A quantum leap for the Luxembourg fund structuring toolbox
Being Europe’s most important cross-border investment funds domicile, with respect to retail (such as UCITS)
and alternative investment funds (AIFs), and with EUR3.4 trillion (US$3.86 trillion) of assets under management
(ALFI, the 31st March 2016), there is no other domicile such as Luxembourg in the world with the same global reach
and worldwide recognition from both investors and managers alike. The same is true for Islamic funds, where
Luxembourg has become the third-largest funds domicile after Saudi Arabia and Malaysia, with 17% of all Islamic
funds domiciled there (Zawya, the 31st December 2015). BISHR SHIBLAQ explores.
The success of Luxembourg’s
investment funds industry is mainly
built upon its ability to connect
managers and investors from around the
world through established distribution
channels, giving funds and its managers
the possibility to use the European
Union (EU) passport for distribution.
Investment funds require a solid, yet
fl exible, legal, regulatory and fi scal
framework, which allows them to make
long-term projections. The Luxembourg
model has traditionally been based on
sound regulation at the product level.
However, since the introduction of
the Alternative Investment Managers
Directive (AIFMD), Luxembourg has
decided to upgrade its existing fund
structuring toolbox and introduce
new and innovative unregulated fund
structures.
The Luxembourg limited
partnership
As an initial step toward the new
European approach for regulation of the
AIF sector, the AIFMD was implemented
by the Luxembourg legislator. In the
same step, the Luxembourg common
limited partnership – société en
commandite simple (SCS or CLP) was
modernized and a quantum leap was
taken with the introduction of the
special limited partnership – société
en commandite spéciale (SCSp or
SLP). Two years and around 1,000 new
limited partnership launches later,
the Luxembourg unregulated limited
partnership (whether common or special)
has become a new norm for the launch of
AIFs. As Islamic funds are focusing on a
large extent on alternative asset classes
such as real estate and private equity,
these unregulated funds are quickly
also becoming the norm for Islamic
alternative funds.
It would, however, be incorrect to state
that the modernized limited partnership
regimes have replaced the tried and
tested investment company in risk
capital (SICAR) or the specialized
investment fund (SIF). While the launch
of new SICARs and SIFs has since
diminished gradually as opposed to
the launch of CLPs and SLPs, it proves
that there is no one-size-fi ts-all solution.
The unprecedented rise of the limited
partnership did, however, indicate to
the Luxembourg legislator that market
participants no longer perceive product
supervision as a must-have. In particular,
Shariah compliant fund managers based
outside of Europe were less keen to
establish a fund with supervision of
both the product and the fund manager.
Instead, market participants put speed to
market, as well as structuring fl exibility
(in the context of regional, international
or global off erings) at the forefront of
benefi cial interests and requirements.
After learning the fi rst lessons from
the implementation of the AIFMD,
the Luxembourg fund structuring
toolbox is now ready for one of its most
signifi cant evolutions: the creation of a
new investment funds framework. This
framework combines the strengths of
the SIF and SICAR regimes, permitt ing a
further combination with the modernized
limited partnership forms under a new
acronym. Known as the RAIF (reserved
AIF), it will be reserved for authorized
AIF managers (AIFMs). The Luxembourg
Government Council has introduced a
bill of law providing for the introduction
of the RAIF regime into Luxembourg law
before the 2016 year-end.
The evolution of the
structuring toolbox – the RAIF
regime
The new regime will allow initiators to
set up a new type of AIF, an asset class
which is of particular interest to Islamic
fund managers, which combines the
legal and tax features of the well-known,
tested and tried SIF or SICAR regimes
without the regulatory supervision of the
Commission de Surveillance du Secteur
Financier (CSSF).
Legal structuring fl exibility: Just like
the SIF and SICAR, the RAIF may be
formed under any of the well-known
Luxembourg corporate, partnership and
contractual legal forms:
– Partnership forms: corporate (SCA),
common (CLP) or special (SLP)
– Corporate forms: public limited
company (société anonyme – SA),
private limited company (société
à responsabilité limitée – S.à r.l.),
cooperative company organized as
a public limited company (société
coopérative organisée comme une SA
– SCOSA), and
– Contractual form: common fund
(fonds commun de placement – FCP).
Furthermore, a RAIF may adopt a
variable (such as SICAV) or fi xed
capital (such as SICAF) structure. Also,
quite importantly, the RAIF may adopt
an umbrella or multi-compartment
structure.
