What is a debt fund?
Debt funds are investment fund vehicles that invest into fixed income products, such as bonds, notes or other debt securities. Since the financial crisis, banks have been subject to an increasing amount of regulation and compliance, making their traditional lending activity more complex and less lucrative.
Corporates on the other hand, have been under increasing pressure to find alternative sources of funding to ease liquidity pressures. As a result, private credit has emerged as a growing asset class with innovate and flexible solutions.
Debt funds may have different legal forms or be set up under a variety of legal regimes, but the goal of these debt funds is to provide funding to corporates. In many cases, banks work closely with debt funds to find an optimal and efficient solution to provide funding to corporates on a cross-border basis.
Why set up a debt fund in Luxembourg?
Luxembourg offers a toolbox of solutions to establish debt funds and vehicles, offering fund promoters a high degree of flexibility for their investments. Precisely, this flexibility has made Luxembourg a globally leading domicile for debt funds, the second largest investment fund centre in the world after the United States and the largest fund domicile in Europe with currently more than EUR 4,7 trillion of assets under management.
The country is a politically and financially stable EU country with a AAA-Rating. As an EU domicile, debt funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.
The key advantages of Luxembourg as a domicile for debt funds are:
1. Stability:
Luxembourg is a stable and recognized fund centre in the heart of Europe, ideally positioned to use the EU passporting rights to distribute the fund across the EU and to global markets.
2. Global Leadership:
Luxembourg is the global leader for cross-border fund distribution. All relevant service providers in the asset management industry have a presence and offer services in Luxembourg. The country is known around the world for its capabilities in asset management and its funds are distributed and known around the world.
3. One Stop Solution:
Setting up a fund with an EU passport, using leading service providers, listing it on a recognized stock exchange, setting up SPVs to benefit from double tax treaties and outsourcing certain functions back to other countries. Luxembourg has the flexibility to offer a one stop solution for operating and distributing investment funds, as well as deploying the funds in an efficient and structured manner.
4. Choice of vehicles:
Fund promoters have the choice between unregulated or regulated debt funds and vehicles: Depending on investor demands, they can either opt for:
(i.)an unregulated fund or vehicle that is quickly set up and needs no approval by the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier or CSSF),
(ii.)a fund that is supervised by the CSSF, or
(iii.)a fund that is not supervised but has appointed a supervised Alternative Investment Fund Manager (AIFM).
5. Global brand:
Investors are comfortable with Luxembourg, as it has the following advantages for investors:
(i.)professional and globally recognized fund service providers are established in Luxembourg,
(ii.)depository/custodian is in Luxembourg, if within the scope of the AIFMD,
(iii.)Luxembourg is a reputable fund jurisdiction with established legal frameworks for funds.
6. EU passport:
The debt fund or vehicle could be distributed within the EU on the basis of the AIFMD passport, if the fund has appointed an AIFM.
7. Tax benefits:
More advantageous tax treatment, with the choice of tax treatment according to the choice of investment vehicle:
(i.)debt funds can be fully taxable and have access to Luxembourg’s double tax treaties network,
(ii.)debt funds can be tax exempt, but with very limited access to double tax treaties,
(iii.)debt funds can be tax neutral with either legal or no legal personality. In that case the partners of the fund will be become taxable and not the fund itself.
Which debt funds exist in Luxembourg?
Luxembourg offers a range of solutions for debt funds, ranging from supervised to non-supervised.
1. SIF (Specialised Investment Fund) is a flexible fund and is a commonly used fund type. The SIF is:
(i.)supervised by the CSSF,
(ii.)reserved for well-informed and professional investors,
(iii.)requires a low level of diversification,
(iv.)can be set up as an umbrella fund,
(v.)may also qualify for the AIFMD passport, provided the conditions are met.
2. RAIF (Reserved Alternative Investment Fund) has been a highly successful fund vehicle, since its introduction in 2016. The RAIF allows for a significantly reduced time to market, with the option to transform later to a supervised fund, if required.
The RAIF is:
(i.)structurally similar to the SIF regime but is not subject to a direct supervision by the CSSF,
(ii.)can also be set up as an umbrella structure,
(iii.)the RAIF 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.
3. Limited Partnerships (CLP/SLP) are highly flexible and have been very successful in the last years. The limited partnerships (CLP/SLP) are:
(i.)not directly supervised and similar to the partnership structures in Common Law jurisdictions,
(ii.)contractual flexibility: The limited partnership agreement (LPA) is the main document organizing the functioning of the partnership, which gives the fund the flexibility to organize the structure of the fund,
(iii.)this fund type is not restricted to any asset type and not subject to any risk diversification rules.
4. 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 debt transactions around the world and is used by multinational corporations, sovereign wealth funds, investment funds, as well as family offices.
5. Securitisation Vehicles (SV) are investment vehicles, that can be set up as an alternative investment vehicle to the fund vehicles mentioned above. It plays a central role in these debt transactions and is used either as a stand-alone debt fund or in conjunction with one of the funds mentioned above. The SV is:
(i.)flexible in nature and can either be set up as a corporate entity or a securitisation fund;
(ii.)can be set up as an umbrella structure with multiple compartments and is required to issue securities (bonds, notes, etc.) in relation to an underlying risk (receivables, credit risk or any other form of risk); and
(iii.)in principle not supervised, provided that the SV does not issue on a continuous basis to the public.
How long does it take to set up a debt fund in Luxembourg?
The time to set-up depends on whether the vehicle is a supervised or non-supervised vehicle. Whilst a non-supervised investment vehicle can be set up within 2 weeks, a supervised vehicle can be established with 2-3 months, depending on the complexity of the fund structure and its investment policy.
How much does it cost to establish a debt fund?
As Luxembourg offers a toolbox of different solutions, the establishment cost greatly varies between the solution chosen and the service providers used to service the fund. Setting up a debt fund which is not supervised, is less costly than a supervised fund.
Apart from setting up your own fund, you can also rent a sub-fund of an existing umbrella structure.
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