What are the pressing issues and emerging trends across the private markets as we fast approach the end of the year?

At an event last week, Greg McKenzie, our Luxembourg Country Head, shares insights into the latest trends shaping the Luxembourg funds market and his observations of the sector’s strong resilience and its ability to innovate amid ongoing economic changes and uncertainty.

The Luxembourg market continues to lead in responding to challenges such as rising borrowing costs, real estate pressures, and evolving LP demands. In this article, he reveals how fund managers and investors are leveraging new strategies to navigate these hurdles while positioning themselves for growth in 2025.

Credit sublines: adapting to rising costs with strategic value

Credit sublines have cemented their role as a critical tool for fund managers, even as borrowing costs rise. These facilities help funds grow net asset value (NAV) without frequent capital calls, optimising internal rate of return (IRR) and providing greater flexibility in portfolio management.

Looking ahead, there is cautious optimism for 2025 as credit strategies remain vital despite rising borrowing costs. Fund managers are adapting by renegotiating terms, exploring alternative structures, and leveraging data to optimise cash flow and returns.

Credit lines continue to provide liquidity and flexibility, allowing managers to focus on long-term goals while delaying capital calls to enhance IRR metrics. Anticipated interest rate easing further bolsters confidence, positioning credit strategies for growth in a shifting market.

Fundraising and LP engagement: still tough times

The fundraising environment remains challenging, with institutional investors favouring established relationships over new partnerships. LPs are consolidating commitments with known GPs, reflecting a cautious approach in the face of ongoing economic uncertainty.

Another dynamic impacting the market is the retention of assets post-COVID. Many assets remain held within portfolios, delaying returns of capital to LPs and reducing their ability to redeploy into new opportunities.

Despite these challenges, LPs are shifting toward more global mandates, seeking to diversify their portfolios across broader geographies rather than sticking to regional allocations. This pivot is creating new opportunities for GPs to align their strategies with a more global investment thesis.

Real estate: navigating change and seizing opportunities

The real estate sector continues to face disruption, with letting issues in commercial real estate weighing on valuations and investor confidence. However, some challenges are also creating opportunities:

  • Fixed-term maturities: Assets with maturing fixed-term debt may push reluctant sellers into the market, creating potential for opportunistic buyers.
  • Closing the buyer-seller gap: The valuation mismatches seen post-COVID are narrowing, paving the way for increased transaction activity and exits.
  • Impact of rate drops: Anticipated reductions in interest rates could drive value increases across certain real estate assets, boosting market momentum.

Notably, credit within real estate is gaining clarity as a distinct allocation bucket for LPs, separating it from traditional real estate or equity classifications. This evolution is helping investors make more informed decisions about their portfolios.

Innovations in NAV lending

The NAV lending market is evolving rapidly, with new structures and strategies enhancing its appeal. Traditional SPV lines remain prevalent, offering mechanisms for funds and lenders to manage default events effectively.

Segmentation is also becoming more pronounced, with lenders aligning their expertise to specific asset classes, such as buyouts, private equity, infrastructure, and credit. This targeted approach is improving due diligence and aligning financing strategies with sector-specific risks.

In addition, a more entrepreneurial attitude is emerging in fund lending. High-net-worth individuals (HNWIs) are increasingly being engaged as part of broader investor pools, signalling a shift toward diversification in funding sources.

Looking ahead: optimism for 2025

Despite a tough fundraising environment and ongoing pressures in real estate, there is cautious optimism for 2025. Anticipated rate reductions, narrowing valuation gaps, and the ongoing evolution of credit strategies are likely to drive momentum across private markets.

With approximately 90% of funds now using call facilities, the Luxembourg market is maturing and adapting to a more complex environment. The industry is seeing increased competition and participation, underscoring the importance of robust due diligence and innovative approaches to capital deployment.

As private markets continue to evolve, collaboration between fund managers, LPs, and lenders will be key to navigating the challenges and seizing the opportunities that lie ahead.

For more insights or to discuss these topics further, please get in touch with Greg McKenzie ([email protected]).