INTRODUCTION

The collective investment undertaking governed by Part II of the UCI Law1 ("Part II Fund(s)") may be traced back to the Law of 25 August 1983 on undertakings for collective investment. It has regained considerable interest in the past few years as alternative managers have sought to expand their investor base and target nonprofessional investors with evergreen vehicles, replicating in the European Union ("EU")2 strategies and terms that were successful in the United States.

In doing so, these managers have selected Part II Funds that are alternative investment funds ("AIF(s)"), regulated by the Luxembourg Commission de Surveillance du Secteur Financier ("CSSF") and that allow subscriptions by any type of investors (including full retail investors). Part II Funds may invest in all types of assets with limited regulatory and leverage restrictions.

The Part II Fund regime was amended among others by the Law of 12 July 2013 on alternative investment fund managers ("AIFM Law") which transposes the AIFMD3 into Luxembourg law. Although the AIFM Law mainly regulates alternative investment fund managers ("AIFM(s)"), it also contains various provisions that apply to AIFs.

The Part II Fund regime was last amended by the Law of 21 July 2023, which modernises the Luxembourg toolbox relating to investment funds (including Part II Funds), and new legal forms are now available to structure a Part II Fund (including 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 "SLP").

Part II Funds are AIFs. When managed by an AIFM authorised in the EU, they benefit from the AIFMD marketing passport in the EU for professional investors as well as some semi-professional investors. They cannot be marketed to retail investors with this passport (unless they are set up as an ELTIF - see Chapter II of this Memorandum), but the regulated status of the Part II Fund eases registration with certain local authorities in the EU and beyond.

Managers generally approach investors indirectly via third party distributors, platforms or nominees. For certain countries, the setting up of a parallel fund is necessary, whilst other countries may require a local feeder.

The European long term investment fund Regulation ("ELTIF Regulation")4 enables AIFMs to market their AIFs in the EU with a passport to retail investors. A Part II Fund (or a compartment thereof) may be set up as an ELTIF to release the full potential of the ELTIF retail marketing passport, but ELTIF Regulation contains a series of investment limitations and the eligibility of alternative portfolios of assets under the ELTIF Regulation needs to be duly assessed case by case.

In addition, the European venture capital Regulation ("EuVECA Regulation")5 and the European social entrepreneurship Regulation ("EuSEF Regulation")6 may also offer new opportunities as they enable AIFMs to market Part II Fund with EuVECA/EuSEF label to certain eligible investors.

CHAPTER I: GENERAL PROVISIONS

The Part II Fund regime is applicable to undertakings for collective investment ("UCI(s)"):

  • qualifying as AIFs under the AIFM Law;
  • whose securities or partnership interests are intended to be placed with the public by means of a public or private offer;
  • whose exclusive object is the collective investment of their funds in assets in order to spread investment risks and to provide their investors with the benefit of the result of the management of their assets; and
  • whose constitutive documents7 and prospectus provide that they are subject to the Part II Fund regime.

1. SCOPE

1.1 Undertakings for collective investment

Part II Funds represent a specific category of UCIs that invest in accordance with the principle of riskspreading. They are regulated UCIs subject to prior authorisation, and thereafter permanent prudential supervision, by the CSSF. 

1.2 Qualifying as AIF managed by an AIFM

Part II Funds always qualify as AIFs and must be managed by an AIFM. 

The UCI Law makes a distinction between two Part II Fund regimes namely:

  • Part II Funds, which fall within the small manager exemption or group exemption, and thus are only subject to certain limited provisions of the AIFM Law and AIFMD8; and
  • Part II Funds, which are managed by an AIFM authorised in accordance with the AIFM Law or AIFMD, and are thus required to comply with the full AIFMD and AIFM Law product rules9 to which Part II of the UCI Law cross-refers.

Part II Funds managed by an exempted/registered AIFM will not be covered in this Memorandum.

1.3 Eligible investors

Part II Funds may accept all types of investors and may in particular be offered to retail investors in Luxembourg and in other jurisdictions subject to compliance with local laws and regulations. 

