Since the 2007-2008 financial crisis, lending from banks in Europe has hugely reduced due to tightening regulations and to the higher capital ratios imposed on banks. Government bonds and fixed-income bonds yields have fallen dramatically, critically affecting investor returns and the guaranteed payments that pension funds have to make. Pension funds and other institutional investors have therefore been seeking alternative investments with higher yields.
And they have found them in loan funds. In recent years, non-banking credit intermediation has meant significant expansion of this asset class in the Grand Duchy: the aggregate capital invested in regulated loan funds was €40 billion in the first half of 2017 alone. We estimate that the overall size of the market is over €100 billion.
However, a big part of the market is not regulated and is thus difficult to assess. In hopes of shedding light on it, we have carried out a loan fund survey in Luxembourg. In doing so, we spoke to the top ten loan fund managers in the world, whose assets under management together total over €45 billion, and all of whom have a presence in Luxembourg. Read on for some of our quantitative and qualitative results.
A note on loan fund types
A distinction can be drawn between two types of loan funds: loan-originating funds and loan-participating funds.
A loan-originating fund is any type of fund that is, according to its investment strategy, allowed to grant and restructure loans (i.e. subsequent amendment of loan conditions such as prolongation or deferral). In contrast, a loan-participating fund is a fund that is allowed to partially or entirely acquire and restructure existing loans originated by banks and other institutions, either directly from the lender or in secondary markets, where such loans are traded. According to their investment strategy they are not allowed to grant loans.
Regulated and unregulated
Based on the survey, the most popular regulated vehicle for loan funds is the SIF (78%), followed by the RAIF (13%) and the UCI Part II (9%). Use of SICARs is marginal. The popularity of the SIF is easily explained by its flexibility with regard to investment policy, as well as by its "lighter" regulatory regime. This vehicle is also well-known by loan fund managers given that it is now a decade old.
Most actors, however, use unregulated vehicles. The vehicle of choice here is the SOPARFI, which is preferred over the unregulated SV. Furthermore, 60% of our respondents have confirmed that they have started (or are in the process of starting) to use a RAIF structure for future investments.
Loan funds can also come in the form of European Venture Capital Funds (EuVECA) or European Social Entrepreneurship Funds (EuSEF), which came into force on 22 July 2013, and which have recently been updated to make them more attractive. Thus far, there aren't many of them: the number of EuVECAs and EuSEFs can be counted on one hand.
The rising numbers of loan funds also show a trend for "on-shorisation," most popularly with SIFs with rising numbers of RAIFs as well.
Find out more
Read the entire survey here.
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