Answer ... The main types of alternative investment funds (AIFs) in Luxembourg are as follows:
- hedge funds;
- private equity funds;
- real estate funds;
- infrastructure funds;
- debt funds;
- commodity funds;
- funds of funds;
- master-feeder funds; and
- European long-term investment funds.
Answer ... AIFs in Luxembourg can be structured as regulated funds (ie subject to the prior authorisation and on-going supervision of the Commission de Surveillance du Secteur Financier (CSSF)) or non-regulated funds.
The regulated alternative investment funds include the following:
- société d’investissement en capital à risque (SICAR) – investment company in risk capital;
- fonds d’investissement spécialisé – specialised investment fund (SIF); and
- organisme de placement collectif – undertaking for collective investments (UCI) subject to Part II of the UCI Law.
Non-regulated funds can be structured as:
- société de participation financière, organised in the form of ordinary commercial companies whose corporate purpose is the holding of participations and related activities;
- limited partnerships (which are not subject to the SICAR Law, the SIF Law or Part II of UCI Law) – either as a common limited partnership (société en commandite simple (SCS)) with legal personality or as a special limited partnership (société en commandite spéciale (SCSp)) without a legal personality; or
- fonds d’investissement alternatif réservé – reserved alternative investment fund (RAIF).
Answer ... A SIF can invest in all types of assets, whereas a SICAR can only invest in securities representing risk capital.
A SIF is subject to risk-spreading requirements: it cannot invest more than 30% of its assets or commitments in securities of the same type issued by the same issuer. This diversification requirement does not apply to SICARs. Both the SIF and SICAR are reserved to investors that qualify as well-informed investors (as defined in the SIF and SICAR Laws).
The main drawback of SIFs and SICARs is that they are subject to the prior authorisation and ongoing supervision of the CSSF.
The RAIF combines the advantages of the SIF or SICAR legal and tax regime without being itself regulated by the CSSF. The RAIF must appoint an authorised AIF manager (AIFM), which will enable it to use the EU marketing passport. The RAIF is thus quick to set up and to market.
Non-regulated AIFs structured as limited partnerships (eg, the SCS and SCSp not qualifying as a SIF, SICAR or RAIF) can invest in all types of assets. There is no prior authorisation and no ongoing supervision of the CSSF. There are no restrictions as to eligible investors. However, they can be marketed only to professional investors. As long as the assets under management do not exceed the threshold set out in Article 3(2) of the AIFM Law, only a registered AIFM need be appointed and no depositary is required.
Answer ... According to the Association of the Luxembourg Fund Industry Private Equity and Venture Capital Investment Fund Survey 2019, there has been a significant increase in the number of unregulated AIFs, such as RAIFs, SCSps and SCSs, which now represent 51% of all Luxembourg private equity funds.
SIFs and SICARs continue to be widely used in the AIF industry for regulated structures. Based on the statistics published by the CSSF, as of 30 November 2019, there were 1,469 SIFs and 252 SICARs.
Answer ... AIFs with a hedge fund strategy are commonly structured as SIFs subject to the SIF Law and UCIs under Part II of the UCI Law.
The SICAR and SIF regimes are particularly well suited for private equity and venture capital investments. However, unregulated vehicles structured as a RAIF or a limited partnership (SCSp or SCS) offer a great level of structuring flexibility for AIFs with a private equity strategy.
Loan funds can also be structured as regulated and unregulated. The SIF is the most commonly used regime for loan funds, followed by RAIFs and Part II funds.
Answer ... From a regulatory perspective, all Luxembourg product laws expressly require that the central administration of a Luxembourg AIF be located in the Grand Duchy of Luxembourg. This requirement applies to both regulated funds (SIFs, SICARs, UCIs) and unregulated funds (eg, RAIFs).
Within this scope, the notion of central administration comprises accounting and administrative functions as clarified in Institut Monétaire Luxembourgeois Circular 91/75. In practice, such functions can be performed, as applicable, either internally by the AIF itself, by a third-party service provider or by the AIFM, which can in turn delegate partially or entirely such functions to a third-party service provider. The CSSF may allow, on a case-by-case basis, the outsourcing of certain tasks linked to the function of the central administration located in Luxembourg to an entity located abroad, subject to certain requirements and under the responsibility of the Luxembourg administrator.
The AIFM or third-party service provider acting on its behalf is subject to the AIFM’s home member state requirements regarding the administration function, including in the relevant national AIF product rules.
From a corporate law perspective, the concept of central administration - which differs from the above regulatory definition - is also used to determine the nationality of commercial companies (including AIFs). In accordance with the Companies Law, an AIF will be of Luxembourg nationality and subject to Luxembourg law if its domicile is located in Luxembourg, which is deemed to correspond to the seat of its central administration.
Answer ... An AIF that has appointed a fully authorised AIFM must appoint a single depositary (as opposed to sub-threshold/registered AIFMs, which are not required to appoint a depositary).
For AIFs established in Luxembourg, the depositary must either have its registered office in Luxembourg or have a branch there if its registered office is in another member state. For EU AIFs, the depositary must be established in the home member state of the AIF. For non-EU AIFs, it shall be established in the third country where the AIF is located or in the home member state or the member state of reference of the AIFM.
The AIFM Law includes certain safeguarding provisions aimed at protecting the assets of AIFs, as follows:
- AIFMs cannot act as depositaries;
- The depositary must act honestly, fairly, professionally, independently and in the interests of the AIF and its investors;
- Provisions to avoid conflict of interests between the depositary, the AIF, its investors and the AIFM apply;
- The delegation of the depositary functions is strictly supervised; and
A two-pronged liability regime applies:
- strict liability of the depositary to the AIF and its investors for loss of financial instruments held in custody; and
- liability for fault - the depositary is liable for all losses suffered by the AIF/investors as a result of the depositary’s negligent or intentional failure to properly fulfil its obligations.
Answer ... Luxembourg offers straightforward processes for the redomiciliation of foreign companies and funds.
Transfer of registered office to Luxembourg: An AIF may be redomiciled to Luxembourg if it transfers its central administration/registered office to Luxembourg. As a result of such transfer, the entity will be of Luxembourg nationality and subject to Luxembourg laws. Provided that the law of the state of origin so permits, such transfer may be performed without interrupting the legal personality of the entity.
Cross-border merger: The foreign fund is merged into a Luxembourg company against the issuance of shares to the shareholders of the foreign fund. The merger entails, under certain conditions, the universal transfer of assets and liabilities to the Luxembourg entity. The foreign entity will then be dissolved without liquidation.
In both cases, the relevant corporate approvals by the board and the shareholders are needed both in the home country and in Luxembourg.
Additional requirements may apply, depending on the legal form into which the AIF is converted (eg, intervention of a Luxembourg notary, issuance of an interim balance sheet and auditor’s report).
The fund documentation of the AIF (ie, offering memorandum, articles of association or limited partnership agreement) will need to be amended in order to reflect the provisions of the applicable Luxembourg laws (including product laws, if applicable).
If it is intended to transform the foreign entity into a Luxembourg regulated AIF, the prior approval of the CSSF will be required.