This remains a clear advantage over other types of vehicles and in particular reserved alternative investment funds ("RAIF(s)")10 or specialised investment funds ("SIF(s)")11 , which are only available to a sub-set of investors (namely well-informed investors) requiring the RAIF/SIF and its intermediaries to check the eligibility of any investors with Luxembourg criteria.

2. INVESTMENT RULES

2.1 Flexibility with respect to eligible assets

The UCI Law allows significant flexibility with respect to the assets in which a Part II Fund may invest.

The Part II Fund regime is expressly designed to accommodate AIFs that invest in any type of assets and which pursue both traditional and alternative investment strategies. It permits the structuring of, inter alia, equity funds, bond funds, money market funds12, hedge funds, real estate funds, infrastructure funds, private equity funds, debt funds, micro-finance funds, social entrepreneurship funds, venture capital funds, green funds, funds which invest in tangible assets such as aircraft, ships, art etc.

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Footnotes

1. "UCI Law" refers to the Law of 17 December 2010 on undertakings for collective investment, as amended, which governs UCIs the units, shares or partnership interests of which may be placed with the public. Part I of UCI Law deals with undertakings for collective investment in transferable securities ("UCITS") regulated pursuant to Directive 2009/65/EC of 13 July 2009 (as amended) ("UCITS Directive"), whereas Part II of the UCI Law governs UCIs which are not subject to the UCITS Directive. The UCI Law is available on our website www.elvingerhoss.lu in both English and French.

2. For the purposes of this Memorandum, the terms "European Union", "EU" and "EU Member States" also refer to and include the European Economic Area ("EEA") and the States that are contracting parties to EEA agreement other than the Member States of the European Union, within the limits set forth by this agreement and related acts.

3. "AIFMD" refers to Directive 2011/61/EU on alternative investment fund managers, as amended.

4. "ELTIF Regulation" refers to Regulation (EU) 2015/760 on European long-term investment funds, as amended (see Chapter II of this Memorandum).

5. "EuVECA Regulation" refers to Regulation (EU) 345/2013 on European venture capital funds, as amended (see Chapter II of this Memorandum).

6. "EuSEF Regulation" refers to Regulation (EU) 346/2013 on European social entrepreneurship funds, as amended (see Chapter II of this Memorandum).

7. i.e. mainly the articles of incorporation (statuts), the management regulations (règlement de gestion) or the partnership agreement (contrat social), depending on the legal form of the Part II Fund.

8. Part II Funds which fall under this category will comprise:

  • Part II Funds that do fall within the AIF definition but whose manager's total assets under management, including any assets acquired through the use of leverage, do not exceed EUR 100 million, or whose total assets under management do not exceed EUR 500 million and whose portfolios of AIFs consist of AIFs that are unleveraged and have no redemption rights exercisable during the 5-year period following the date of initial investment in each AIF (Article 3.2 (a) and (b) of the AIFM Law). This category benefits from the so-called "small manager" or "registered manager" exemption; and
  • Part II Funds that do fall within the AIF definition but whose only investors are the AIFM or the parent undertakings or the subsidiaries of the AIFM or other subsidiaries of those parent undertakings, provided that none of those investors is itself an AIF.

9. The AIFMD and AIFM Law include provisions, which apply to AIFs managed by authorised AIFMs. These are notably the requirements for the AIF to appoint a depositary in accordance with the AIFMD/AIFM Law provisions, to provide certain information to investors, to publish an annual report and to comply with certain valuation, investment and leverage rules all of which in accordance with the specific requirements of the AIFMD/AIFM Law.

10. For more information on RAIFs, see our Memorandum "Reserved Alternative Investment Funds, Luxembourg regime for investment funds not supervised by the Luxembourg regulator and dedicated to sophisticated investors" on our website www.elvingerhoss.lu.

11. For more information on SIFs, see our Memorandum "Specialised Investment Funds, Luxembourg regime for investment funds dedicated to sophisticated investors" on our website www.elvingerhoss.lu.

12. Since 21 July 2018, Part II Funds which qualify as money market funds ("MMF(s)") under Regulation (EU) 2017/1131 on MMF must be specifically authorised as MMF. In addition, the manager of a MMF must be specifically authorised to manage a MMF (Article 5 of the MMF Regulation).

 

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.