Agefi Luxembourg - décembre 2024

Décembre 2024 27 AGEFI Luxembourg Fonds d’investissement By Marie-Laure MOUNGUIA, EY Luxembourg Partner, Private Equity & Private Debt R ecent actions by the Fed and the EuropeanCentral Bank to decrease interest rates have brought some relief andhope to the markets.While private credit has good reasons to rejoice, concerns are also rising about the future perfor- mance of this asset class. Resilience in changing macroeconomic environment Overthepastfiveyears,theprivateassetmar- ket had to navigate several challenges in an ever-evolvingmacroeconomic environment. The pandemic, interest hikes and transaction scarcity had their fair share in the list. In this context, private credit emerged as a resilient assetclass.Fillingthefinancinggapleftbythe retrenchment of banks, the asset class consol- idateditspositionasareliablesourceofcapital in the full spectrum of credit strategies and became oneof thepreferredallocations for investors.Accord- ing to Financing the Economy 2024, (1) Private Credit nowrepresentsmorethanUSD3trillionassetsunder managementworldwide. Arecent decrease in interest rates arrivedafter aper- sisting period of high rates which profoundly af- fected the industry. Even thoughhigh rateswerenot the sole driver boosting the attractiveness of the asset class in recent years – increased investors’ fa- miliarity and more favorable regulations also helped – concerns are rising. Revival of dealmaking Macroeconomic stability and regulatory certainty are expected to boost transactions in 2025. In a context of high levels of dry powder, the revival of leveraged buyouts should be significant and that is good news for credit funds which never re- ally stopped fundraising. 2024 private credit fundraising is expected to land at a higher level than the prior year, after the 2021 record year close to USD 350 billion raised. (2) Consequently, capital deployments are expected to flood the market in the coming years. Financialmodels put to the test of the real economy Concerns are rising onupcomingperformance. The double effect of, on one hand, new originations at lower spreadand, on theotherhand, thebacklashof the mechanisms put in place during high rates pe- riodtorelieveborrowers,mightaffectyieldsonover- all portfolios in the future. Indeed, maturity extension, shift to payment-in-kind interest and waiver of covenant breachwere extensively applied whileborrowerswere struggling tomanage their in- terest coverage ratios. Agencieswho tried todevelopdefault rates showed that they have remained at relatively low levels de- spite tense market circumstances since 2020. Data might however hide some bias in asset valuations, especially now that rates are turning down. Values of the past high-yieldoriginated loansmight benefit from an uptick when rates are decreasing and may not fully capture the distressed reality of borrowers if credit risk is not accurately adjusted. We might thenfaceasituationwherefinancialdataisdeviating from real economy. Conclusion The revival of dealmaking is a positive sign for the alternative investment industry, but challenges re- main. Private credit playerswill have to keep an eye onborrowers, especially themost vulnerableones to test their models in time of turmoil. No doubt that such a resilient asset class will find its own way to navigate this newmacroeconomic environment. To read the complete Financing the Economy report, visit our website: https://www.ey.com/en_lu/future-of-private-credit. 1)AIMA-ACC&EYFinancingtheEconomy2024 2)PrivateDebtInvestor Falling Interest Rates: The Good and Bad News for Private Credit Source:AIMA-ACC&EYFinancingtheEconomy2024 Six years of financing growth despite severe economic and political challenges (USDbillion capital deployment by Financing the Economy survey participants) Source:MSCIdatapresentedbyPrivateDebtInvestor Year-on-yearfundraisin($bn) Source:PrivateDebtInvestor Estimatedcapitaldeployment Forecastcapitaldeployment Proxydefaultratesbycalendarquarter.Loanswithmarketvaluereportedatbelow80%ofcostbasisaretreated asnonperforming Defaultratesforseniorandmezzanineloans(%) A s ESG (Environmental, So- cial, andGovernance) in- tegration deepens, the financial sector faces an evolving regulatory landscape that de- mands agility and foresight. The year 2025 is poised to be a pivotal moment for funds, banks, finan- cial institutions and insurance companies as regulatory shifts reshape sustainable finance prac- tices worldwide. Institutions that prepare early will not only ensure compliance but also position themselves as leaders in sustaina- ble finance. Here is a guide to the critical updates and how organi- zations can proactively adapt. ESGTerminology and FundNamingGuidelines TheEuropeanSecuritiesandMarketsAu- thority (ESMA) has introduced stringent guidelines on ESG-related fund names, effective for new funds since November 2024andmandatoryforexistingfundsby May 2025. These guidelines aim to elimi- nate ambiguity in the use of sustainabil- ity-related terminology in financial products. According to the new rules, funds must allocate at least 80% of their investments to environmental or social objectives, while avoiding exposure to controversial sectors such as fossil fuels, armsmanufacturing, and tobacco. This regulatory push is designed to combat “ greenwashing ”—the practice of overstating sustainability claims to at- tract investors. Fundmanagerswill need to scrutinize their investment strategies, ensuring that marketing materials and pre-contractual documents provide transparent and verifiable ESG claims. To standout ina competitivemarket, or- ganizations can consider adopting vol- untaryESG labels and certifications that enhance investor trust. Furthermore, third-party verification of ESG claims can provide a competitive edge, foster- ing greater transparency and long-term market confidence. SFDRandSimplified Categorization The Sustainable Finance Disclosure Reg- ulation(SFDR)isundergoingasignificant transformationwith the introduction of a simplifiedframeworkthatclassifiesfinan- cialproductsintothreedistinctcategories: sustainable, transition, and non-catego- rized.Thisstreamlinedstructureenhances clarity for investors, helping them distin- guish between fully sustainable funds, funds in transition, and those without a specific ESG focus. To meet these