Introduction
The specialised investment fund ("SIF(s)") was first introduced by the Law of 13 February 2007 ("SIF Law")1 and has since enjoyed great success. The SIF offers a regulated label whilst maintaining flexibility in terms of investment scope and structuring and also benefits from an attractive tax regime. 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 SIF regime was amended among others by the Law of 12 July 2013 on alternative investment fund managers ("AIFM Law") which transposes the AIFMD2 into Luxembourg law. Although the AIFM Law mainly regulates alternative investment fund managers ("AIFM(s)"), it also contains various provisions that apply to alternative investment funds ("AIF(s)"), for which SIFs may qualify. The SIF regime was also amended by the Law of 21 July 2023, which modernises the Luxembourg toolbox relating to investment funds (including SIFs), namely to take into account certain legal changes and market requirements.
The SIF Law is divided into two parts. The first part contains the general provisions applicable to all SIFs, while the second part contains specific provisions applicable only to those SIFs which qualify as AIFs ("SIF AIF(s)") and which are managed by an AIFM that is authorised in accordance with the AIFM Law or AIFMD provisions. SIF AIFs that are managed by an AIFM authorised in the European Union ("EU")3 may benefit from the AIFMD passport in order to be marketed to professional investors in the EU through a regulator-to-regulator notification regime.
In addition, the European long term investment fund Regulation ("ELTIF Regulation")4, 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 SIF AIFs with an ELTIF label to retail investors in the EU and SIF AIFs with a EuVECA/EuSEF label to certain eligible investors other than professional investors in the EU, provided that the relevant investors qualify as well-informed investors under the SIF Law.
Chapter I: General provisions applicable to all SIFs
The SIF regime is applicable to undertakings for collective investment ("UCI(s)"):
- whose securities or partnership interests are restricted to one or several well-informed investors;
- 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 offering documents provide that they are subject to the SIF regime.
1. Scope
1.1. Undertakings for collective investment
SIFs represent a specific category of UCIs that invest in accordance with the principle of risk-spreading. They are regulated UCIs subject to prior authorisation, and thereafter permanent prudential supervision, by the Luxembourg Commission de Surveillance du Secteur Financier ("CSSF").
1.2. Well-informed investors
Investment into SIFs is limited to well-informed investors that are able to adequately assess the risks associated with an investment in such a vehicle.
The SIF Law defines well-informed investors not only as (a) institutional investors and (b) professional investors within the meaning of Annex II of MiFID8, but also as (c) other investors who:
- confirm in writing that they adhere to the status of well-informed investors; and
- either
(i) invest a minimum of EUR 100,000; or
(ii) 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 to appraise the contemplated investment in the SIF.
Therefore, sophisticated retail or private investors will be authorised to invest in SIFs 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 SIF.
1.3. Optional regime
The SIF regime is optional to the extent that the constitutive or offering documents must expressly provide that the investment vehicle is subject to the provisions of the SIF Law. Accordingly, any investment vehicle, which is reserved to one or more well-informed investors, will not necessarily be governed by the SIF regime. Instead it could opt to be established as an unregulated company subject to the general rules of Luxembourg Company Law9.
2.Investment rules
2.1. Flexibility with respect to eligible assets
The SIF Law allows full flexibility with respect to the assets in which a SIF may invest, subject to the CSSF's prior approval of the investment objective, strategy and policies.
The SIF regime is expressly designed to accommodate UCIs 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 funds10, real estate funds, hedge funds, private equity funds, debt funds, microfinance funds, social entrepreneurship funds, venture capital funds, green funds, infrastructure funds, funds which invest in tangible assets such as aircraft, ships, art, etc.
2.2. Applicability of the principle of risk-spreading
The SIF Law does not provide for specific investment rules or restrictions applicable to the SIF, it only requires that SIFs are subject to the principle of risk-spreading. The CSSF has issued guidelines in its Circular 07/309 as to the meaning of risk-spreading in the context of SIFs, which are detailed below.
Circular 07/309 stipulates the following guiding principles:
- A SIF may not invest more than 30% of its assets or
subscription commitments in securities of the same type issued by
the same issuer11.
However, this restriction does not apply to:
- 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
- target UCIs which are subject to risk-spreading requirements at least comparable to those applicable to SIFs12.
- Short sales may not, in principle, result in the SIF holding a short position in securities of the same type issued by the same issuer representing more than 30% of its assets.
- 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.
These guidelines shall, in principle, apply to all SIFs, although the CSSF may grant exemptions to the risk diversification requirements under Circular 07/309 on a case-by-case basis13.
Furthermore, the CSSF may accept a "grace period" during which SIFs may depart from the aforementioned diversification rules. This grace period should be disclosed in the SIF offering document and may vary depending on the type of assets under management14.
