Fund vehicles for Private assets

Introduction

A variety of legal wrappers adapted to investor targets and investment policy

  • Reserved Alternative Investment Funds (RAIF), Specialised Investment Funds (SIF), investment companies in risk capital (Société d’investissement en capital à risque  or SICAR) and Securitisation vehicles
  • Complemented by flexible company and partnerships laws

Facilitating tailored and flexible product design

  • Open-ended, semi open-ended and closed-ended private funds may all be structured using a variety of Luxembourg legal vehicles, including two types of limited partnerships (common limited partnership or SCS[1] and special limited partnership or SCSp[2]) leaving extensive contractual freedom to partners
  • Luxembourg debt funds can originate, participate, syndicate loans and accommodate all types of debt strategies including investments in secondary debt, mezzanine and distressed loans
  • Possibility to adopt flexible accounting option principles including International Financial Reporting Standards (IFRS), Luxembourg Generally Accepted Accounting Principles (GAAP), US GAAPs or Limited Partnership Agreements’ bespoke requirements

Key figures3

15%

in AuM of regulated real estate investment funds in 2021

41%

in AuM of private debt funds in 2021, totalling EUR 181.7 billion

30%

in AuM of regulated private equity funds in 2021, totalling EUR 137.2 billion

1,800+ RAIFs

and 6,500+ SCSp

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Fund vehicles for private assets

Reserved Alternative Investment Fund (RAIF) – L_230716_RAIF_eng.pdf (cssf.lu)

  • Can be structured as an investment company with variable capital (SICAV), an investment company with fixed capital (SICAF) or an investment company in risk capital (Société d’investissement en capital à risque  or SICAR), as well as a limited partnership or a common fund 
  • RAIFs require a Luxembourg authorised AIFM , a Luxembourg depositary, a Luxembourg auditor, a Luxembourg administrator, a registrar and a transfer agent
  • No fund authorisation is required,enabling efficient time-to-market
  • They can be exclusively marketed to well-informed investors and can benefit from the distribution passport of the AIFM
  • Minimum subscription amount of EUR 125,000 or less if the investor’s expertise, experience and knowledge can be certified by certain regulated financial entities
  • Flexible investment policy: the RAIF is either subject to SIF  diversification rules or SICAR  asset eligibility requirement in case it opts in for the SICAR special tax regime
  • The mandatory documentation consists of an offering document,  KIID/KID, financial statements (at least audited annually) and periodic disclosures (for full AIFM regime AIFs)
  • The NAV must be calculated on the occasion of each issue or subscription or redemption or cancellation of shares or units and at least once a year; or in any case, the NAV is required for reporting purposes
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Market insight: Highly popular vehicle since inception (c50% growth in 2020) due to its flexibility and speed to market

Specialised Investment Fund (SIF), in corporate or partnership form (Law of 13 February 2007)Law of 13 February 2007 (coordinated version) – CSSF

  • Can be structured as an investment company with variable capital (SICAV), an investment company with fixed capital (Société d’Investissement à Capital Fixe or SICAF) or a common fund (FCP)
  • SIFs require prior to set-up authorisation, a Luxembourg management company (if not internally managed), a Luxembourg depositary, a Luxembourg auditor, a Luxembourg administrator, a registrar and a transfer agent
  • They must be marketed only to well-informed investors. They can benefit from an EU/EEA passport if managed by an authorised AIFM. Otherwise, they are subject to national private placement regimes
  • The minimum investment by a shareholder or unitholder is EUR 125,000 or less if the investor’s expertise, experience and knowledge can be certified by certain regulated financial entities
  • A SIF cannot invest more than 30% of its assets, or its commitments to subscribe, to securities of the same nature issued by the same issuer
  • A prospectus or offering document, KIID/KID, financial statements (at least audited annually) and periodic disclosures (for full AIFM regime AIFs) are mandatory
  • If a SIF is managed by an authorised AIFM, the NAV must be calculated at each issue or subscription or redemption or cancellation of shares or units and at least once a year; in any case, the NAV is required for reporting purposes
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Market insight: SIFs represent half of the private capital market, but have experienced declining market share since the introduction of the RAIF regime

