• AuM of private debt funds increased by 45.4% over the year to a total of EUR 267.8 billion
• 45% are structured as RAIFs, up 9% compared to 2021
• 68% of investors are from Europe, 14.5% from North America and 17.5% rest of the world
• 23% are article 8 funds, 2% article 9
• 85% of respondents favoured special limited partnerships (SCSp)

 It reveals that the sector saw AuM of private debt funds surge by 45.4%[1] compared to last year, bringing total assets under management to a record €267.8 billion. This builds on the 40.6% growth in AuM for private debt funds seen in the 2021 survey.

Camille Thommes, Director General of ALFI, commented: “This latest survey illustrates once again the continuous growing appetite of investors for private debt funds. Amidst a challenging market environment with rising interest rates, private assets continue to offer attractive investment opportunities and appealing risk adjusted returns for investors. Moreover, sustainability in private debt is gaining in importance. Beyond regulatory compliance, asset managers are integrating ESG considerations into investment strategies to respond to growing investor demand.”

Valeria Merkel, Partner in Audit, Private and Public Asset Management & Co-Head of Private Debt at KPMG said: “Whilst the COVID-19 pandemic gradually wound down in 2022, the year has been marked by disruptive

geopolitical conditions, uncertainties, and volatility in the global economy.  In these challenging circumstances, the Luxembourg private debt market demonstrated its resilience once again by expanding at the same remarkable pace as 2021. The demand for financing remains robust, despite inflation, recession risks and geopolitical tensions. Meanwhile banks are further reducing their lending activities due to ongoing regulatory capital needs and expected loan loss provisions. As a result, we expect the private debt market’s steady and healthy growth to continue in the coming years.”

Other topics and findings of the research were:

• Fund structures: Depending on their investment strategy, private debt funds can either be debt-originating or debt-participating, making up 44% and 56% of the industry respectively. The survey shows 83% of private debt funds are closed-ended vehicles, and 17% are open-ended. Specialised Investment Funds remain the most popular fund vehicle, representing 49% but they are closely followed by RAIFs at 45%.
  
  
• Investors demand ESG: 80% of investors claim that ESG is a vital factor in their investment decision making. 50% would divest their capital from companies with poor ESG records. There is still plenty of work to do towards reaching the maturity seen in other markets.
  
  
• Tokenization of debt investment vehicles and debt instruments will provide a technological advantage to asset managers, reducing costs of loan origination and due diligence, increasing liquidity and reducing barriers to entry.

• Regulatory outlook: The AIFMD 2, still in its negotiation phase will provide common minimal rules for loan originating alternative investment funds, but it is not expected to come into force until 2025. Meanwhile fund managers expect the ELTIF review to result in changes that will ease portfolio diversification and distribution rules.
  
  
• The investment strategy of Luxembourg private debt funds is mainly focused on three debt strategies: direct lending (64%), distressed debt (13%), and mezzanine (13%). Compared to last year, this reflects a decrease in direct lending (-8%), and an increase in venture debt (+4%), as well as slight increases in mezzanine (+2%) and distressed debt (+1%).

Camille Thommes concludes: “The Luxembourg fund centre remains the domicile of choice for private debt. Initiators appreciate not only the attractive legal toolbox with the unregulated special limited partnership (SCSp) as well as the reserved alternative investment fund (RAIF), but also value the expertise and sophistication of market participants servicing that segment.”

Download the full ALFI/KPMG Private Debt Fund Survey 2022.