promoters can choose between single or multiple compartments. Figure 6 shows how these types are split as of 30 June 2023. Similar to last year, the percentage of single compartment funds is higher than sub-funds used for separate investment strategies.

Complex share classes mean that different management and performance fee structures can be managed for different investors. Usually, a single compartment is chosen to focus on one asset class, and sub-funds are used to build up different strategies. Due to other accounting and consolidation considerations, investors tend to opt for the simplest solution.

Similar to last year, most funds range up to EUR100 million in size (35%) (Figure 7); however, these funds’ market share dropped significantly (-21%). Mid-size funds — i.e. those with a net asset value of between EUR100 million and EUR500 million — represent 21.5% of the total number of debt funds. There was a surge in funds ranging from EUR1 billion to EUR5 billion in size (+23%). As of 31 July 2023, and based on CSSF data, the directly regulated market of debt funds (i.e. SIF, SICAR, and Part II) represented around EUR75.3 billion AuM (compared to EUR77.1 billion of AuM in mid-2022). However, it’s important to keep in mind that these numbers exclude AuM invested in RAIFs and other indirectly supervised and unregulated investment vehicles.

Based on the information received from depositary banks, the total AuM as at 30 June 2023 for regulated funds and indirectly supervised investment vehicles is approximately EUR404.4 billion. Moreover, the depositaries surveyed reflected an average growth in AuM of 51% compared to last year.⁸

Overview of key data

Initiator origin

Similar to last year, the vast majority of debt fund initiators (promoters) in Luxembourg are from the EU, distantly followed by those from North America (Figure 8). Most of the initiators come from the UK (42%, versus 43.3% last year), followed by the US (19%) and Germany (14%), with only fewer than 5% from Luxembourg.

Investments per fund and holding period

The number of investments per debt fund is highly variable and depends on several factors, including the fund’s size and investment strategy.

Based on the information gathered, the average number of investments per fund is 38, a significant drop compared to 52 last year.

Regarding maturity, 34% of the funds have maturities between eight and 12 years, compared to 47% last year, and 32.5% have maturities below eight years compared to 29% in 2022 (Figure 9). Regarding maturity strategy, similar to last year, most investments are held to maturity (98%), and only a small percentage are held for trading (2%).

Evergreen funds also surged to 20.5% in 2023 versus 11% in 2022.

Investment strategy

Luxembourg debt funds use three main debt strategies (Figure 10): direct lending (64%), distressed debt (13%), and mezzanine (13%). These proportions are exactly the same as last year, although the numbers of each fund have surged.

Sector financed

Recent surveys have specifically asked which sector is financed. Illustrated in Figure 11, there’s a balance between infrastructure and transportation (18%), energy and environment (16%), chemicals, IT, telecoms, media and communications (16%) and healthcare and life science (15%). All sectors remain stable compared to last year’s survey.

Geographical investment target

Most debt funds (98%) have a multi-country investment approach. Similar to last year, the preferred investment targets (Figure 12) are in the EU (42%), other European countries (totaling 29%) and North America (13)%).

Investor type and origin

Similar to last year, the main investor type is institutional investors (81%), followed by retail investors (8%), private banks (4.5%) and high-net-worth individuals (HNWIs) (3.5%) (Figure 13). Compared to last year, the percentage of institutional investors fell (-3%) as well as retail investors (-1%), while private banks increased (+2.5%). Most institutional investors are pension funds or insurance companies (52%, in line with last year).

Similar to last year, these investors are mainly from EU countries (Figure 14). Seventy-six percent of funds have between 1 and 25 investors per fund (Figure 15).

Financial statements

Like last year, the financial statements of Luxembourg debt funds are mostly prepared in euros (68%), closely followed by US dollars (24%) (Figure 16). Just over half (56%) consolidate their assets (Figure 17).

Valuation methodology

The most popular valuation method used is fair value (67.5%), followed by cost less impairments (22%) and amortized cost (10.5%). Lux GAAP remains the main accounting standard (60%), followed by IFRS (30%) (Figure 18).

Management fees

Like last year, management fees typically lie between 0% and 1.5%, with a small proportion above 1.5% (Figure 19).

Other information

Only a small percentage of funds (1.3% compared to 2% last year) are listed on a stock exchange (Figure 20). Furthermore, 81% (compared to 76% last year) of the funds do not use separately managed accounts (SMA).

Most funds (57%) have an expected return between 1%–5%, followed by 30.5% with an expected return between 6%–10% (Figure 21).

• RAIFs have been included in the list of “regulated” investment vehicles for presentation purposes, although they are only indirectly supervised and neither authorized nor directly supervised by the CSSF.
• RAIFs have been included for presentation purposes, although they are only indirectly supervised and not authorized or directly supervised by the CSSF.
• Excluding UCITS and including RAIFs as indirectly regulated vehicles.
• Ibidem.
• Article 3, §2 and §3 of the law of 12 July 2013 on Alternative Investment Fund Managers.
• Based on the definition of AIF: “any collective investment undertaking, including investment compartments thereof, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which does not require authorisation pursuant to the UCITS Directive.”
• The data for the unregulated debt fund market only refers to AIFs. No data has been collected for unregulated non-AIF vehicles.
• Average growth between June 2022 and June 2023 based on data provided by the depositaries surveyed.