Luxembourg: The Reserved Alternative Investment Fund - A New Luxembourg Regime For AIFs

INTRODUCTION

The Law on Reserved Alternative Investment Funds dated 23 July 2016 ("RAIF Law")1, introducing a new type of Luxembourg investment vehicle named "Reserved Alternative Investment Fund" (in short "RAIF"), entered into force on 1 August 2016.

The RAIF is regulated under the AIFMD2 and benefits from the corresponding EU passport but is not supervised by the Commission de Surveillance du Secteur Financier ("CSSF"), making it an attractive vehicle from a time-to-market perspective.

The AIFMD, a managers' directive and a change of Paradigm

The AIFMD requires that authorised alternative investment fund managers ("AIFMs") ensure that the alternative investment funds ("AIFs") they manage comply with the AIFMD product rules3, irrespective of whether or not the relevant AIF is subject to a product regulation.

When an AIF is a regulated and supervised product, compliance with product rules is consequently ensured at two levels: at the level of the AIF itself and at the level of its AIFM. Similarly, the AIF is subject to a double supervision system, by its supervisory authority and that of its AIFM, which could be based in a different country.

This double system of approval and supervision is not required by the AIFMD. It entails increased protection, which is not necessarily deemed justified by a series of professional and sophisticated investors performing their own review of the AIF's structure and documentation.

The RAIF

The introduction of the RAIF regime seeks to widen the range of investment vehicles available in Luxembourg, offering a new option to the initiators of Luxembourg AIF projects.

The creation, launch, documentation, activities and termination of the RAIF are not subject to the approval of or any supervision by the CSSF, but still enjoy all the structuring flexibility from which (CSSF approved and supervised) Luxembourg funds benefit.

In order to be eligible for this new regime, the RAIF has to be an AIF managed by an authorised AIFM, both within the meaning of the AIFMD. The AIFM may be established in Luxembourg, in another Member State of the European Union ("EU Member State") or even, once the AIFMD passport is available to third countries, in a third country in accordance with the provisions of the AIFMD.

Due to the necessity for the RAIF to be managed by an authorised AIFM, it is indirectly supervised through the prudential supervision exercised by the competent authority of its AIFM. For the same reason, the RAIF benefits from the European passport granted by the AIFMD for marketing to professional investors in the EU.

The other features of this new Luxembourg investment vehicle are substantially identical to those of the specialised investment fund ("SIF")4 and the RAIF Law has therefore been drafted drawing heavily from the text of the SIF Law5.

The main differences between the RAIF Law and the SIF Law result from the fact that all references to the role and mission of the CSSF found in the SIF Law have been excluded from the RAIF Law. However, certain mechanisms have been introduced to ensure compliance with the law, particularly by the AIF's management body.

The RAIF should become a vehicle of choice for managers and investors looking to combine contractual freedom and short time-to-market together with both the protection of the AIFMD framework and the RAIF Law, and the marketability of an investment vehicle benefiting from an EU passport.

The purpose of this Memorandum is to describe the main features of the RAIF regime.

CHAPTER I: GENERAL PROVISIONS

1. Scope

The RAIF regime is applicable to Luxembourg AIFs (i) managed by an authorised AIFM, (ii) that invest in accordance with the principle of risk-spreading6, (iii) whose securities or partnership interests are reserved for well-informed investors, and (iv) whose constitutive documents7 provide that they are subject to the provisions of the RAIF Law.

1.1 AIF managed by an authorised AIFM

RAIFs represent a specific category of AIFs that must be managed by an authorised AIFM. Therefore, unlike a SIF, a RAIF cannot be a non-AIF or be managed by an exempt AIFM8.

1.2 Not supervised by the CSSF

An essential difference between the RAIF and the SIF is that the latter is subject to approval and supervision by the CSSF whereas the RAIF is not subject to such approval and supervision.

