Introduction
The reserved alternative investment fund ("RAIF(s)") was first introduced by the Law of 23 July 2016 ("RAIF Law")1 and has since enjoyed great success. The RAIF is a Luxembourg undertaking for collective investment ("UCI(s)") qualifying as alternative investment fund ("AIF(s)") managed by an authorised alternative investment fund manager ("AIFM(s)") within the meaning of the AIFMD2, 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 scope of eligible investors includes not only institutional investors and professional investors but also other types of well-informed investors, such as sophisticated private investors meeting certain conditions.
The RAIF regime was amended among others by the Law of 21 July 2023, which modernises the Luxembourg toolbox relating to investment funds (including RAIFs), namely to take into certain legal changes and market requirements.
In order to be eligible for the RAIF regime, the RAIF has to be an AIF managed by an AIFM that is authorised in accordance with the Law of 12 July 2013 on alternative investment fund managers ("AIFM Law") or AIFMD. For the time being, the AIFM must be established in Luxembourg or in another Member State of the European Union ("EU")3. The RAIF Law also provides for the possibility for the AIFM of a RAIF to be established in a third country once the AIFMD passport is available to third countries.
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 EU passport granted by the AIFMD for marketing to professional investors in the EU.
The other features of the RAIF are substantially identical to those of the specialised investment fund ("SIF(s)")4 and the RAIF Law has 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 RAIF Law, particularly by the AIF's management body.
The European long term investment fund Regulation ("ELTIF Regulation")6 may also offer new opportunities to certain RAIFs as it enables AIFMs to market RAIFs with an ELTIF label to retail investors in the EU, provided that the relevant investors qualify as well-informed investors under the RAIF Law.
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-spreading7, (iii) whose securities or partnership interests are reserved for well-informed investors, and (iv) whose constitutive documents8 provide that they are subject to the provisions of the RAIF Law.
1.1. AIFs 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 exempted AIFM9. Moreover, a RAIF cannot, in principle, be internally managed10.
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 constitutive 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 (other 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 within the meaning of Annex II of MiFID11, and (c) other investors who:
- confirm in writing that they adhere to the status of well-informed investors; and
- either
- invest a minimum of EUR 100,000; or
- benefit from an assessment made by an EU credit institution, MiFID investment firm, UCITS management company or authorised AIFM certifying that they have the adequate expertise, experience and knowledge in order to 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).
The above conditions do not apply to the directors and those other persons involved in the management of the relevant RAIF.
1.4. Optional regime
The RAIF regime is optional to the extent that 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 one or more well-informed investors will not necessarily be governed by the RAIF regime. Instead it could opt to be established as an unregulated company subject to the general rules of Luxembourg Company Law12 or as a SIF or an investment company in risk capital (société d'investissement en capital à risque or "SICAR(s)") 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 to 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 invest13.
The RAIF regime is expressly designed to accommodate AIFs that invest in any type of assets and which pursue both traditional and alternative investment strategies.
It indeed permits the structuring of, inter alia, equity funds, bond funds, money market funds14, 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 aircraft, ships, art, etc.
2.2. Applicability of the principle of risk-spreading
The RAIF Law does not provide for specific investment rules or restrictions applicable to the RAIF, it only requires that RAIFs are subject to the principle of risk-spreading.
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 account15.
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 capital16 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(s)") and the société d'investissement à capital variable ("SICAV(s)") with multiple legal forms available.
In this Memorandum we will focus on the legal forms most commonly used by RAIFs, namely the FCP and the investment company.
3.1. Fonds commun de placement
An FCP itself is not a legal entity. It represents a coproprietorship of assets which are managed, on behalf of the joint owners, by a Luxembourg management company generally 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 below), investors in an FCP are entitled to vote only if, and to the extent that, the management regulations provide for such a possibility.
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(s)") or with fixed capital ("SICAF(s)").
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 unitholders/ shareholders/partners or the intervention of a notary.
A RAIF created under the form of a SICAV can typically adopt one of the following corporate forms, namely that of a public limited company (société anonyme or "SA"), a partnership limited by shares (société en commandite par actions or "SCA"), a common limited partnership (société en commandite simple or "SCS"), a special limited partnership (société en commandite spéciale or "SLP"), a private limited company (société à responsabilité limitée or "Sàrl") or a cooperative set up as a public limited company (société coopérative organisée sous forme de société anonyme or "SCSA"). SICAFs are not limited to specific corporate forms under the RAIF Law.
There are a number of aspects to consider when making a choice between the different corporate forms available.
