Luxembourg has built its reputation as a global centre for the hosting, administration and distribution of investment funds on a flexible and dynamic regulatory regime for asset managers and their funds. The most recent addition to the grand duchy’s ‘fund toolbox’, as the industry likes to describe it, was the introduction of the Reserved Alternative Investment Fund (July 2016). An enhancement of the country’s existing rules governing alternative funds, the RAIF is designed to offer much greater flexibility and faster time to market for funds aimed at sophisticated investors.
A surge of new RAIFs launched since the establishment of the regime indicates that it seems to be meeting an important need for both fund managers and their investors. The Law on Reserved Alternative Investment Funds dated 23 July 2016 governs what investments the RAIF can hold and in what proportion, and the type of investor protection applicable to the regime’s target market.
Building on established expertise
Most collective investment funds in Luxembourg, including UCITS covered by the EU’s retail fund rules, specialised investment funds (SIFs), and private equity-oriented SICAR vehicles – are subject to ongoing supervision by the country’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF). These structures have generally worked well, proved popular with investors, and helped to establish the Luxembourg fund industry as a benchmark for quality and expertise.
However, the Alternative Investment Fund Managers Directive muddied the waters on product regulation. The legislation, which came into force in 2013, aims to ensure that fund managers – as opposed to individual funds – are adequately supervised.
The AIFMD provides a passport across Europe to all funds managed by an authorised alternative investment manager, rather than requiring authorising of each individual fund. However, it meant that many funds became subject to double regulation – both directly by the CSSF, as well as through their managers under the AIFMD.
Fund managers complained that the double layer of oversight was excessive, particularly for funds targeted at sophisticated investors, and was delaying the launch of funds, to the cost of their competitiveness.
The RAIF initiative also reflects Luxembourg’s new shift in regulatory focus, from the product supervision approach to the management supervision model introduced by the AIFMD.
Choice of structure
These concerns prompted the creation of the RAIF regime, offering a new structure for sophisticated investors that would not be subject to the supervision of the CSSF – instead, the appointment of an alternative investment fund manager subject to the AIFMD rules would ensure sufficient oversight.
Therefore, a RAIF does not need regulatory approval in order to be launched and is not directly supervised by the CSSF. A RAIF must be managed by an AIFM, and is hence indirectly supervised by the CSSF, through its manager. Otherwise the new structure largely replicates the regime applicable to SIFs, which was introduced in Luxembourg in 2007. The RAIF initiative also reflects Luxembourg’s new shift in regulatory focus, from the product supervision approach of the past to the management supervision model introduced by the AIFMD.
RAIFs may take the form of a contractual fund (fonds commun de placement or FCP) or an open-ended or closed-ended investment company, usually with variable capital (SICAV). Their corporate structure can be a public limited liability company (société anonyme, or SA), a corporate partnership limited by shares (société en commandite par actions, or SCA), a private limited liability company (société à responsabilité limitée or SARL), or a common or special limited partnership (société en commandite simple, or SCS, or société en commandite spécialisée, or SCSp).
RAIFs have considerable flexibility on the way they are structured. For example, the rules governing the issue and redemption of shares can be tailored separately for each sub-fund of a RAIF and there is a segregation of assets and liabilities between the sub-funds.
Investment in RAIFs is limited to ‘well-informed’ investors, which fall into three categories – institutional investors, professional investors, and any other investor that confirms in writing that they are well informed and either (i) invest a minimum of €125,000 or (ii) demonstrate their experience with a certificate from a bank, an investment firm covered by the EU’s MiFID legislation, a UCITS management company or an alternative investment fund manager.
RAIFs are subject to lighter diversification requirements than those applicable to UCITS funds. They may not invest more than 30% of their gross assets in any single asset, compared with as little at 10% for other types of fund, giving investment managers a broader range of options for the way they manage and structure the fund’s underlying assets.
The payment of dividends is not subject to any legal restrictions, and there is no requirement to create a statutory reserve in funds having the form of a SICAV.
In addition, the 30% rule does not apply to funds investing in securities issued or guaranteed by an OECD member state or local authorities within an OECD country, or by public international bodies with an EU, regional or worldwide scope; or to investment in funds subject to equivalent diversification requirements.
The payment of dividends is not subject to any legal restrictions, and there is no requirement to create a statutory reserve in funds having the form of a SICAV. This gives the investment manager flexibility on the way income is paid out of the fund, and means that it can be tailored to the nature of the underlying assets.
As they don’t require prior approval from the regulator, RAIFs can be set up quickly and easily, helping to reduce set-up and administration costs.
Time to market
As they don’t require prior approval from the regulator, RAIFs can be set up quickly and easily, helping to reduce set-up and administration costs, and thus benefiting investors.
RAIFs are fully compliant with the AIFMD, which gives managers an EU-wide distribution passport to professional investors, but also offers investors the assurance of the AIFMD’s investor protection safeguards, including the appointment of an independent depositary that is liable for loss of assets, a CSSF-approved third-party auditor, and the publication of audited annual reports.
The RAIF has proved a popular addition to Luxembourg’s existing range of alternative investment fund vehicles. Since its launch in 2016, around 470 funds have been launched by investment groups from around the world for a wide range of assets and strategies, including infrastructure, hedge fund strategies and private equity – their assets under management now total around €19bn.
With its flexible structure and the ease provided by the absence of direct regulatory supervision, the RAIF has helped to cement Luxembourg’s standing as a centre for alternative investment funds within the EU and make a range of investment strategies available to sophisticated individuals as well as institutional and professional investors.