There is thus no need for CSSF approval for the creation, launch or even termination of a RAIF and, similarly, no approval is required in the event of changes to its constitutional documents, offering document or other documents governing its functioning. The operations and activities of the RAIF are at no point under the ongoing supervision by the CSSF or any supervisory authority (otherwise than via the AIFM). The timeframe within which a RAIF can be set up and launched is therefore more attractive from a time-to-market perspective.

1.3 Reserved to well-informed investors

In the same manner as for SIFs, investment into RAIFs is limited to well-informed investors that are able to adequately assess the risks associated with an investment in such a vehicle.

The RAIF Law defines well-informed investors as (a) institutional investors, (b) professional investors, and (c) other investors who

  • confirm in writing that they adhere to the status of well-informed investors; and
  • either

    1. invest a minimum of EUR 125,000; or
    2. benefit from an assessment made by a credit institution, an investment firm or a UCITS management company or an authorised AIFM certifying their expertise, experience and knowledge to adequately appraise the contemplated investment in the RAIF.

Therefore, sophisticated retail or private investors will be authorised to invest in RAIFs through the use of this latter category (c).

Persons involved in the management of the RAIF are deemed to be well-informed investors.

1.4 Optional regime

The RAIF regime is optional. The constitutive documents must expressly provide that the investment vehicle is subject to the provisions of the RAIF Law. Accordingly, any investment vehicle which is reserved to well-informed investors will not necessarily be governed by the RAIF regime; instead it could opt to be established as another unregulated company subject to the general rules of Luxembourg Company Law9 or as a SIF or an investment company in risk capital (société d'investissement en capital à risque or "SICAR") supervised by the CSSF.

It should be noted that, those various available Luxembourg regimes can also be combined when structuring an investment project either by setting up different vehicles to meet the specific needs of various investors (e.g. by creating dedicated feeder funds or parallel vehicles), but they can also be combined in a "phased" approach as conversions from one regime to the other are possible. A fund could, for instance, be established as a RAIF to be in a position to organise a rapid first closing with investors not requiring a product subject to direct supervision and to be converted into a SIF later on, once CSSF approval is obtained to welcome other investors that wish or must invest in a directly supervised product.

2. Investment Rules

2.1 Flexibility with respect to eligible assets

The RAIF Law allows full flexibility with respect to the assets in which a RAIF may invest.10

The RAIF regime is expressly designed to accommodate AIFs that invest in any type of assets and which pursue both traditional and alternative investment strategies11.

This distinguishes the RAIF slightly from the SIF as it is expected that changes will shortly be made to the SIF Law to grant authority to the CSSF to introduce some restrictions as regards the type of assets in which a SIF can invest.12 In that respect it is expected that the CSSF will restrict investments in certain tangible assets by SIFs which are not reserved to professional investors.

2.2 Applicability of the principle of risk-spreading

The RAIF Law does not provide for specific investment rules or restrictions, it only requires that RAIFs are subject to the principle of risk-spreading.13

The preparatory works of the RAIF Law clarify that, in the absence of any detailed rules in the law itself, the principle of risk-spreading and its interpretation in relation to SIFs should be taken into account.14

It is the responsibility of the governing body of the RAIF to ensure that the minimum diversification rules implied by the RAIF Law are complied with.

As an exception, certain RAIFs investing solely in risk capital15 do not need to spread the investment risk which means that the diversification requirements set forth above do not apply to such RAIFs.

3. Legal Forms

The RAIF Law specifically refers to the fonds commun de placement ("FCP") and the société d'investissement à capital variable ("SICAV"), but does not limit the legal forms a RAIF may take. Other legal forms are therefore possible16. In this Memorandum we will focus on the legal forms most commonly used by SIFs, namely the FCP and the investment company.

3.1 Fonds commun de placement

An FCP itself is not a legal entity. It represents a co-proprietorship of assets which are managed, on behalf of the joint owners, by a management company established under, and governed by, either Chapter 15 of the UCI Law17 (i.e. a management company whose corporate object is to manage at least one UCITS, in addition to the management of the relevant RAIF) or Chapter 16 of the UCI Law.

