Fund sponsors increasingly explore ways to facilitate access by retail investors to private assets. Part II UCIs have been instrumental in this development. This contribution discusses the increased success of the Part II UCI fund regime with private markets firms accessing the private wealth market.
Part II UCIs & the Modernized Luxembourg Fund Structuring Toolbox
With a view to remain agile and based on years of regulatory and market practice, as well as developments at European and international levels, including ELTIF 2.0, and the increased appetite of non-professional investors for alternative asset classes, Luxembourg modernized its Part II UCI regime in 2023 to further align it with the needs of fund managers. Amongst others, the changes introduced increased the structuring options for Part II UCIs by adding additional legal forms under which such funds can be established, such as the partnership limited by shares (société en commandite par actions or SCA), the common limited partnership (société en commandite simple or SCS) and the special limited partnership (société en commandite spéciale or SCSp).
In particular, we expect that the SICAV-SCA will progressively replace the SICAV-SA as the form of choice as investor facing vehicle for funds established under the Part II UCI regime. Indeed, the SICAV-SCA combines the variable capital and control through a manager-owned general partner with an opaque legal form, which is typically preferred in an open-ended structure with retail or private wealth investors.
Will Part II UCIs be the most popular ELTIF Fund Vehicle?
It is clear that the Luxembourg toolbox updates support the ongoing tendency to make AIFs more accessible to retail investors. In this context, while the Part II UCI regime was only used by a limited number of alternative investment fund managers over the past decade, including under ELTIF 1.0, it has been “rediscovered” over the last couple of years with private wealth investors’ growing interest in private markets and private markets players looking into broadening their investor base.
Indeed, Part II UCIs allow for the launch of open-ended subscription-based funds that sponsors launch, including as feeders or fund-of-fund structures (“FoF”) investing in traditional illiquid AIFs that are, normally speaking, restricted to professional investors only. Part II UCIs are also available for all types of investors with minimum investment tickets significantly lower than the EUR 100K, which apply under other Luxembourg product laws and the marketing to retail or semi-professional investors, subject to certain local restrictions, has been accepted in many European jurisdictions.
Due to their flexibility, Part II UCIs are also expected to remain to be the most popular vehicle for ELTIFs established under ELTIF 2.0, in particular for retail ELTIFs availing of the EU distribution passport to retail investors.
Part II UCIs: The Fund Regime of Choice for Retail & Private Wealth Investor Markets
While there is no one-size-fits-all solution for alternative investment fund managers when it comes to tapping into the retail investor base, considering the very wide bandwidth of the retail concept, we are convinced that the Part II UCI, structured as an umbrella fund (with the option to launch multiple sub-funds within the same legal entity), will quickly establish itself as the fund regime of reference to cover the (real) retail and private wealth investor markets.
Indeed, in an environment where evergreen funds are poised to become ever more popular, the umbrella Part II UCI provides the ideal platform under which various (semi) open-ended strategies (through one or more sub-funds with an unlimited duration) marketed to private wealth investors, could be combined with either closed-ended (with limited duration) or (semi) open -ended ELTIFs (with longer duration, albeit mandatory specific term) marketed to either professional, private wealth or (real) retail investors. Considering also the costs of setting up and maintaining these regulated structures and the typical ROI being potentially hampered by the (required) liquidity pockets in the case of (semi) open-ended (sub-) funds, using an umbrella Part II UCI as platform assists in achieving substantial economies of scale, while facilitating the management from an operational side.
Despite the current uncertainties as to the contents and timing for the adoption of the final ELTIF Level 2 RTS, European semi-liquid retail alternative investment funds would generally be launched as Part II UCIs, with ELTIF-relevant wording already baked in the fund’s constitutional documentation, so as to facilitate the designation as ELTIF, or, in case of an umbrella fund, the launch of sub-funds under the ELTIF label, at a later stage. Irrespective of how regulatory developments with respect to ELTIF 2.0 crystallize, Luxembourg is on such basis, either way, expected to increase its attractiveness as an attractive pan-European hub for retail AIFs.
Marc Meyers is co-managing partner of Loyens & Loeff Luxembourg and heads its investment management practice Group. Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and Senior Fellow/Guest Lecturer of the International Center for Financial Law & Governance at the Erasmus University Rotterdam. The law firm is a knowledge partner of Investment Officer.