One consideration is the control, which the initiator of the project would like to exercise over the RAIF. Whatever its form, different mechanisms may be put into place when structuring a RAIF, so as to reduce the risk of an unfriendly takeover. However, should the taking of control over the RAIF be a real concern, it is generally advisable to use the corporate form of an SCA, an SCS or an SLP which all provide for dissociation between the categories of partners allowing the initiator to retain control over the vehicle. Another aspect to consider is the restrictions on the transferability of the units, shares or partnership interests and the number of unitholders/shareholders/ partners. The applicable tax regime may also influence the adoption of a particular corporate form.
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 provisions of the RAIF Law applicable to SICAVRAIF deviate from the requirements of the Luxembourg Company Law on many aspects in order to offer the RAIFs a more flexible corporate framework.
An investor subscribing for shares/units/partnership interests in a SICAV/SICAF-RAIF becomes a unitholder/ shareholder/partner of the investment company and can participate in and vote at general meetings of unitholders/shareholders/partners in accordance with the terms and conditions of the investment company's constitutive documents, subject however to the specific requirements imposed by applicable laws. Therefore, unitholders/shareholders/partners of a SICAV/SICAFRAIF can or must decide on a variety of matters including the appointment or revocation of the members of the governing body, the approval of the annual accounts and the liquidation of the SICAV/SICAF-RAIF.
3.3 Focus on the special limited partnership
Among the corporate forms available for establishing an investment company, the SLP is very popular. The key characteristic, which distinguishes the SLP, 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 an 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 allows flexibility and freedom in the organisation of an SLP due to the limited number of mandatory rules18.
4.Requirement to appoint an AIFM
Except for the limited internally managed exemption mentioned in Section 1.1 of this Chapter I, the RAIF Law provides that a RAIF must be externally managed through the appointment of a separate authorised AIFM responsible for managing the RAIF.
It is the governing body19 of the RAIF which must appoint the authorised AIFM which, for the time being, can either be established in Luxembourg or in another EU Member State20.
The relevant external AIFM must be authorised and licensed to manage funds pursuing the same investment strategies as those pursued by the relevant RAIF. For instance, in Luxembourg, the AIFM licence granted by the CSSF may be limited to manage funds pursuing certain investment strategies only, such as real estate, infrastructure or private equity strategies. Moreover, if the AIFM is established in an EU Member State other than Luxembourg, it must have passported its management services in Luxembourg in accordance with the AIFMD before it can start managing the relevant RAIF on a cross-border basis.
Footnotes
1 The RAIF Law is available on our website www.elvingerhoss.lu in both English and French.
2 "AIFMD" refers to Directive 2011/61/EU on alternative investment fund managers, as amended.
3 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.
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 share 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 SIFs, as amended. For more information, see our Memorandum "Specialised Investment Funds, Luxembourg regime for investment funds dedicated to sophisticated investors" on our website www.elvingerhoss.lu.
6 "ELTIF Regulation" refers to Regulation (EU) 2015/760 on European long-term investment funds, as amended.
7 Except for certain RAIFs investing solely in risk capital as discussed in Chapter III Section 1.2 of this Memorandum.
8 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 RAIF.
9 An "exempted" AIFM" is an AIFM that benefits from one of the exemptions of Article 3 of the AIFMD (i.e. small manager exemption or group exemption), that does not have to comply with all the provisions of the AIFMD, but which is therefore deprived of the benefit of the EU marketing passport provided for by the AIFMD.
10 In line with the provisions of the AIFMD, there is one exemption to the obligation for RAIFs to appoint an external AIFM, which applies to RAIFs that are AIFs exempted under Article 2.3(c) or (d) of the AIFMD because they are managed either (i) by a supranational institution or by another similar international institution acting in the public interest, or (ii) by the Central Bank of Luxembourg or another national central bank. Such RAIFs will have access to the RAIF Law without having to appoint an external AIFM.
11 "MiFID" refers to Directive 2014/65/EU on markets in financial instruments, as amended.
12 "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended.
13 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.
14 Since 21 July 2018, RAIFs, 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).
15 In the context of SIFs, the CSSF has issued guidelines in its Circular 07/309 as to the meaning of risk-spreading. 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 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.
Whenever a SIF is structured as an umbrella fund with multiple compartments, any reference to the SIF in the foregoing guidelines must be understood as a reference to any of its compartments
The CSSF may grant exemptions on a case-by-case basis and there can be a "grace period" during which SIFs may depart from the diversification rules mentioned above.
16 See Chapter III Section 1.2 of this Memorandum.
17 "UCI Law" refers to the Law of 17 December 2010 on undertakings for collective investment, as amended.
18 For more information, please see our Memorandum "Luxembourg Partnerships in the asset management industry" on our website www.elvingerhoss.lu.
19 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.
20 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 has become available to third countries (see Chapter II Section 1 of this Memorandum).
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