What is an alternative investment fund?
An alternative investment fund (AIF) is typically a fund investing in an alternative asset class in the broadest sense, covering private equity funds, real estate funds, hedge funds, art funds or venture capital funds. The EU directive regulating this sector, the AIFMD has defined the term very broadly including any fund type which is not a fund falling under the UCITS directive.
Before the introduction of the AIFMD, Luxembourg was already an important fund domicile due to its global standing in the UCITS sector.
Luxembourg took the advantage of realizing that the AIFMD not only covered supervised funds, but also unsupervised funds and introduced new fund types to offer a complete toolbox of solutions to fund promoters. This flexibility has made Luxembourg the leading European domicile for AIFs. Building on Luxembourg’s unchallenged expertise on global fund distribution, AIFs established in Luxembourg can also be distributed within the EU on the basis of the EU passport, as well as abroad to more than 70 countries.
Establishing an alternative investment fund in Luxembourg:
There are different alternative investment fund types in Luxembourg. Depending on the needs of investors and promoters, you can choose the most suitable fund type:
- SOPARFI: (Financial holding company or sociéte de participations financières). Due to its flexible financing policy, its structural benefits, its lack of investment restrictions and its advantage in accessing treaty benefits, the SOPARFI has taken on a central role in the structuring of cross-border transactions around the world and is used by multinational corporations, sovereign wealth funds, investment funds, as well as family offices. Click Here.
- SIF: (Specialised Investment Fund) is a more flexible investment fund that is available for all asset classes and investment strategies. It is a supervised corporate vehicle, reserved for well-informed and professional investors. A low level of diversification is required, and the SIF can also be set up as an umbrella fund. The SIF may also qualify for the AIFMD passport, provided the conditions are met. The SIF is:
- supervised by the CSSF
- reserved for well-informed and professional investors,
- requires a low level of diversification,
- can be set up as an umbrella fund
- may also qualify for the AIFMD passport, provided the conditions are met.
- SICAR:(Investment Company in Risk Capital) is also a supervised investment vehicle, which has the principal purpose of investing in risk-bearing assets. The SICAR is not subject to any diversification rules but is restricted to well-informed and professional investors. The SICAR may also qualify for the AIFMD passport, provided the condiitions are met. The SICAR is:
- not subject to any diversification rules,
- restricted to well-informed and professional investors,
- may also qualify for the AIFMD passport, provided the conditions are met,
- interesting fiscal regime and double tax treaty access.
- RAIF: (Reserved Alternative Investment Fund) was introduced in 2016 and has been a highly successful fund type. It is structurally similar to the SIF or SICAR regime but is not subject to a direct supervision by the CSSF. The RAIF can also be set up as an umbrella structure. The RAIF however has to appoint an AIFM (Alternative Investment Manager) in Luxembourg, which itself is regulated by the CSSF, but can therefore benefit from the AIFMD passport.
- Special Limited Partnership (SLP or SCSp) and Common Limited Partnership (CLP or SCS): are highly flexible fund structures that are not supervised. The limited partnership agreement (LPA) is the main document organizing the functioning of the partnership, which gives the fund the contractual flexibility to organize the structure of the fund. This fund type is not restricted to any asset type and not subject to any risk diversification rules. This fund type is tax transparent.
Which legal form for the alternative investment fund?
Whether to choose a fund or company form is a difficult question and depends on the overall structure of the transaction. In many transactions, the promoters would establish a fund for the fundraising and the SOPARFI to acquire a target and to exit and investment in a tax efficient way.
Luxembourg offers the possibility to offer an interesting regime for the fund establishment, as well as for the company to acquire the target.
One of the most flexible fund types is the RAIF. It can either be established in a contractual form (FCP), a corporate legal form (S.A. or S. à. r.l.) or a partnership form (SCS or SCSp) and can even opt for a different tax regime, if it invests exclusively in risk capital. These structural possibilities have made Luxembourg, the domicile of choice for alternative funds.
How long will it take to establish an alternative investment fund in Luxembourg:
The length of establishment depends on whether the fund is a supervised or non-supervised fund vehicle. Whilst a non-supervised investment vehicle can be set up within 2 weeks, a supervised vehicle can be established with 2-4 months, depending on the complexity of the fund structure and its investment policy.
Which alternative investment fund type is the most popular?
In recent years the RAIF and the Special Limited Partnership are increasingly the first choices when establishing an AIF. This is mainly due to the features of both funds, allowing them to be established and distributed within a short time frame:
- Reserved Alternative Investment Fund:
- Establishment within 4-6 weeks.
- No regulatory approval required.
- Unsupervised fund.
- EU passporting rights through AIFM.
- Can invest in any asset type.
- Special Limited Partnership:
- No minimum capital required.
- Establishment within 2-3 weeks.
- No regulatory approval for the launch of the fund required.
- Unsupervised fund.
- Appointment of regulated AIFM is not mandatory, if sub-threshold (below EUR 100 Million).
- EU passporting possible through AIFM..
- No Custodian required, if sub-threshold
- Tax transparent fund.
- Can invest in any asset type.
- High contractual flexibility.
What are the costs of establishing an alternative investment fund in Luxembourg?
As Luxembourg offers a variety of different solutions, this greatly varies between the solution chosen and the service providers used to service the fund or the company. Setting up a fund which is not supervised, is less costly than a supervised fund.
The most popular structure, the SOPARFI can be incorporated within only 2-3 days after opening the bank account and depositing the minimum share capital of EUR 12,000. The notarial fees typically amount to EUR 1,600 – EUR 1,800. Upon incorporation before a notary the SOPARFI has legal personality and can enter immediately into legally binding agreements, such as a domiciliation agreement with a corporate services provider, providing the SOPARFI with a registered office.
In order to establish a Special Limited Partnership, we typically incorporate a SOPARFI, acting as GP of the SLP. This would involve the same costs as the establishment of the SOPARFI. The SLP cost would then only depend on the form of constitution (private deed or notarial deed). Once the LPA is executed, it can be registered with the Luxembourg Trade and Companies’ Register.
Reach out to us, to learn more about the different Luxembourg alternative investment funds.