The Specialised Investment Fund (SIF) regime was established in Luxembourg by the Law of 13 February 2007 (SIF Law). The SIF regime's purpose was to offer great flexibility on investment scope, structuring, and providing for an advantageous tax regime, while being regulated at the fund level by the Commission de Surveillance du Secteur Financier (CSSF).
The entry into force of the Alternative Investment Funds Managers Directive (AIFMD), particularly Recital 10, “This Directive does not regulate AIFs,” took the discussion of the regulation at the fund level a bit further. Indeed, in Luxembourg's regulatory framework, a double layer of supervision exists: direct supervision from the CSSF and indirect supervision from the alternative investment fund manager (AIFM), which is also regulated by the CSSF.
The Law of 23 July 2016 on reserved alternative investment funds (RAIF Law) introduced a new regime into the Luxembourg toolbox: the RAIF, a fund structure that combines features of the investment company in risk capital (société d'investissement en capital à risque, or SICAR) and the SIF while being regulated at the level of the AIFM only.
Introducing the RAIF Was a Great Success
Despite RAIFs being available only since 2016, they have already surpassed SIF structures (1,211 SIF vehicles currently) by more than double. Currently, there are more than 2,712 RAIFs registered with the Luxembourg Trade and Companies Register (RCS). These numbers of RAIF structures show their popularity with fund managers and the trust from investors.
When the asset manager or the fund's sponsor contemplates creating a new investment strategy, alongside the current SIF structure established prior to 2016, it should also consider converting the SIF, including the existing compartment(s), into a RAIF for the following reasons.
Suitable for Open-Ended Funds (e.g.,-Evergreen Funds), Applicable for Closed-Ended Funds
Conversion from a SIF to a RAIF is relevant for open-ended funds as a solution to reduce regulatory costs and improve efficiency. For closed-ended funds, this conversion is also applicable. Its relevance diminishes if the fund's term is nearing completion. In such cases, particular attention must be paid to the fund's remaining life cycle to assess whether the conversion is worthwhile.
Creating a New Subfund Into an Existing SIF: A Short-Term, Low-Cost Solution
Provided that a Part I or Part II SIF (i.e., managed by an authorised AIFM) fund was already established and successful, launching a new compartment within the preexisting structure has some advantages.
Key advantages of launching a new subfund in the existing SIF:
- Lower setup costs: The incremental costs are typically lower because the SIF's operational processes, service providers, and regulatory framework are already in place.
- Operational efficiency: Leveraging existing relationships and processes, leading to quicker setup and potential economies of scale, can reduce running costs.
- Regulatory continuity: The SIF remains subject to oversight by the CSSF, which may be preferred by investors seeking double regulatory supervision.
Converting to a RAIF: Long-Term Strategic Flexibility, Savings, and Faster Market Access
Alternatively, converting to a RAIF could offer significant benefits in the long term, especially in terms of cost and operational efficiency. While the SIF regime requires direct CSSF supervision, the RAIF relies on the supervision at the AIFM level only. This allows for more flexibility and fast implementation of investment decisions.
Key advantages of converting to a RAIF:
- Greater flexibility: A RAIF is not subject to direct CSSF approval for the launch of new compartments or adjustments to investment strategies. This allows for shorter setup times and faster decision-making, allowing timely responses to market opportunities and investor needs. Such agility can be critical in a rapidly evolving regulatory environment or when deploying complex investment strategies.
- Faster time to market: A RAIF benefits from a streamlined regulatory process, as the absence of CSSF approval reduces the time required to establish new funds or sub-funds. This is particularly advantageous for asset managers seeking to quickly capitalize on market trends or introduce new products in a competitive investment landscape.
- Branding and positioning: Establishing a new RAIF allows for distinct branding, which may appeal to investors looking for a separate investment vehicle.
- Investor protection: Despite the absence of direct CSSF oversight, the RAIF remains fully compliant with the AIFMD framework, ensuring that investor protections such as risk management, transparency, and reporting are upheld.
