Shedding Light On A Fast-Growing Asset Class: Loan Funds

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...