Once upon a time in 2013, Luxembourg launched the conversion of the EU directive on alternative investment fund managers (AIFMD) into its national law. It ultimately culminates, alongside the conversion of other European countries of the AIFMD, into the first globally regulated environment for alternative investment funds (AIFs).
Since then, the grand duchy made it to the top of the league of fund hubs, securing the position of the second-largest fund centre in the world, right after the United States of America, by constantly adapting its legislation to the needs of the market and fund sponsors.
The Luxembourg AIFs toolbox allows for the combination of features from different jurisdictions, especially in relation to the limited partnership regime, which can serve the needs of clients from both common law and civil law jurisdictions. Thus, this toolbox offers a comprehensive solution for a wide range of clients, enhancing the financial centre’s attractiveness and competitiveness. It is also a vital point of interest for Belgian and Dutch investors, representing the 7th and 10th largest fund sponsors in Luxembourg.
The AIF toolbox of the grand duchy spans across the following vehicles:
1. Simple and special limited partnerships
Unregulated investment funds are most of the time governed by the Luxembourg law of 10 August 1915 on commercial companies. Several kinds of vehicles are conceivable within the limited partnership regime. Mostly the simple limited partnership (SCS) and the special limited partnership (SCSp) are being the most appreciated ones in the Luxembourg market. If the activities of an unregulated vehicle fall within the boundaries of the AIFMD, then it is eligible to be categorised as an AIF. An unregulated fund can be either open-ended or closed-ended, but it cannot be structured as an umbrella fund due to the applicable legal regime. There is no obligatory minimum capital amount specified for SCS and SCSp structures. An unregulated vehicle is not required to obtain prior approval from the Luxembourg financial regulator, the CSSF. The vehicle has the flexibility to invest in any type of asset classes and can adopt any investment policy or strategy. Unregulated funds are suitable for private equity, venture capital, infrastructure and real estate investment structures, as well as for holding and financing activities.
2. Reserved Alternative Investment Fund
The reserved alternative investment fund (Raif) was created through the enactment of the Luxembourg Law on 23 July 2016. The introduction of the Raif framework enabled fund sponsors to establish a type of alternative investment fund that amalgamates the legal and tax aspects of the widely recognised Specialised Investment Fund (SIF) and Investment Company in Risk Capital (Sicav) frameworks, while still remaining outside the scope of regulation. The primary objective of the Raif framework is to reduce the uncertainty associated with fund launches by eradicating the necessity of obtaining prior authorisation of the CSSF and by eliminating direct prudential supervision from it over the vehicle itself. The Raif can be established as either contractual mutual fund (FCP), partnership or corporate form, with flexible (Sicav) or fixed capital (Sicaf). Raifs have the flexibility to be structured as open-ended or closed-ended funds and can be created as a standalone fund or as an umbrella structure. Within twelve months of its launch, Raif must achieve net assets worth EUR 1.25 million. The management of a Raif must be carried out by an authorised external manager, i.e. the so-called AIFM. The Raif has the freedom to invest in any asset class and adopt any investment policy or strategy, except when it chooses the Sicav’s tax regime. In such case, it is limited to investing in risk capital. The Raif is required to create a prospectus, a PRIIP Key Information Document (KID) -if it is open to retail investors- and an annual report.
3. Specialist Investment Funds
The sole purpose of the Luxembourg specialised investment fund (SIF) governed by the Luxembourg law of 13 February 2007 is to collectively invest in various assets, thus enabling the distribution of investment risks and providing investors with the advantages resulting from the management of their assets. The SIF can be formed as either contractual mutual fund (FCP) or as investment company with variable or fixed capital. SIFs have the flexibility to be established as open or closed-ended funds and can be created either as standalone fund or as part of an umbrella structure. The SIF‘s net assets must achieve a minimum of EUR 1.25 million within 12 months after receiving approval from CSSF and the risk diversification requirement needs to be fulfilled after an initial ramp-up period.
4. Luxembourg investment company in risk capital
The Luxembourg investment company in risk capital (Sicar) was explicitly created for investing in private equity and venture capital. Thus, the Sicar regime aims to encourage the collection of funds from investors who are willing to take on the higher risks involved in investing in risk capital, in anticipation of a higher return. The law governing the Sicar is dated 15 June 2004. Before starting its activities, the Sicar must be authorised by the CSSF and are required to appoint an AIFM. A Sicar must always be constituted as corporate entity with fixed or variable share capital and may be set up as a stand-alone fund or as an umbrella structure with multiple compartments. The share capital (including share premiums, if any) must reach EUR 1 million within 12 months following the CSSF’s approval of the fund entity in question. Furthermore, a Sicar is not required to comply with the principle of risk diversification. In terms of disclosure requirements, a Sicar must prepare a prospectus, a PRIIPs Key Information Document (KID) if open to retail-type investors and an annual report.
Update
On 24 March 2023, the Luxembourg Parliament issued a draft law that suggests amendments to the five sectoral laws (Sicar, SIF, UCI, AIFM, Raif) regulating investment funds in Luxembourg.
These changes include, inter alia, the following:
- modifying the definition of “informed investor”; to align with European standards (applicable to Sicar, SIF and Raif) and to align the Luxembourg regime to the European standard by lowering the current investment threshold from 125,000 to 100,000 Euros;
- extending the period for the constitution of the minimum capital requirements for certain funds (applicable to Sicar,SIF, Part II of the UCI, Raif); allowing AIFMs to use tied agents (a natural or legal person who, under the full and unconditional responsibility of only one firm on whose behalf the tied agent acts); extending the non-judicial liquidation regime (i.e. voluntary or administrative) to management companies and managers; reforming the supervisory commissioner regime in case of withdrawal of an entity supervised by the CSSF from the official list; modernising the subscription tax regime on three specific points in order to support the emergence of new European products such as European Long Term Investment Funds (Eltifs) and Pan-European Individual Pension Savings Products (Peps) following the European Commission’s efforts to create a true Capital Markets Union (CMU).
Conclusion
The Luxembourg AIF fund toolbox is ever evolving and adapting to market changes. Luxembourg remains the place to be in Europe when it comes to setting up alternative investment funds.
Tom Loonen is a professor of financial law at VU University Amsterdam and special counsel for Pinsent Masons PLC Netherlands. Jan Saalfrank is partner investment funds of Pinsent Masons PLC Luxembourg. The law firm is knowledge partner of Investment Officer.