Under the FCP structure, investors subscribe for units in the FCP which represent a portion of the net assets of the RAIF and they are only liable up to the amount they have contributed.

The rights and obligations of the unitholders and their relationship with the management company are defined in the management regulations.

The management company on behalf of the FCP takes all decisions relating to the investments and the operations of the FCP.

Unlike investors in an investment company (as explained in further detail below), investors in an FCP are entitled to vote only if, and to the extent that, the management regulations provide for such a possibility18.

3.2 Investment company

A RAIF can alternatively be established under the form of a corporate-type fund.

An investment company subject to the RAIF regime can be created either with variable capital ("SICAV") or with fixed capital ("SICAF").

The capital of a SICAV is increased or reduced automatically as a result of new subscriptions and redemptions without requiring any formalities such as the approval of the general meeting of shareholders or the intervention of a notary to be performed.

A RAIF created under the form of an investment company can typically adopt one of the following corporate forms, namely that of a public limited company (société anonyme), a partnership limited by shares (société en commandite par actions), a common limited partnership (société en commandite simple), a special limited partnership ("SLP") (société en commandite spéciale) or a private limited company (société à responsabilité limitée).

Investment companies are subject to the provisions of the Luxembourg Company Law except in those cases where the RAIF Law expressly derogates therefrom. In fact, the RAIF Law deviates from the requirements of the Luxembourg Company Law on many aspects in order to offer the RAIFs a more flexible corporate framework.

Among the corporate forms available for establishing an investment company, the SLP is becoming more and more popular.

The key characteristic which distinguishes the SLP from other corporate forms is that it has no legal personality. It is very similar in structure to the Anglo-Saxon LP which has traditionally been favoured for private equity investments.

The SLP is a partnership entered into by one or more unlimited or general partners (associés commandités) who will bear unlimited joint and several liability for all of the obligations of the partnership, with one or more limited partners (associés commanditaires) whose liability is limited to the amount they contributed pursuant to the provisions of the limited partnership agreement (contrat social). An SLP can be of a limited or unlimited duration.

The law which governs SLPs contains limited mandatory rules and therefore allows for maximum flexibility and freedom in the organisation of an SLP19.

4. Appointment Of An AIFM

According to the RAIF Law, a RAIF must be externally managed through the appointment of a separate authorised AIFM responsible for managing the RAIF20. Contrary to SIF-AIFs, a RAIF cannot be internally managed.

It is the governing body21 of the RAIF which must appoint the authorised AIFM, which can, either be established in Luxembourg22 or in another EU Member State23.

The AIFM may delegate portfolio management or risk management to third parties in accordance with the provisions of the AIFMD. Delegation arrangements must be disclosed in the offering document of the RAIF.

To read this Memorandum in full, please click here.

Footnotes

1 The RAIF Law is available on our website together with an unofficial English translation of the same.

2 "AIFMD" refers to Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers. For further information, see our various AIFMD memoranda on our website www.elvingerhoss.lu.

3 The AIFMD includes provisions which apply to AIFs managed by authorised AIFMs. These are notably the requirements for the AIF to appoint a depositary and an approved statutory auditor, to provide certain information to investors, to publish an annual report and to comply with certain investment and leverage rules.

4 Notably as regards the various legal forms (corporate and contractual) which are available, the absence of limitation as regards eligible assets or investment policies, the possibility to have multiple compartments and multiple classes as well as the flexible subscription, redemption and distribution features and, as a matter of principle, the tax regime of a taxe d'abonnement at a 0.01% rate (or nil rate in certain circumstances).

5 "SIF Law" refers to the Law of 13 February 2007 on specialised investment funds as amended. For further information, see our SIF Memorandum on our website www.elvingerhoss.lu.

