North American Fund Managers - Luxembourg Part II Funds As A Gateway For Global And Canadian Retail Capital

Historically, Canadian private wealth capital to invest in illiquid investment strategies has largely been raised through Canadian vehicles or US fund structures. A third route has opened over the past few years. An increasing number of North American fund managers (NAFM) are turning to Luxembourg private wealth funds, so-called Part II UCIs, to raise private wealth capital globally (but beyond the US) for illiquid strategies. Canadian private wealth investors are showing a growing appetite for these offerings.  

Part II UCIs offer a flexible platform to access international private wealth with a company-style fund. Such funds can be established as umbrella vehicles with multiple sub-funds to accommodate different strategies within a single structure, allowing sponsors to market different products and features while maintaining operational efficiency. Part II UCIs can generally mirror the key economic features of US private wealth funds NAFM are familiar with.

Investors in a Part II UCI do not need to meet any specific Luxembourg-driven eligibility thresholds or reporting requirements. In practice, the only eligibility and/or investment thresholds that apply are those driven by the marketing rules of the jurisdiction where the product is offered, or by any contractual minimum investment amount set by the Part II UCI itself. Such minimum investment amounts are typically set at around USD 25,000.

To anticipate the needs of private wealth investors, that usually seek permanent access to investment products and prefer a possibility to withdraw during the life of the fund, Part II UCIs are typically structured as evergreen products with withdrawal rights calibrated to the illiquidity of the portfolio.

Within a sub-fund, different share classes can be structured, such as distributing and accumulating share classes. Accumulating classes offer administrative convenience for investors as yield is automatically reinvested and may reduce the tax drag on investment income, depending on the investor’s residence. The share classes may also support differentiated fee, incentive and currency arrangements. Compared to other European retail products, Part II UCIs are subject to very limited investment restrictions and also allow NAFM to channel global private wealth into North American strategies.

Because Part II UCIs are fully regulated in Luxembourg and require prior authorisation by the financial regulator (CSSF), they can usually navigate local retail marketing regimes across Europe and globally. Both European and non-European, including Canadian, private wealth channels are familiar and comfortable with Part II UCIs which eases their distribution. During the approval process for an open-ended Part II UCI, the Luxembourg regulator focuses in particular on the Part II UCI’s liquidity management. A liquidity pocket (15-20%) supplemented by at least two qualifying liquidity management tools is required.

For all the above reasons, Part II UCIs should be on the radar of NAFM and Canadian private wealth channels. Educating private wealth investors about liquidity restrictions is a key focus point when offering a Part II UCI product.

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.