- Cost efficiency: Without the need to incur CSSF fees at the level of the RAIF, and with compliance requirements consolidated at the AIFM level, fund managers can achieve a more cost-effective operational model. These savings can be reinvested in other areas of fund management or passed on to investors, thereby enhancing overall fund performance.
RAIF vs. SIF: A Comparative Table
The following comparison highlights the core differences between the RAIF and SIF. The RAIF regime offers all the benefits of the SIF regime without the direct supervision of the CSSF:
| Topic | RAIF | SIF |
| Regulatory supervision |
No direct CSSF supervision. Oversight and monitoring via the AIFM. |
CSSF to approve all constitutive documents and any proposed changes, including:
Ongoing supervision of AIF by the CSSF and subject to fees, including:
|
| Reporting to the CSSF |
Not at the level of the RAIF. An annual report assessing the assets, liabilities, income, and operations of the RAIF is required at AIFM level. |
Annual report to assess the assets, liabilities, income and operations of the SIF. Annual report at the level of the AIFM. |
| AIF status/AIFM | Is always an AIF and requires an authorized AIFM, which is subject to AIFMD. |
If SIF subject to Part I of SIF Law, either the SIF does not qualify as an AIF and shall comply only with SIF Law or the SIF qualifies as an AIF and falls within the AIFMD exemption managed by a registered AIFM. If SIF subject to Part II of SIF Law, the SIF qualifies as an AIF managed by an authorized AIFM and requires complying with AIFMD. |
| Establishment |
No CSSF approval required. Establishment must be notified by the AIFM to the CSSF. Registration on RCS RAIF list 20 business days after establishment. |
Establishment subject to CSSF prior approval (which can take up to six months) followed by registration on CSSF official list. |
| Minimum subscribed capital of €1,250,000 to be reached within 24 months of setup, with a minimum 5% of capital to be paid up on subscription for shares (i.e., not partnership interest) if applicable. | ||
| Investment restrictions | None — all assets, any strategy or investment policy (exceptions are when using SICAR tax regime). |
None — all assets, any strategy or investment policy. Prior approval of any changes to the investment objective and strategy is required by the CSSF. |
| EU marketing passport | Available. |
No passport for SIF subject to Part I of the SIF Law. Passport for SIF subject to Part II of the SIF Law. |
| Subject to payment of a fee for the application in certain jurisdictions where the fund will be marketed. | ||
| Marketing documentation | Offering document to comply with disclosure requirements under Article 23 of AIFMD. |
Offering document to comply with disclosure requirements under Article 23 of AIFMD and with the provision of chapter 7 of the SIF Law (i.e., must include all information necessary for prospective investors to make an informed investment decision). Any change to the offering document elements is subject to CSSF prior approval. |
| Board of managers of general partners | No specific requirements. |
Proof of qualifications and experience, good standing, and honour to be submitted to CSSF. CSSF to approve board of managers. No residency requirements (but consider in respect of substance). |
| Delegation |
Requirements per AIFMD. Delegation to be disclosed in issuing document. Delegation to third parties must be notified by the AIFM to the CSSF prior to the delegation arrangements becoming effective. |
Requirements per AIFMD. Delegation to be disclosed in issuing document. Delegation to third parties must be approved by the CSSF prior to the delegation arrangements becoming effective. CSSF typically conducts a closer review of delegation arrangements for SIFs and can impose higher requirements before approval. |
Practical Checklist for SIF Conversion to RAIF
For fund managers considering a conversion to a RAIF structure, a thorough legal and operational review is essential to ensure a smooth transition. Please consider the following steps:
- Review of fund documentation: Ensure that all existing fund documentation is aligned with the requirements of the RAIF regime, with particular attention to investor disclosures and risk management policies in line with AIFMD standards.
- Secure all existing investors' consent or voluntary early redemption: Engage with existing investors to secure the necessary consents, or voluntary early redemption (in the case of open-ended funds) for those who will not consent, for conversion from a SIF to a RAIF, ensuring transparency around the changes in regulatory oversight and any resulting operational benefits.
- Secure CSSF's approval of the conversion: Obtain approval from the CSSF for the conversion from a SIF to a RAIF.
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.