  • Investment vehicle designed specifically to suit the needs of private equity and venture capital
  • Restricted eligibility : investing in capital at risk assets with the intention to ultimately dispose the assets
  • Flexible investment policy: no portfolio diversification requirement
  • Stringently regulated and supervised vehicle (requiring ex-ante regulatory approval)
  • Institutional and professional qualified investors only
  • SICAR is exempt of subscription tax. It may benefit from double tax treaties as a fully taxable Luxembourg company
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Market insight: Value of assets under management is almost 10 times lower than SIFs. Although growth is very limited, SICARs remain used an investment platform for top tier private equity firms

Unregulated Alternative Investment Fund (AIF), in corporate or partnership form

  • No investment restrictions
  • Indirect supervision (only if qualified as AIFs)
  • Institutional and professional investors only
  • Single legal entity: not possible to create ring-fenced compartments
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Market insight: Highly popular, notably since increased tailoring of limited partnership vehicles to the needs of the industry in 2014

Securitisation vehicle – L_220304_securitisation.pdf (cssf.lu)

  • May be regulated, or unregulated where the securitisation vehicle does not make more than three issuances a year to the public
  • Offers investors a very flexible regime, a high level of protection and legal certainty
  • Can be set as corporate entities or funds with no legal personality managed by a management company
  • Possibility to quickly set up multiple compartments while ring fencing assets/liabilities
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Market insight: Efficient intermediary holding vehicle for debt strategies

European Long-Term Investment Fund (ELTIF) – EUR-Lex – 32015R0760 – EN – EUR-Lex (europa.eu)

  • Must qualify as an alternative investment vehicle under AIFMD but there is no legal requirement for the product to be regulated under Luxembourg law
  • It is usually set-up as a Part II UCI, a RAIF, or a Luxembourg SIF
  • Available to both institutional and retail investors. Additional requirements apply to ELTIFs distributed to retail investors
  • Eligible investments include debt and equity instruments in all unlisted companies, as well as real assets such as infrastructure
    • ELTIFs are restricted from the following asset types and strategies
    • Investments in short sell assets
    • Direct or indirect exposure to commodities
    • Securities lending, borrowing, repurchase transactions or any other agreement that has an equivalent economic effect and poses similar risks, if thereby more than 10% of the ELTIF assets are affected
    • Financial derivative instruments (except for hedging purposes)
  • Regulated and supervised vehicle (requiring ex-ante regulatory approval)
  • Certain countries provide favorable tax incentives to invest in ELTIFs
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Market insight: This European product has been very slow to take off due to the complexity of the requirements. Interest has grown in the last two years with a number of tier one asset managers launching ELTIFs, notably due to certain national tax incentives or favorable treatment as an investment underlying a life insurance policy. Significant simplification and additional flexibility is expected to be implemented in 2023 and should make the product more attractive, notably for sponsors looking at providing access to alternative strategies to individual investors

  • They can be set as a SICAV/F or an FCP
  • Prior to set up, Law 2010 Part II UCIs require authorisation, Luxembourg management company (if not internally managed), Luxembourg depositary, Luxembourg audit, Luxembourg administrator, registrar and transfer agent
  • They can benefit from EU/EEA passport if they are managed by an authorised Alternative Investment Fund Manager (AIFM), otherwise they are subject to national private placement regimes.
  • There is no minimum investment by a shareholder or unitholder
  • Flexible investment policy: these UCIs can invest in transferable securities, alternative investments (e.g. hedge funds), venture capital, futures contracts and options, and real estate
  • The NAV must be calculated at least monthly and, if managed by an authorised AIFM, the NAV must be calculated at each issue
  • Mandatory documentation consists of the prospectus, KIID/KID, financial statements (at least audited annual and unaudited semi-annual) and periodic disclosures (for full AIFM regime AIFs)
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Market insight: Historical vehicle to provide alternative strategies to a wider pool of investors. After a period of stagnation, interest is increasing again due to retail investors’ growing appetite for alternative assets

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[1] société en commandite simple

[2] société en commandite spéciale

[3] ALFI Annual Report 2022 and CSSF Statistics as at 30 April 2022