In the field of alternative investment, private debt funds have been making lightning progress for several months. The Private Debt Fund Survey 2024 report, presented by Alfi and KPMG last autumn, gave an account of this for Luxembourg. Although the figures analysed--from custodian banks associated with private debt funds--relate to 2023, they are nonetheless impressive. “The study reveals that private debt assets under management have climbed to an impressive €510bn, reflecting growth of 21.5% in just six months between June and December 2023,” comments Alfi CEO Serge Weyland in the report’s introduction.
Investors’ appetite for private debt is being confirmed month after month. The Luxembourg financial centre, a preferred domicile for these funds, is taking full advantage of this momentum, thanks to its solid regulatory framework, political stability, expertise and distribution facilities.
Alternative to bank credit
“The popularity of private debt funds is nothing new. Its origins lie in the banking crisis of 2008,” comments Kelly Hebert, managing director of France, Belgium and Luxembourg at M&G Investments. “At that time, we saw a withdrawal of traditional credit institutions, with access to finance becoming much more difficult for many companies. As a result, these players looked for alternatives, giving rise to a boom in the capital markets. The movement was much more marked in the United States. Investment in private equity and debt is much more advanced there than in Europe. However, the trend on this side of the Atlantic has been gathering pace in recent months.”
The development of debt funds often goes hand in hand with that of private equity. For SMEs, and even very small businesses, these are now the two most popular sources of finance for bringing their projects to fruition. We can see that economic players are increasingly favouring private investment to meet their financing needs, to the detriment of listed markets. Over the last 20 years (2001 to 2022), the number of IPOs has been half that of the previous two decades (1980 to 2000). The size of the private equity market, meanwhile, has increased 20-fold. “The growth of private debt has gone hand in hand with the growth of investment in unlisted companies,” says Hebert. “It’s reassuring for an investor in a debt fund to know that a private equity player is committed to the process. In the United States today, 78% of borrowers’ financing comes from the capital markets, compared with 22% from banks. In Europe, the opposite is true: 70% of financing needs are still met by banks.”
A growing need in the real economy
The development of private debt is more advanced in the United States, partly because the shock of the banking crisis was more severe there. The investment dynamic is also stronger there. Private equity is more developed there. In Europe, a large proportion of capital remains uninvested, or not yet invested.
However, given the growing needs of businesses, recourse to private debt should continue to grow. “Today, private debt is seen as a genuine alternative to bank financing,” says Hebert. “It is a source of additional resources that, until now, was not accessible. For many economic players, it is a very welcome lever for development. Plus, funds often manage to lend more flexibly and much more quickly than traditional players.”
The effect of falling interest rates
The fall in interest rates in Europe, which began a year ago, has made private borrowing more attractive to economic players. It has also encouraged many investors to turn to alternative products, such as private debt, thereby supporting the growth of this asset class. “This has particularly benefited borrowers,” says Hebert. “On the one hand, they benefited from a base rate of 1.25%, following the ECB’s announcements. On the other hand, the credit premium has also narrowed by 1.20%, due to competition between managers.”
The latter, faced with an influx of capital, are tending to offer more attractive terms to borrowers in order to put assets under management to work. The result: in the space of a year, companies wishing to borrow have seen interest rates on European private debt fall by around 2%.
A booming market
On the demand side, private debt funds are emerging as increasingly popular partners for economic players. But what about the supply side?
Investors, too, seem to have fully grasped the benefits of incorporating private debt funds into their strategy. The increase in assets under management worldwide bears witness to this. According to a study conducted by the Alternative Credit Council, in collaboration with EY, the private credit market recently reached $3trn, up from $900bn in 2021.
These assets are directly mobilised to finance the real economy, whether through traditional loans to businesses or loans backed by other assets, such as property debt or infrastructure debt.
The UBS Global Family Office Report 2025 is another indicator of the growing appeal of debt products to investors. It shows that the structures responsible for managing the wealth of wealthy families have increased their investments in this asset class. Average allocations to private debt have doubled, reaching 4% in 2024, compared with 2% the previous year. And among family offices planning to change their allocations in 2025, private debt is expected to account for 5% of the portfolio.
This strengthening of positions in debt has come at the expense of private equity, whose allocations have fallen by one point, due in particular to the turbulence that has been affecting the unlisted sector for several months. The sharp rise in interest rates from 2022 has led many private equity managers to extend the duration of their holdings. The cost of money is weighing on company valuation multiples and, consequently, on investors’ exit prospects. Private debt, according to the UBS report, therefore appears to be an alternative that can generate an additional return while providing welcome diversification.
Attractive returns
“It is these prospects of attractive returns that explain the growth in the supply of private debt in recent years,” continues Hebert. In Europe, the returns expected from this type of financing are between 450 and 600 basis points above the key rates of the European Central Bank. A fund can therefore expect returns of 8-10% for senior debt, in other words debt that has priority for repayment. “From a medium- to long-term investment perspective, the investor benefits from a comfortable risk premium, linked in particular to the complexity of the structuring of these operations,” explains the managing director.