Whenever a SIF is structured as an Umbrella SIF (see Section 3.2 (a) of this Memorandum), any reference to the SIF in the foregoing guiding principles must be understood as a reference to any of its compartments.
3.Structural aspects and functioning rules
3.1. Legal forms
The SIF Law specifically refers to a fonds commun de placement ("FCP(s)") and a société d'investissement à capital variable ("SICAV(s)"), with multiple legal forms available.
This Memorandum focuses on the legal forms most commonly used by SIF, namely the FCP and the investment company.
(a) 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 Law15 (i.e. a management company whose corporate object is to manage at least one UCITS, in addition to the management of the relevant SIF) 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 SIF, 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 will be 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.
(b) Investment company
A SIF can alternatively be established under the form of a corporate-type fund.
An investment company subject to the SIF 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 SIF created under the form of a SICAV can adopt any one of the corporate forms listed by the SIF Law, 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 SIF 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 SIF. Whatever its form, different mechanisms may be put into place when structuring a SIF, so as to reduce the risk of an unfriendly takeover. However, should the taking of control over the SIF 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 Luxembourg Company Law except in those cases where the SIF Law expressly derogates therefrom. In fact, the provisions of the SIF Law applicable to SICAV-SIF deviate from the requirements of the Luxembourg Company Law on many aspects in order to offer the SIFs a more flexible corporate framework.
An investor subscribing for shares/units/partnership interests in a SICAV/SICAF-SIF 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/SICAFSIF 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-SIF.
(c) 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 rules16.
3.2. Other structuring aspects
(a) Umbrella structure and multiple securities/ partnership interest classes
The SIF Law specifically refers to the possibility of creating a SIF with multiple compartments ("Umbrella SIF(s)"), which compartments may differ in, inter alia, their investment policy, redemption policy, dividend policy, fee structure, reference currency, appointed investment manager/adviser and/or type of target investors.
The SIF Law further provides that each compartment of such a vehicle will be linked to a specific portfolio of investments segregated from the investment portfolios pertaining to the other compartments, unless a clause included in the constitutive documents provides otherwise. Pursuant to this so-called "ring-fencing" principle, although an Umbrella SIF constitutes a single legal entity, the assets of each compartment can only be used to satisfy the rights of investors in that particular compartment and the rights of creditors whose claims have arisen in connection with the operation of that particular compartment, unless a clause to the contrary is included in the constitutive documents of the Umbrella SIF.
The above structuring possibility and its terms must be expressly provided for by the constitutive documents of the Umbrella SIF and reflected in its offering document (which must also describe each compartment's specific investment policy).
The CSSF may withdraw the authorisation it granted to one compartment without automatically undermining the authorisation it granted to the other compartments of the Umbrella SIF. Moreover, each compartment of an Umbrella SIF may be liquidated separately and the liquidation of a compartment shall not involve the liquidation of another compartment. Only the liquidation of the last remaining compartment of the Umbrella SIF involves the liquidation of the SIF as a whole.
In addition, or as an alternative to the umbrella structure, different classes of securities or partnership interests can be created within the same SIF or even within the same compartment of an Umbrella SIF. Such classes may have different characteristics particularly as regards their fee structuring arrangement, their targeted investors, and/or their distribution policy.
The issue of tracking shares by a SIF, i.e. shares tracking the performance of a specific underlying asset, is also possible under certain conditions.
(b) Cross-compartment investments
A compartment of an Umbrella SIF can invest under certain conditions in one or more other compartments of the same SIF, a so-called "cross-compartment investment"
This type of investment must be provided for in the SIF offering document, but not necessarily in its constitutive documents. The SIF Law does not prohibit the possibility to create a master/feeder structure within the same SIF.
c) Capital structure and debt financing
The SIF Law provides that the minimum capitalisation of a SIF is EUR 1,250,000 which must be reached within 24 months following the authorisation of the SIF by the CSSF.
Except in the case of an FCP, the reference point for this minimum amount is the subscribed capital plus any issue premium paid or, where applicable, the value of the amount constituting the partnership interests, rather than the net assets.
A SIF set up as an investment company can issue partly paid shares, which must be paid up to a minimum of 5% per share on issue, except for certain legal forms.
A SIF may also finance its activities and the acquisition of its portfolio of investments, where appropriate, on a substantially predominant basis, via borrowings as well as via the issue of bonds or other debt instruments.
(d) Issue and redemption of securities or partnership interests
The conditions and procedures applicable to the issue and, if applicable, the redemption or the repurchase of securities or partnership interests are to be determined in the constitutive documents.
SIFs can function as either open-ended or closed-ended funds, for both subscriptions and redemptions.
Also, there is no requirement for the issue, redemption or repurchase price to be based on the net asset value, such as the requirement placed on open-ended SICAV or FCP governed by the UCI Law. SIFs can therefore issue securities or partnership interests at a predetermined fixed price or repurchase them below net asset value (for example to reduce the discount in the case of a closedended SIF). Similarly, the issue price may be composed of a portion of par value and a portion of issue premium.
