ALFI/KPMG launch Private Debt Funds Survey 2023

Highlights of the study

• AuM of private debt funds increased by 51% over the year to a total of €404.4billion
• 53% are structured as RAIFs, up 8% compared to 2022
• 69% of investors are from Europe, 16% from North America and 15% rest of theworld
• 17% are Article 8 funds, 6% Article9;
• 85% of respondents favoured special limited partnerships(SCSp).

The annual KPMG Private Debt Fund Survey 2023, commissioned by the Association of the Luxembourg Fund Industry (ALFI) shows extraordinary phenomenal growth in the Luxembourg private debt industry. Assets under management (AuM) soared 51% to €404.4 billion* compounding last year’s AuM growth of 45.4% amid a profoundly changed geopolitical and macroeconomic environment.

Julien Bieber, Partner Tax, Alternative Investments & Co-Head of Private Debt at KPMG in Luxembourg said: “Despite uncertainties, the Luxembourg private debt fund market has demonstrated once again, its attractivity by expanding at a remarkable pace and the outlook for this asset class is optimistic. The Luxembourg financial hub managed to capture this phenomenal growth thanks to its cross-border fund raising and investment know-how. We’re seeing private debt hit new levels of mainstream acceptance compared to the traditional bank lending, impacting how borrowers access and negotiate debt packages. The demand for debt financing remains robust, such as financing sustainable projects in many economic sectors and major infrastructure. The appeal to this asset class is steadily growing.”

Britta Borneff, Director of Events, Communications and Business Development at ALFI, commented: “Private debt, a thriving investment opportunity, is underscored by the latest Private Debt Fund Survey from KPMG that depicts a compelling landscape. While challenges and opportunities amidst geopolitical and macroeconomic turbulence calls for cautiousness, investor appetite for private debt funds has continued to grow. The commitment to ESG strategies and the integration of technology, from tokenisation to AI, signal a future where retail investors could enjoy enhanced access to private debt and increased liquidity.”

Other topics and findings of the research were:

Fund structures: This year, the split has widened between debt-originating and debt-participating funds, making up 42% and 58% of the industry respectively. The survey also found 86% of private debt funds are closed-ended vehicles - 14% being open-ended. Reserved Alternative Investment Funds (RAIFs) have overtaken Specialised Investment Funds (SIFs) as the most popular fund vehicle, representing the majority at 53% compared to 38%. Most funds continue to be regulated (55%) while 45% are unregulated.

Investor base: Similar to last year, the majority of investors in private debt funds are institutional investors (81%), followed by retail investors (8%) and private banks (4.5%). However, this marks a 3% and 1% drop in institutional and retail investors, respectively, and a rise of 2.5% in private banks compared to last year. As with last year, most investors are from the EU (46.5%) and wider Europe (22%).

The investment strategy of Luxembourg private debt funds is mainly focused on three debt strategies, the proportions of which remain the same as last year, despite the number of underlying funds increasing: direct lending (64%), distressed debt (13%), and mezzanine (13%). Based on data provided by depositaries surveyed. This does not cover all the market and only includes
regulated funds and indirectly supervised investment vehicles, such as RAIFs, SIFs or SCSp.

Sector and geographical focus: Private debt funds are invested widely across sectors, with the largest proportion invested in Infrastructure and Transportation (18%), closely followed by Energy and Environment, and Chemicals, IT, Telecoms and Communications (both 16%), and Healthcare and Life Sciences (15%). Nearly all debt funds (98%) have a multi-country investment approach and similar to last year, the EU (42%) and wider Europe (27%) remain the preferred investment target, followed by North America (13%).

ESG classification: While the majority of funds are Article 6 with no formal ESG objectives, Article 8 funds with sustainable considerations make up a signification portion. Article 9 funds with clear sustainable objectives represent the remainder at 6%. • Regulatory outlook: Upcoming AIFMD 2 has progressed over the past year with trilogue discussions taking place – implementation is not expected until 2025 but good progress has been made on loan-origination fund rules. The new double tax treaty between Luxembourg and the UK is also set to benefit certain private debt funds. The European long-term investment fund (ELTIF) review meanwhile is expected to ease portfolio diversification and distribution rules.

Bieber concludes with his view on how the private debt market can benefit even more from a certain sophistication: “The EU remains very attractive for investments since other markets face oversaturation, especially in the US. Private debt is particularly agile in the new environment, with high inflation, high nominal interest rates and low economic growth: Investors are finding an interesting option to protect their capital with strong risk-weighted returns generated by investment strategies such as loans bearing floating interest rates to well capitalised borrowers. Additionally, the EU is beefing up its regulatory framework and ESG integration as a boost to offer high quality pan-European products. The potential for digitalisation and tokenisation to revolutionise this market should not be underestimated, as it bears promises of retailisation, risk reduction and ultimately, helping make better decisions.”

*Based on data provided by depositaries surveyed. This does not cover all the market and only includes regulated funds and indirectly supervised investment vehicles, such as RAIFs, SIFs or SCSp.

Discover more findings of the ALFI/KPMG Private Debt Fund Survey 2023.

For more information, please contact:

Marina Fraser Harris / Sophie Svestad / David Read
Peregrine Communications
Tel: +44 (0) 20 3040 0867
alfi@peregrinecommunications.com

Luigi Salerno
Head of Communications,
ALFI Tel: +352 22 30 26 – 1
communications@alfi.lu

Notes to editors:

The Association of the Luxembourg Fund Industry (ALFI) represents the face and voice of the Luxembourg asset management and investment fund community, championing mainstream, private assets and sustainable investing. ALFI seeks to promote Luxembourg’s fund sector internationally, and to cultivate for the benefit of its members a collaborative, dynamic and innovative ecosystem underpinned by the most robust regulatory framework. ALFI’s ambition is to empower investors to meet their life goals.

Created in 1988, the Association today represents over 1,500 Luxembourg domiciled investment funds, asset management companies and a wide range of business that serve the sector. These include depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax advisory firms, auditors and accountants, specialised IT and communication companies.

Luxembourg is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg domiciled investment funds are distributed in more than 70 countries around the world.