David Capocci of the consulting firm KPMG Luxembourg:“The loan fund industry looks to remain a healthy and growing one”Photo credit: KPMG 

Assets under management in Luxembourg-domiciled loan funds reached €49bn at the end of June, a 23.5% increase over the previous 12 months. These figures come from a study by KPMG on behalf of the Association of the Luxembourg Fund, demonstrating how this country is benefiting from this global trend.

Two-thirds of investors into these funds are institutions seeking new ways to make healthy returns, with the remainder either very wealthy individuals (14%), private banks (8%), family offices (4%) or sovereign wealth funds (1%). 7% of assets are held by retail investors. Nearly half of investors are European, 23% from Russia, 13% north American and 13% Asian, according to the study, which was published on 20 November.

Geographically diverse

The vast majority of initiators (83%) are from Europe, with 16% from North America and the remainder from Latin America. As for the geographical investment target, almost all take a multi-country approach: a particular speciality of Luxembourg. The EU accounted for 39%, North America 19%, 13% Asia Pacific, Russia 14% and Latin America 9%. A variety of strategies are used, but mainly those featuring senior loans (35%), high yield (22%) and direct lending (18%).

David Capocci, head of alternative investments at KPMG Luxembourg, commented: “The percentage of loan funds set up as reserved alternative investment funds (RAIFs)--the newest fund structure to have been introduced in Luxembourg--remains stable compared to last year,” at 13%.

He added that he expected RAIFs to gain greater market share. “Despite the regulatory and tax changes on the horizon, the loan fund industry looks to remain a healthy and growing one”. That said, specialised investment funds (SIFs) are loan fund managers’ first choice of structure, due to their flexibility regarding investment policy, their regulatory regime and being well known due to having been available for a decade.

Two types of loan funds

There are two types of loan fund. A loan originating fund whose strategy allows it to grant, restructure and acquire loans; and a loan participating fund that can acquire and restructure partially or entirely existing loans originated by banks and other institutions, either directly from the lender or on secondary markets.

This remains a niche activity in Luxembourg, with the €49bn assets of these funds dwarfed by the €4,207bn total managed by this country’s fund industry. Camille Thommes, director general of Alfi, said: “Our survey shows that Luxembourg loan funds are more popular than ever, and we expect this to become an even more significant asset class over time.”