Luxembourg announced plans for a new alternative investment fund (AIF) on Dec. 14, 2015. The Reserved Alternative Investment Fund (RAIF) will go into effect in mid-2016, pending parliament’s approval. Fund managers will now have another strong product — the new RAIF structure adds to an existing range of Luxembourg investment fund products for your investors.
In addition to the RAIF, Luxembourg has a range of structures for undertakings for collective investment (UCI). It’s important to understand the variations because each type is regulated differently, and choosing a structure has traditionally been based on a fit with a fund’s investment policy or distribution strategy.
There are two main UCI types:
AIF asset types
- Undertakings for Collective Investment in Transferable Securities (UCITS). UCITS stemmed from a 1985 directive that created a single European market for retail investment funds and included extensive investor protection measures. UCITS are defined as UCIs that invest in securities (such as stocks and bonds) that are listed on a recognized stock exchange. They must be open-ended, and the investor must be able to redeem holdings at any time. A UCITS’s investment policy must also reflect certain rules on portfolio diversification, asset liquidity and the use of hedging.
- Alternative investment funds (AIFs). The Alternative Investment Fund Manager Directive (AIFMD) created the first regulated environment for AIFs to enter the European market. AIFs can include hedge funds, funds of hedge funds, venture capital and private equity funds, and real estate funds. The new RAIF structure is a subcategory under an AIF.
AIFs don’t have specific legal restrictions on the types of assets they invest in, but the investment policy must be approved by the Commission de Surveillance du Secteur Financier (CSSF). The CSSF has risk diversification requirements, but these are not as strict as the requirements for UCITS.
Three main legal structures have generally been available for AIFs:
- Common investment funds. Defined as fonds commun de placement, common investment funds don’t have a defined legal structure, but they must be managed by a fund management company.
- Variable capital investment companies. Defined as a société d’investissement à capital variable (SICAV), this structure has varying capital depending on investor subscriptions and redemptions. A SICAV can be self-managed or it can appoint a fund management company.
- Fixed capital investment companies. This structure is defined as a société d’investissement à capital fixe (SICAF). A SICAF can be self-managed, or it can appoint a fund management company.
Each of these structures can be a standalone fund, with a single investment portfolio, or they can be structured as a multiple compartment fund (umbrella fund), which creates separate sub-funds (compartments) under the roof of a single legal entity. These sub-funds function as independent entities, each with its own investment policy, target distribution market and investor profile. Each fund or sub-fund can issue different classes of shares that vary, for instance, in the type and level of commissions, enabling particular shares or units to be tailored to the needs of a specific market or clients (institutional or private).
The new RAIF
- Specialized investment funds (SIF). A SIF can invest in any type of assets, but are typically real estate funds, hedge funds or private equity funds. They have less regulation but must have active portfolio management. SIFs must have an effective system to monitor, measure and manage portfolio investment risk. They must also be structured to limit the risk of conflicts of interest between the fund and its investors, and there are several conditions related to the use of third parties. SIFs must respect the principle of risk diversification, but there are not any quantitative limits on the fund’s investments and there can be multiple compartment funds. They can issue an unlimited number of different share classes, which allows each fund and sub-fund to be designed to fit the needs and preferences of particular target investors.
- Risk capital investment company (SICAR). Also known as a société d'investissement en capital à risqué, a SICAR provides a vehicle for private equity and venture capital investment. A SICAR is entitled to create multiple investment compartments, thus permitting a private equity fund to group different investment strategies or meet the demands of different investors within one legal structure. There are no investment diversification rules, and a SICAR may have an open-ended or closed-ended structure. Typically, a SICAR has a limited life span and must identify the mechanism by which its shareholders can redeem their holdings in the company.
RAIFs enable investors to quickly and flexibly set up an investment vehicle, working with an asset management firm. The RAIF is a variation on a SIF and is similar to a SIF in that it includes the ability to market its products across the EU, has full flexibility of legal forms and has no investment policy limitations. A significant difference is that RAIFs do not need approval or supervision from the CSSF as long as they comply with AIF requirements and are managed by a regulated alternative investment fund manager (AIFM). RAIFs can be set up within days, ensuring greater efficiency and speed to market.
The RAIF must:
- Qualify as an AIF
- Be managed by an external AIFM established in Luxembourg or another EU member state
- Have its registered office and administration in Luxembourg
- Have a Luxembourg depositary and an auditor
The RAIF can follow any investment strategy and invest in any type of asset, subject to risk spreading requirements. Additionally, the AIFM must comply with the AIFMD and must notify regulatory authorities once it starts to manage the RAIF.
The Luxembourg Parliament is considering the draft RAIF law and expects to make a final decision by mid-2016. To explore any opportunities for your firm, please contact Grant Thornton LLP.
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