The Luxembourg private debt market has reached a new milestone, surpassing 500 billion dollars in assets under management (AuM) according to the 2024 Private Debt Fund Survey, published by KPMG in collaboration with the Association of the Luxembourg Fund Industry (ALFI). The survey reveals a 21.5 percent growth in AuM, reaching 510 billion dollars, continuing its strong upward trajectory despite global market turbulence.
While the market thrives, concerns have emerged over a shift towards less rigorous environmental, social, and governance (ESG) standards. The survey highlights that 76 percent of funds are now classified under Article 6 of the Sustainable Finance Disclosure Regulation (SFDR), which is the least demanding in terms of ESG requirements. In contrast, funds under the more stringent Article 8 have only marginally increased to 21 percent, while those under Article 9—indicating the highest commitment to sustainability—have dropped by 2 percent, now accounting for just 3.5 percent of the market. This points to a more cautious approach towards ESG integration, potentially raising concerns among investors increasingly focused on sustainability.
Debt funds by ESG classification
Raifs replacing SIFs as fund structure
The Luxembourg private debt market has demonstrated exceptional resilience, according to Alfi and KPMG, with AuM increasing by 90 billion dollars in just six months. Special Limited Partnerships (SCSp) remain the dominant structure for indirectly supervised private debt funds, representing 86 percent of the market. Among regulated fund structures, Reserved Alternative Investment Funds (Raifs) now make up 62 percent of the market, a 9 percent rise from the previous year, while the proportion of Specialized Investment Funds (SIFs) has fallen to 32 percent.
In terms of investment strategy, direct lending remains the most prevalent, although it decreased slightly to 62 percent, the survey found. Mezzanine strategies have gained ground, now accounting for 16 percent of the market, overtaking distressed debt, which fell to 8 percent. The market has also seen a notable increase in open-ended funds, which nearly doubled to 26 percent, although closed-ended funds still dominate at 74 percent.
North America key market
Luxembourg’s private debt funds continue to focus predominantly on Europe, with 35 percent of investments targeting EU member states and an additional 25 percent in other European countries. North America remains a key market, representing 16 percent of investments, while the Asia-Pacific region and the Middle East account for 3 percent and 4 percent respectively.
Sectorally, the top investment areas include chemicals, IT, telecoms, media & communications (18 percent), infrastructure & transportation (17 percent), energy & environment (16 percent), and healthcare & life science (16 percent). These sectors reflect a diverse allocation strategy, aimed at tapping into various high-growth industries.
Eltif complexity remains a challenge
The introduction of AIFMD II, with its clearer guidelines on loan origination, is set to further strengthen Luxembourg’s position as a leading domicile for private debt funds, according to the survey report. The survey also anticipates the “retailisation” of private debt, with European Long-Term Investment Funds (Eltifs) and other initiatives expected to attract more retail investors into the market, although the complexity of these products remains a challenge.