According to PwC market research, Luxembourg ranks as the largest center for alternative funds in Europe when combining both regulated and non-regulated structures.1 As of March 2021, the domicile held more than 838 billion euros in regulated alternative fund assets under management (AuM).2 And it’s private debt AuM, a key component of this market, is projected to grow by 7.4% and hit 167 billion euros by 2025.3
We wanted to understand what makes this domicile so attractive for private debt, so we spoke to one of our Luxembourg experts, David Kubilus, chief commercial officer, UK and Luxembourg for U.S. Bank Global Fund Services. He explains why the market is flourishing and what you should keep in mind if you’re interested in entering it.
The low interest environment that’s prevailed for the past ten years has forced investors to seek higher yielding investments. Private debt still offers positive returns while a lot of bonds and money markets show zero or negative yields.
The Luxembourg government and regulators have given asset managers a very flexible framework of vehicles and fund types that can address the requirements of different types of investors and the different geographies for private debt investments. There is also a mature ecosystem in Luxembourg to support these funds and their distribution from a legal, audit and management company perspective.
Private debt is still a fairly new asset class for investment funds. Very few administrators in Luxembourg know how to handle it. Maintaining the critical data elements required for accounting and servicing private debt instruments is a complex process.
Private debt is a sub-class of private capital but could include CLOs, CDOs, infrastructure debt and private loans. Each one of these structures has its own nuances.
There are many different types of private debt, and this asset class has its own requirements with regards to static data maintenance and events processing. Your service provider should have skilled staff with deep knowledge of the asset class along with the technology to support it. Another key requirement is an operating model that limits functionalization and focuses on high touch servicing.
Providers that can offer more than just the fund administration piece of your solution, such as the servicing of underlying investments – like loans – can also add value. With servicing teams working in the same integrated systems, you’ll receive consistent data output and reporting and an overall more efficient client experience.
There are a few vendor solutions that can support private debt. However, the challenge is supporting all different kinds of private debt and automating the collection of data and calculations.
Our experience has been that you need to supplement vendor solutions with proprietary data enrichment and reconciliation tools to obtain a superior service experience. It’s also important to prioritize a smooth, seamless onboarding process to start the relationship off in a way that instills confidence and trust.
Luxembourg’s private debt growth is soaring. If you’re interested in entering this market, there’s no better time than the present. Find an administrator with the right reputation, reliability and resources, and you’ll be well positioned to take advantage of the benefits Luxembourg offers.
For more information on the spectrum of fund servicing solutions offered by U.S. Bank, visit usbank.com/globalfundservices.