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 non-professional 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 risk-spreading. They are regulated UCIs subject to prior authorisation, and thereafter permanent prudential supervision, by the CSSF.
1.2 Qualifying as AIFs 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.
2.2 Applicability of the principle of risk-spreading
The UCI Law does not provide for specific investment rules or restrictions applicable to Part II Funds, it only requires that Part II Funds are subject to the principle of risk-spreading. The CSSF has issued guidelines as to the meaning of risk-spreading in the context of Part II Funds in IML Circular 91/75 and CSSF Circular 02/80.
Generally, IML Circular 91/75 provides that a Part II Fund may not invest more than 20% of its net assets in a single company.
Moreover, CSSF Circular 02/80 provides that a Part II Fund pursuing a fund-of-fund strategy shall not invest more than 20% of its net assets in securities issued by the same target UCI13. The Part II Fund may hold more than 50% of the units of a target UCI with multiple compartments, provided that such an investment in the target UCI represents less than 50% of the net assets of the Part II Fund.
These guidelines shall apply in principle to all Part II Funds, although the CSSF may grant exemptions under the IML Circular 91/75 and the CSSF Circular 02/80 on a case-by-case basis.
The CSSF may also allow less stringent risk diversification requirements for certain types of Part II Funds. For instance, the CSSF has separately indicated that infrastructure Part II Funds may be permitted to invest up to 30% of their net assets in certain infrastructure investments, subject to certain conditions (including but not limited to appropriate disclosures in the prospectus).
Furthermore, the CSSF may grant a ramp-up period to Part II Funds, during which the Part II Fund may deviate from the above risk diversification rules.
Whenever a Part II Fund is structured as an Umbrella Part II Fund (see Section 3.2 (a) below), any reference to the Part II Fund 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 UCI 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 Part II Fund, 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 Law (i.e. a management company whose corporate object is to manage at least one UCITS, in addition to the management of the relevant Part II Fund) 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 Part II Fund, 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 in further detail below), investors in an FCP are not entitled to vote, unless the management regulations provide for such a possibility.
(b) Investment company
A Part II Fund can alternatively be established under the form of a corporate-type fund.
An investment company subject to the Part II Fund 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 Part II Fund created under the form of a SICAV can adopt any one of the corporate forms listed by the UCI 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 UCI 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 Part II Fund. Whatever its form, different mechanisms may be put into place when structuring a Part II Fund, so as to reduce the risk of an unfriendly takeover. However, should the taking of control over the Part II Fund 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 Law14 except in those cases where the UCI Law expressly derogates therefrom. In fact, the provisions of the UCI Law applicable to SICAV-Part II Fund deviate from the requirements of the Luxembourg Company Law on many aspects in order to offer the Part II Funds a more flexible corporate framework.
An investor subscribing for shares/units/partnership interests in a SICAV/SICAF-Part II Fund 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/SICAF-Part II Fund 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-Part II Fund.
Among the forms recently made available for establishing an investment company, the SCA, SCS and the SLP were specifically awaited by the industry15.
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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).
13 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 provided that the principle of segregation of the commitments of the different compartments vis-à-vis third parties is ensured.
14 "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended
15 For more information, please see our Memorandum "Luxembourg Partnerships in the asset management industry" on our website www.elvingerhoss.lu.
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.
