The rise of loan origination funds in Luxembourg

By: José Santamaria

Increase in Non-Bank Lending Changing Loan Landscape

The exponential growth of non-bank lending provides opportunities and challenges to the fund management industry. This was the focus of “The Rise and Rise of Loan Origination Funds”, a presentation and panel discussion hosted by SS&C in Luxembourg.

“Driven by an environment of low yields and ever-increasing regulatory changes impacting banks, borrowers have been forced to look elsewhere to fund their financing and liquidity requirements,” said Nicolas Grenie, head of loan solutions atSS&C.

This has led to an increase in non-bank lending, including:

  1. direct lending to SMEs, peer-to-peer platforms, and mortgages
  2. secondary market for bank loans, high yield loans, and distressed loans
  3. financing of infrastructure 

In response, the market now offers financing alternatives, including loan securitization, regulated funds, and unregulated investment vehicles. The challenge lies in the complexity of the loan asset class, structuring, and the liquidity profile of the underlying loans. Unlike a traditional bond, loans require specialized investment management, back office operations, and risk and valuations teams. Central administration must be prepared to accommodate the increasing deal flows; today’s manual processes cannot support increased loan volumes, complex credit/risk, and increasing regulatory reporting requirements. There is no one technology solution that meets every need, but those who invest in new solutions and automated processes will be better equipped to manage asset growth and inherent portfolio and operational risks. 

Referencing the European Securities and Markets Authority (ESMA) opinion, “key principles for a European framework on loan origination by funds”,  panellists (including senior experts from SS&C, PwC Luxembourg, Duff & Phelps Management, and Elvinger Hoss Prussen), agreed that Luxembourg’s breadth of fund structures, stability, and regulatory framework make it an attractive jurisdiction to domicile loan funds. Luxembourg also has flexibility as a domicile and tax regime to support loan investment vehicles, as evidenced by the growing number of securitization, real estate, and funds being launched every year.

The panel outlined key risk management and valuation nuances that are specific to the loan asset class. Although loans may share similar features with bonds, fund managers must treat them differently. Each loan, (e.g. secondary bank loan, high yield, distressed), requires specialized pre- and post-investment risk, ongoing credit assessment, and valuation expertise. A loan’s life cycle, including interpretation of documentation, trade settlements, liquidity, income, and pay downs, can also differ drastically from traditional bonds and requires specialized management company expertise.

Alternative finance is growing in Europe. Global regulators (e.g. ESMA and European member states) are aware of this trend and non-bank lenders have proven they are a viable alternative source of funding. The challenge for all industry participants is to demonstrate expertise, transparency, and operational efficiency.

SS&C Loan Services offers a comprehensive suite of technology and outsourced services across the entire loan spectrum: accounting, reserving, credit risk analysis, middle- and back-office administration, agency or shadow servicing of commercial and residential mortgages and bank loans. SS&C Loan Services comprises three core areas covering bank loans, commercial loans and mortgages. To find out more, please contact