Central Bank of Luxembourg publishes study on captive financial institutions’ reliance on external lenders

The Central Bank of Luxembourg released Cahier d’études No. 197 analysing how Luxembourg-based captive financial institutions (CFIs, sector S127) owned by private equity or real estate investment funds link to external lenders. It finds that most CFIs are primarily connected within fund-group structures and therefore show limited exposure to external borrowing, while a smaller subset relies heavily on loans. In 2022, CFIs with credit exposures below 5% of liabilities accounted for 60% of CFIs linked to private equity or real estate funds and 63% of total assets. By contrast, CFIs whose main funding source is loans had average credit exposure of 70% of liabilities, representing 15% of CFIs and 10% of assets, and formed indirect links between funds and external creditors via structures such as conduits, mixed structures and extra-group loan origination companies. These loan-funded CFIs absorbed 70% of all loans to CFIs tied to the two fund types; banks were the main providers, alongside investment funds, insurers and pension funds. Of the loan stock to these entities in 2022, 60% financed real estate investments and 40% private equity, with German banks mainly supporting real estate financing and US banks the main funders of private equity; real estate exposures were concentrated in Western Europe, notably Germany and the United Kingdom. The study also reports that the creditor network financing these CFIs expanded between 2014 and 2022, with relationships increasing in number and volume, and notes that the views expressed are those of the author rather than the Central Bank of Luxembourg or the Eurosystem.