With its flexible and efficient alternative investment fund options, Luxembourg is increasingly becoming the centre of choice for fund managers in Asia, write Anja Grenner and Seamus Fox.
Luxembourg is the second-largest fund centre in the world and the largest in Europe, with over 4.5 trillion euros in assets under management (AUM). The Grand Duchy is increasingly becoming the centre of choice for fund managers in Asia, and its alternative investment fund structures are a key reason why.
Luxembourg alternative investment funds
Luxembourg's private equity and real estate fund structures can be tailored to the needs of Asian fund managers, and its two unsupervised structures - the Reserved Alternative Investment Fund (RAIF) and the Special Limited Partnership (SLP) - are of particular appeal to Asian sponsors wanting to expand their asset and limited partner (LP) base. Similar to those seen in offshore centres like the Cayman Islands and British Virgin Islands (BVI), unsupervised structures don't require intervention from the Luxembourg regulator in order to be launched.
Recent growth in unsupervised funds is spurred by the sophistication of investors, who do not necessarily need the protection of Luxembourg's regulator, the CSSF (Commission de Surveillance du Secteur Financier). Asian alternative fund managers generally look to set up their funds in a very efficient way, and the SLP - very similar in structure to the Anglo-Saxon limited partnership in Cayman, Scotland or the UK - caters to this. It does not have a legal personality, but still owns its assets under its own name. This structure was established in order to complement Cayman funds or offer sponsors the option of setting up one single fund only.
Luxembourg offers two other partnership types, both with own legal personality:
- the partnership limited by shares, Société en Commandite par Actions (SCA)
- the common limited partnership, Société en Commandite Simple (SCS).
The RAIF - efficiency and flexibility
Dubbed a ‘game changer' when it entered the European funds world in 2016, there are some key elements that make the RAIF stand out:
- Faster setup than the previous regulated alternative funds.
- Unlike Luxembourg's established and successful Specialised Investment Fund (SIF) and Société d'investissement en capital à risqué (SICAR) structures, the RAIF is not subject to the approval or direct supervision of the CSSF. It falls instead under the Alternative Investment Fund Managers Directive (AIFMD).
- It can be set up as an umbrella fund with different sub-funds.
- It benefits from a simplified tax regime, the RAIF pays an annual tax of one basis point on net assets or, similar to the tax regime applying to SICARs, is tax-exempted for capital invested in assets that are considered risk capital (e.g. Private Equity and Venture Capital).
Establishing parallel funds in Hong Kong, Cayman and Luxembourg is a solution for local investors where certain statutory jurisdictional requirements must be met.
What's very important in these scenarios is to be able to service the different funds and the investors behind them in their own time zones. It's also advantageous to appoint a single administrator - such as TMF Group - that can service all the funds in that parallel structure across all jurisdictions, for economies of scale.
Despite ongoing US-China tensions, European investors remain extremely interested in Asian markets and this is where a Luxembourg structure is advantageous for Asian fund managers.
Alongside the issue of taxation, substance has been a focus in recent years for both the Organisation for Economic Co-operation and Development (OECD), and the European Union (EU).
While substance is a topic that is ever-evolving, Luxembourg funds are well-placed, as most appoint an AIFM due to passing a certain size threshold or to be able to distribute the fund within the EU.
The Luxembourg AIFM is an entity that is regulated and directly supervised by the CSSF. Normally it has at least four or five local staff, and therefore largely meets the necessary substance requirements.
Investment decisions, risk and portfolio management functions mostly take place in Luxembourg, as do interactions with the local authorities, further satisfying substance rules.
Luxembourg fund services providers
From accounting and reporting to depositary, corporate secretarial, transfer agency and domiciliation: when structuring your investments it's important to find a service provider that can perform all the essential functions of the AIFM, depositary and central administrator.
They should be able to cater to – and service – all entities, i.e. the fund and all related companies in Luxembourg (MasterCos, HoldCos, Carry Vehicles etc.) as well as all entities in all other jurisdictions involved.
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.