Subscriptions in different tranches can be achieved through the successive subscriptions of new securities ascertained at the initial subscription through subscription commitments or by means of partly paid securities, the remaining amount of the issue price of the securities initially issued being payable in further instalments.
A SIF set up under the form of an SCS or an SLP may also offer partnership interests that do not take the form of securities, but which set up capital accounts for each partner (and/or if relevant loan accounts) onto which contributions, withdrawals, loans, allocation of profits and other financial movements of the partners will be recorded, and which show the financial standing of each partner vis-à-vis the SIF and his co-partners. The use of capital accounts may provide for more flexibility in response to any specific requirements and/or constraints that investors in the SIF may have.
(e) Dividend policy
A SIF set up as an FCP or a SICAV is not required to maintain a legal reserve and the SIF Law does not provide for any restriction on the distribution of dividends, provided that the minimum capitalisation referred to in Section 3.2 (c) of this Memorandum is complied with.
(f) Valuation of assets
In light of the virtually unlimited types of assets in which a SIF can invest, SIFs are subject to flexible valuation rules. The SIF Law states that, unless otherwise provided for in the constitutive documents, the assets of a SIF must be valued at fair value. This value is to be determined in accordance with the rules set forth in the constitutive documents17.
SIFs are not required to calculate and publish their asset value per share on a regular basis (although some type of determination of total net assets will have to be performed on a quarterly basis for the purpose of assessing the amount of the taxe d'abonnement to be paid on a quarterly basis as discussed in Chapter V of this Memorandum, and that the net asset value of the SIF will, as a matter of principle, be determined at least once a year, namely at the end of the financial year).
(g) Risk management system
A SIF must employ a risk management system, which enables it to detect, measure, manage and monitor appropriately the risk of its portfolio positions and their contribution to the overall risk profile of the portfolio.
CSSF Regulation 15-07 specifies the content of the risk management system (and conflict of interest policy, see Section 3.2 (h) of this Memorandum) which must be implemented by a SIF. The Regulation makes a distinction between SIFs managed by an authorised AIFM and the other SIFs and it restricts its application to SIFs which are not managed by an authorised AIFM.
(h) Conflicts of interest
A SIF must be structured and organised so as to reduce to a minimum, the risks that any conflicts of interest, which may arise between the SIF and any person being involved in the activities of the SIF or being directly or indirectly linked to the SIF, could harm the interests of its investors. In the case of potential conflicts of interest, the SIF must ensure that the interests of its investors are preserved.
In this respect, SIFs are required to establish a conflicts of interest policy, which must be communicated to the CSSF. CSSF Regulation 15-07 further details the expectations of the CSSF as regards the conflicts of interest policy for SIFs, including the obligation to keep and regularly update a record of the types of collective portfolio management activities carried out by or on behalf of the SIF in which a conflict of interests entailing a material risk of damage to its interests has arisen or may arise. The Regulation makes a distinction between SIFs managed by an authorised AIFM and the other SIFs and it restricts its application to SIFs which are not managed by an authorised AIFM.
Footnotes
1. The SIF 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. "ELTIF Regulation" refers to Regulation (EU) 2015/760 on European long-term investment funds, as amended.
5. "EuVECA Regulation" refers to Regulation (EU) 345/2013 on European venture capital funds, as amended.
6. "EuSEF Regulation" refers to Regulation (EU) 346/2013 on European social entrepreneurship funds, as amended.
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 SIF.
8. "MiFID" refers to Directive 2014/65/EU on markets in financial instruments, as amended.
9. "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended.
10. Since 21 July 2018, SIFs, 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 an MMF must be specifically authorised to manage a MMF (Article 5 of the MMF Regulation).
11. For the purpose of this restriction, in the case where the issuer is a target UCI with multiple compartments, each compartment is deemed to be a distinct issuer if the compartments of that target UCI are "ring-fenced" against the claims of third parties.
12. 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.
13. For instance, the CSSF has indicated, for specific infrastructure investments, that it would relax the aforementioned maximum 30% ratio if certain conditions are met. The CSSF recognises that infrastructure funds often make very sizeable investments and may therefore have difficulties in complying with the risk-diversification ratio.
14. For example, Luxembourg investment funds investing in real estate usually benefit from a four-year grace period.
15. "UCI Law" refers to the law of 17 December 2010 on undertakings for collective investment, as amended.
16. For more information, please see our Memorandum "Luxembourg Partnerships in the asset management industry" on our website www.elvingerhoss.lu.
17. For the specific valuation aspects applicable to a SIF AIF, which is managed by an authorised AIFM, see Chapter II, Section 4 of this Memorandum.
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