6 Except for certain RAIFs investing solely in risk capital as discussed in Chapter III Section 1.2 of this Memorandum.

7 I.e., mainly the articles of incorporation (statuts), the management regulations (règlement de gestion) or the partnership agreement (contrat social).

8 An "exempt" AIFM is an AIFM that benefits from one of the exemptions of Article 3 of the AIFMD, that does not have to comply with all the provisions of the AIFMD, but which is therefore deprived of the benefit of the European passport for marketing provided for by the AIFMD.

9 "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended.

10 If the RAIF wishes to adopt the same tax regime as the one applicable to a SICAR, it will however have to restrict itself to investment in risk capital as further discussed in Chapter III Section 1.2 of this Memorandum.

11 It permits the structuring of, inter alia, equity funds, bond funds, money market funds, real estate funds, hedge funds, private equity funds, debt funds, micro-finance funds, social entrepreneurship funds, venture capital funds, green funds, infrastructure funds and those funds which invest in tangible assets such as art, luxury goods, wines, etc.

12 A draft bill of law amending the SIF Law to that effect was deposited with the Luxembourg Parliament.

13 Unless the RAIF restricts itself to investment in risk capital to benefit from the same tax regime as the one applicable to a SICAR as further discussed in Chapter III Section 1.2 of this Memorandum.

14 In the context of SIFs, the CSSF has issued guidelines in its Circular 07/309 as to the meaning of risk-spreading. Whenever a SIF is structured as an umbrella fund, any reference to the SIF must be understood as a reference to any of its compartments. Circular 07/309 stipulates (in summary) the following guiding principles that are applicable to SIFs:

1. A SIF may not invest, long or short, more than 30% of its assets or subscription commitments in securities of the same type issued by the same issuer. This restriction does not apply to:

(i) securities issued or guaranteed by an OECD Member State or its regional or local authorities or by EU, regional or global supranational institutions and bodies; and

(ii) target UCIs which are subject to risk-spreading requirements at least comparable to those applicable to SIFs. This flexibility allows a SIF to be structured as a feeder-fund of another Luxembourg or foreign investment fund (the master fund) provided that the constitutive or offering documents of the master fund provide sufficient evidence that it is subject to appropriate risk-spreading requirements.

2. When using derivative financial instruments, a SIF must ensure a risk-spreading comparable to the above, by means of an appropriate diversification of such derivatives' underlying assets. In order to secure the same objective, the counterparty risk in an OTC transaction must, where applicable, be limited in consideration of the relevant counterparty's quality and qualification.

The CSSF may grant exemptions on a case-by-case basis and there can be «grace period» during which SIFs may depart from the aforementioned diversification rules.

15 See Chapter III Section 1.2 of this Memorandum.

16 It is possible, for example, to establish a RAIF as an investment company with fixed capital ("SICAF") or even under a fiduciary contract.

17 "UCI Law" refers to the Law of 17 December 2010 on undertakings for collective investment, as amended.

18 This is not usually the case, which makes the FCP a flexible vehicle that is attractive for initiators who wish to maintain maximum control over the RAIF.

19 For further information, please see our designated SLP Memorandum on our website www.elvingerhoss.lu.

20 In line with the provisions of the AIFMD, supranational institutions managing RAIFs acting in the public interest will have access to the RAIF Law without having to appoint an authorised AIFM.

21 In the case of an FCP (see Chapter I Section 3.1 of this Memorandum), it is either its management company which acts as AIFM or another entity, as appointed by the management company.

22 For more detail on the requirements which must be satisfied in order to obtain authorisation as a Luxembourg AIFM, see our Memorandum AIFMD Key Features & Focus on Third Countries on our website www.elvingerhoss.lu.

23 The RAIF Law also refers to the possibility for an AIFM established in a third country to manage the RAIF but only when the AIFMD passport will have become available to third countries (see Chapter II Section 1. of this Memorandum).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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