Lending money to SMEs is obviously not without risk. These initiatives require the mobilisation of a variety of experts, capable of carrying out technical due diligence to ensure the borrower’s ability to repay, or drawing up solid, well-structured financing contracts. “In this area, nothing is standard. Financing can be modulated in various ways, by playing on the different levels of seniority of the debt tranches,” Hebert says. A senior tranche guarantees a high level of protection for the investor, while a mezzanine or subordinated tranche presents a higher level of risk, but also higher return prospects--as always when it comes to investment.
Good risk management
As an investor, you should never underestimate the risks. When it comes to private debt, the main risk lies in the possibility of a borrower defaulting.
To limit this possibility, the first challenge is to rigorously assess the quality of the borrower. It is also essential to ensure that the loans granted are sufficiently diversified. With this in mind, investing via a fund provides a high level of diversification. The more numerous and varied the credit lines, the more diluted the risk.
Revenue guarantees
Although private debt fund managers can theoretically finance any type of project, certain sectors are of particular interest to them.
“One of the main areas of activity supported by private debt is healthcare, laboratories and medical equipment,” says Hebert. “Between 25% and 30% of the debt allocated is directed towards this sector, which in particular offers solid guarantees of long-term income.” The technology and digital sector is another major beneficiary of private debt, as are the pharmaceutical and biotechnology industries. Next in line are highly specialised industrial players, as well as the infrastructure sector, particularly in renewable energies. “Debt funds prefer to target mature companies that can demonstrate a real capacity to generate regular income. In healthcare, the guarantees lie in public funding policies. In IT, business models based on licences or subscriptions are particularly popular.”
A long-term approach
Investing in private debt implies a long-term commitment. In most cases, managers invest via closed-end funds, with an investment horizon of five to seven years. The advantage for investors lies in the relative predictability of this formula: from the outset, they know the return they can expect throughout the term of the loan. The capital lent and the interest are generally repaid in the form of regular coupons. This is a very different dynamic to that of the bond market, where the value of government or listed corporate bonds traded on the markets can fluctuate over time.
The attractiveness of debt funds is likely to increase further in the coming years, particularly with the prospect of consolidation in the European capital market. As mentioned above, Luxembourg stands to benefit directly from this trend. Thanks to its solid regulatory framework, the financial centre has vehicles that are particularly prized by debt fund managers, such as the SCSp or the Raif.
The challenge for the Luxembourg financial centre is to continue to support this remarkable growth, by fully seizing the opportunities that lie ahead. It is a question of listening to the expectations of managers and investors alike, in order to enable economic players to take up new challenges, innovate and transform themselves sustainably--by guaranteeing fluid, secure and efficient access to private debt.
€510bn
Private debt funds established in Luxembourg, based on data from 13 custodian banks based in the country, manage €510bn in assets. Between 30 June and 31 December 2023, the Luxembourg private debt fund market recorded an average growth in assets under management of 21.5% (according to the Private Debt Fund Survey 2024 by Alfi and KPMG).
Various levels of debt
The concept of private debt, as an asset class, encompasses several categories, ranging from senior debt, which enjoys the highest degree of protection thanks to strong guarantees, to subordinated debt.
Senior debt
This is similar to traditional bank loans. It benefits from specific guarantees that place it at the top of the list of debts to be repaid in the event of financial difficulty on the part of the borrower. Its repayment priority makes it a relatively secure debt, which translates into a lower cost of borrowing.
Mezzanine debt
Mezzanine debt is a form of subordinated debt. It is repaid after the senior debt has been repaid. Its intermediate position between traditional debt and equity makes it a popular financing instrument for sophisticated financial packages. Because of the increased risk involved, it offers a higher return.
Other subordinated debt
Subordinated debt includes all debt whose repayment is conditional on the prior settlement of senior debt. With the exception of mezzanine debt, it includes various financial instruments backed by second-rate collateral. Their higher level of risk results in a more attractive return for lenders.
The unitranche
A more recent but increasingly popular form of financing, this hybrid form of financing replaces both senior and subordinated debt, thereby simplifying the financing structure. Repayable at maturity, it is generally underwritten by specialist investment funds and has an intermediate cost. Its appeal lies in the flexibility it offers borrowers, while providing a higher return for lenders.
Various strategies
Lending by debt funds can take several forms. There are several main strategies. Direct lending is similar to lending to businesses, as a bank would do. Direct debt accounts for more than half of the financing granted. Mezzanine debt generally refers to a hybrid form of financing that combines elements of debt and equity. Some financing strategies are based on assets, such as loans linked to property or infrastructure projects (a bit like a mortgage). There are also private debt funds that lend to companies that have defaulted, gone bankrupt or are at high risk of bankruptcy. Or vehicles that buy the debt of these companies at a considerable discount. The aim is to benefit from the potential improvement in the company’s financial health, which would guarantee payment of the debts and increase their value.
This article, originally published in French, was written for the alternative investments supplment to the July 2025 issue of Paperjam magazine published on 13 June. The magazine content is produced exclusively for the magazine. It is published on the site to contribute to the full Paperjam archive. Click this link to subscribe to the magazine.
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