Investment strategy: The RAIF (just like
the SIF) is subject to a minimum risk-
spreading requirement (such as with a
30% counterparty exposure limit safe
harbor rule of aggregate committ ed
capital/net asset value). If the RAIF elects
to only invest in qualifying risk capital
investments (just like a SICAR does),
the risk-spreading requirement will not
apply.
Eligible investors: The RAIF will be
available to well-informed investors
which include institutional investors,
professional investors and investors
investing a certain minimum amount
(GBP125,000 (US$181,411)) further
Continued
accepting a self-certifi cation. The eligible
investor concept will have to be applied
in the context of the AIFMD marketing
passport, which reserves the benefi t of
the passport to professional EU-based
(such as established or resident) investors
only.
Governance: The naming convention
of the RAIF stems from the legal
requirement that a RAIF must be
managed by, and is thus, reserved
for fully authorized AIFMs. Each
Luxembourg AIF which elects to
be treated as a RAIF must appoint
a duly authorized AIFM, whether
established in Luxembourg, in another
EU member state or, upon and subject
to the implementation of the third
country management passport, a third
country authorized AIFM. This is the
fundamental access condition for the
use of the new regime: only authorized
AIFMs may avail themselves of the new
legal and fi scal framework of the RAIF.
Registered AIFMs as well as currently
third country AIFMs may not manage a
RAIF.
No CSSF supervision: The creation of a
RAIF will have to be witnessed in front
of a Luxembourg notary public. The
notary public must ensure that the RAIF
is then registered with the Luxembourg
Trade and Companies’ Register within
10 days of its formation. However, the
formation in front of a Luxembourg
notary does not mean that a Luxembourg
limited partnership and a FCP electing
for the RAIF regime must be enacted in a
notarial deed. Unlike the corporate form,
RAIFs and common and special limited
partnerships electing for the RAIF regime
may be formed under private seal.
Additionally, the confi dentiality of the
limited partnership agreement will be
upheld.
The absence of supervision and the
fact that the CSSF will not have to
authorize the launch of a new RAIF (or
any changes thereto) will probably be
recognized as the most welcome feature
of the new regime. Fund managers and
initiators have long been requesting
timing certainty when applying for new
product launches. With the introduction
of the manager regulation via the
AIFMD, the Luxembourg legislator
identifi ed an opportunity to revise
its long-standing strategy: continue
the strong and recognized regulatory
framework applicable to the Luxembourg
fund product and the Luxembourg
services providers surrounding it,
but replacing the authorization and
prudential supervision of the CSSF by
the authorization and supervision of
the product through the authorized
AIFM. The outcome will be absolute
planning certainty, resolving the single
most important issue of the Luxembourg
alternative funds center.
Tax features: The RAIF will either be
subject to an annual subscription tax
(taxe d’abonnement) at a rate of 0.01%,
with various exemptions, or be subject to
the tax regime applicable to SICARs, ie
be fully subject to tax save for qualifying
risk capital income and gains.
Conversions: Existing SIFs, SICARs
and unregulated AIFs may elect for
the RAIF regime, subject to securing
the relevant approvals from investors
and, where applicable, the CSSF.
While the product regulation has been
replaced by the AIFM authorization as
a prerequisite for certain institutional
investors, it remains to be seen whether
managers will wish to change the
regulatory status if and when the AIF is
running smoothly. In particular, there
may be limited appetite for managers
of regulated closed-ended AIFs to seek
a regime change. The question may
possibly be raised much faster in respect
of umbrella structures, which continue to
launch new compartments or sub-funds,
ie all the investors in the predecessor
compartments or sub-funds will have to
consent to such a regime change.
Outlook
The introduction of the RAIF is a
long-awaited development, made
possible by the implementation of the
AIFMD without sacrifi cing the investor
protection standards, which were built
up successfully over the past 25 years. It
is clear that the new regulatory
environment has already changed how
Islamic funds are being structured in
Luxembourg. Islamic fund managers are
already choosing the Luxembourg
limited partnerships over other AIFs. The
introduction of the RAIF will enable
Islamic fund managers to use a true
alternative to AIFs set up in other
domiciles. The combination of a high
degree of fl exibility and structuring
possibilities, combined with the
compatibility with EU regulations and
passporting options will be a quantum
leap for the conventional, as well as the
Islamic, fund industry.
Bishr Shiblaq is the head of offi ce at Arendt &
Medernach – Avocats. He can be contacted at
bishr.shiblaq@arendt.com.