requirements, financial in- stitutions will face increased scrutiny on their ESGdue diligence processes, partic- ularly around the adverse impact of their investments on environmental and social factors. Institutions must not only meet minimum sustainability criteria but also demonstrateactivemanagementandmit- igation of negative impacts. Advanced ESGdataplatformsandAItoolscanbein- strumentalinstreamliningdatacollection, analysis,andreporting,helpingorganiza- tionsmonitortheirESGimpactandensure regulatory compliance. Furthermore, a potential sustainability grading system could set a newbenchmark for fund per- formanceevaluation,enablinginvestorsto make more informed decisions. In this context, our ESG Consulting Team is ac- tively contributing to the current discus- sion at the Luxembourg level on the evaluationofSFDR.Weareobservingthat this is part of the 2024 supervisory priori- ties of the CSSF, which issued a commu- nicationon it inMarch 2024. Corporate SustainabilityReporting Directive (CSRD) Expansion The expansion of the Corporate Sustain- abilityReportingDirective(CSRD)in2025 marks a critical milestone for financial in- stitutions. Under the revised directive, evenentities previouslyexempt—suchas UCITS and AIFs—may find their man- agers subject to sustainability reporting under the Accounting Directive. This broader scope reflects the growing de- mand for comprehensive ESG reporting across the financial sector. AkeyfeatureoftheCSRDistheintroduc- tion of digital tagging through the Euro- pean Financial Reporting Advisory Group’s (EFRAG) XBRL Taxonomy. By 2026,allESGdatawillneedtobedigitally tagged, enhancing data comparability and accessibility. While this adds a new layerofcomplexity,italsopresentsanop- portunity for firms to differentiate them- selves by adopting robust ESG reporting systems.Earlyinvestmentindigitalcapa- bilities will attract ESG-conscious in- vestors and establish organizations as innovators in transparent reporting. Thosewhoadoptthesesystemsearlywill likely benefit fromincreasedmarket visi- bility and investor confidence. Asorganizationsprepare forCSRDcom- pliance, addressing foundational chal- lenges is critical. The first wave of implementation has highlighted the im- portance of readiness in areas such as conducting materiality assessments (DMA), streamlining data collection processes, engaging stakeholders effec- tively, and ensuring alignment with evolving policies. By reflecting on these lessons, firms can refine their strategies, mitigate risks, andposition themselves to navigate the complexities of ESG report- ingwith greater efficiency. IFRSS1&S2: ANewGlobal Standard The International Financial Reporting Standards (IFRS) Foundation has intro- duced two groundbreaking standards: IFRS S1 (General Requirements for Sus- tainability-related Disclosures) and IFRS S2 (Climate-related Disclosures). These standards aim to create a unified global baseline for ESG reporting, ad- dressing the long-standing challenge of fragmented reporting practices across jurisdictions. IFRS S1 emphasizes comprehensive sus- tainability disclosures, including gover- nance, strategy, risk management, and performance metrics. IFRS S2 focuses specifically on climate-related risks, re- quiring firms to disclose their exposure to bothphysical and transition risks and explain how they manage these chal- lenges. Companieswill need to integrate ESG considerations into existing finan- cial reporting processes and involve cross-functional teams from finance, legal, and ESG departments. Aligning with IFRS standards could open doors to international capital markets, where ESG compliance is increasingly a pre- requisite for investor interest. Corporate SustainabilityDue DiligenceDirective (CS3D) The Corporate Sustainability Due Dili- genceDirective (CS3D) introduces anew eraof corporate accountability, requiring large companies to implement due dili- gencepractices addressinghumanrights and environmental impacts throughout their supply chains. Although direct im- plementation for financial institutions will begin in 2027, their upstream busi- nesspartners—particularlythoseinhigh- risk sectors—will be affected much earlier. CS3D mandates that companies identify, prevent, and mitigate adverse impacts within their supply chains, fos- tering greater responsibility and trans- parency. While financial institutions are not directly targeted, they will need to adapt their lending and investment strategies to ensure that their business partners comply with these standards. Enhancedduediligenceframeworkswill become essential for managing supply chainrisks,particularlyasnon-compliant partners could pose significant reputa- tionalrisks.Leveragingtechnologiessuch as blockchain for supply chain trans- parency will not only facilitate compli- ancebutalsostrengthenstakeholdertrust and bolster long-term resilience. Now is the Time to TakeAction As 2025 approaches, ESGreadiness is no longer amatter of choice but a necessity. Financial institutions must view these regulatory changes not just as compli- ance obligations but as opportunities to innovate and lead in sustainablefinance. By refining their ESG frameworks, en- gaging stakeholders, and investing inad- vanced reporting technologies, organi- zations can transform regulatory chal- lenges into strategic advantages. Start by reassessing fund names, ensur- ingalignmentwithSFDRcategorization, and building capacity for CSRD and IFRS compliance. Those who act now will not only meet regulatory expecta- tions but also foster investor confidence, enhance their market position, and con- tribute meaningfully to the global sus- tainability agenda. With a proactive approach, 2025 can be- come a year of transformation, position- ing institutions to thrive in the evolving ESG landscape. During our most recent AIF Club webcast on December 11, we discussed these critical updates with our clients and found a shared consensus on the urgency and importance of these changes. Key points included the neces- sity of early action, the benefits of ad- vanced reporting technologies, and strategies for aligning with new regula- tory frameworks. VanessaMÜLLER, Partner,ESGLeader AnnaILLARIONOVA ESGConsultingSeniorManager MartinaSCAVINO ESGConsultingManager EYLuxembourg Staying Ahead with ESG 2025: Key Regulatory Updates and StrategicActions