Luxembourg private debt industry grows 36.2% from 2019

Private debt funds domiciled in Luxembourg rose to a record €108.4bn, with an average AUM growth of 36.2% from 2019 levels.

The Luxembourg private debt industry has grown a whopping 36.2 percent from last year, according to a KPMG survey done in collaboration with the Association of the Luxembourg Fund Industry. Private debt domiciled in Luxembourg now comprises €108.4 billion in assets under management, encompassing all regulated and indirectly supervised debt funds.

“The private debt market has seen tremendous success over the past few years, steadily growing into a strong asset class. And today, amidst the chaos of a global pandemic, it has not only remained resilient, but it continues to exceed expectations,” said Valeria Merkel, audit and co-head of private debt at KPMG.

Regulatory capital has caused banks’ market share in the loan sector to diminish since the 2008 financial crisis, and covid has increased loan loss provisions, causing an even further pullback in bank lending activity, said Robin Doumar, founder and managing partner at Park Square Capital in a Q&A in the report. “Increasingly, private debt funds have become the relationship lenders of choice for the private equity industry while the market share of banks further declines.”

Luxembourg was domicile to €40 billion of private debt funds in 2017, according David Capocci, head of alternative investments at KPMG. That grew at a rate of 40 percent over the two years to 2019, and then accelerated significantly in the past year.

The makeup of private debt funds sits at 73 percent closed-ended funds and 27 percent open ended, with 43 percent of vehicles being debt originating and 57 percent being debt participating funds.

The survey also shows that the vast majority of debt fund initiators (82 percent) are based in the EU, with the top three countries being the UK (43 percent), Germany (21 percent) and France (10 percent). Only 1 percent of funds originate in Luxembourg. After Europe, the remaining 17 percent come from North America, and 1 percent come from Central and South America.

The report’s authors noted that the European market saw a bevy of regulatory changes in 2020, some of which may have significant consequences for cross-border investment in the future.

“This year we saw the transposition of the EU Anti-Tax Avoidance Directive 2 into Luxembourg domestic law,” said Julien Bieber, partner, tax and co-head of private debt at KPMG.  “This introduction has made waves for loan fund actors and alternative investment players and the impact has been felt within many layers of the alternative investment industry.”

According to Bieber, other measures affecting the private debt industry in Luxembourg include the application of the interest deduction limitation rule for unregulated investment vehicles investing in distressed debt or non-performing loans, the new anti-hybrid provisions for unregulated investment vehicles, the formal notice the European Commission sent concerning the interest limitation rule exemption, and the ratification of the Multilateral Instrument by many jurisdictions and which amended many double tax treaties, among others.