Since the 2008 crisis, mid-sized companies have often come up short when it comes to growth finance, due to banks lowering their levels of debt financing and opting instead for more established borrowers. Combine this with the high price of assets nowadays, and the low-interest-rate environment, and we find companies—and indeed everyone—looking high and low for new sources of yield.
The fruits of these searches are increasingly in the same area: debt.
Debt funds are on a serious uptick in Europe, with more and more deals each year since 2008. But why debt? Its success seems to have come about by a convergence of private equity and real estate: those in private equity have the experience in debt financing, while those in real estate are finding real estate too pricey to get to their desired yield and have thus also sought refuge in debt investment. Debt investment can also be less risky than owning the real estate outright if done properly, which has further driven them in this direction.
Further enticing new investors in debt has been the void left in the market by banks, who are stepping out of the real estate game on account of the changing regulatory environment. This opens the way for pension funds, insurance companies, private equity investors, and others to take advantage of the high yields and safe returns of debt.
Identify, specify, classify
We've even seen debt funds gaining layers of specialisation in their post-2008 boom. Some get into debt funds by buying loan books from a bank or other lender, while others coinvest with a bank that's looking to reduce its exposure. Specialised managers have furthermore emerged to create new types of lending vehicles in response to the will of the market. Among these are bridge loan financing, currently very popular in North America, which involves helping borrowers to either roll over their loan at favourable terms or borrow to purchase new property. Then there is peer-to-peer lending now being established through securitisation vehicles, which draws on a crowdsourcing model. New lenders are also stepping in to assist cash-strapped governments worldwide in their need to fund the refurbishment and construction of infrastructure. And finally there are real estate specialists or investment managers who are simply making loan investments instead of buying the asset directly.
Raving about the RAIF in Luxembourg
Luxembourg has a history of finding new solutions for investors with the help of its flexible and efficient legal/regulatory/tax environment. In this case the history is barely history: earlier this year a new investment vehicle dubbed the Reserved Alternative Investment Fund vehicle, or RAIF, was launched. The RAIF is made to be simple: it can be launched without prior approval from the CSSF (Luxembourg's regulator), it offers a high level of investor protection (with the AIFMD quality seal), it has access to a marketing passport, and it possesses a high level of structuring flexibility... click here for even more advantages.
Depending on the investor's tax residency, a well-structured RAIF could be a very efficient way to convert interest income into capital gains—which are generally more favourably taxed.
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