What is a venture capital fund?
Venture capital funds (VC funds) are investment vehicles focusing on investments into startups and small- to medium-sized enterprises (SMEs) that are not publicly traded and show a strong growth potential. VC funds are active in raising capital to directly invest into these privately held SMEs.
Why set up a VC fund in Luxembourg?
Luxembourg offers a toolbox of solutions to establish VC 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 private equity 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, private equity 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 VC funds are:
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.
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 VC 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).
Investors are comfortable with Luxembourg, as it has the following advantages for investors:
1.professional and globally recognized fund service providers are established in Luxembourg,
2.depository/custodian is in Luxembourg, if within the scope of the AIFMD,
3.Luxembourg is a reputable fund jurisdiction with established legal frameworks for funds.
The VC Fund or vehicle could be distributed on the basis of the AIFMD passport, if the fund has appointed an AIFM. There is also the possibility to benefit from a passport and label for VC funds in the EU, named EuVECA. Provided the fund fulfills certain investment requirements, he can obtain this EU label and be passported on this basis within the EU.
More advantageous tax treatment, with the choice of tax treatment according to the choice of investment vehicle:
(i.)VC funds can be fully taxable and have access to Luxembourg’s double tax treaties network,
(ii.)VC funds can be tax exempt, but with very limited access to double tax treaties,
(iii.)VC 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 VC funds and vehicles exist in Luxembourg?
Luxembourg offers a range of solutions for the venture capital sector, ranging from supervised to non-supervised.
1.SIF (Specialised Investment Fund) is a flexible VC 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.SICAR (Investment Company in Risk Capital) is also a supervised VC fund. The SICAR must invest in risk-bearing assets, which is typically the case in VC investments. The SICAR is:
(i.)not subject to any diversification rules,
(ii.)restricted to well-informed and professional investors,
(iii.)may also qualify for the AIFMD passport, provided the conditions are met,
(iv.)interesting fiscal regime and double tax treaty access.
3.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 SIF or SICAR, if required. The RAIF is:
(i.)structurally similar to the SIF or SICAR 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.
4.Limited Partnership (CLP/SLP) is a highly flexible fund vehicle that has 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.
5.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.
How long does it take to set up a VC fund in Luxembourg?
The time to set-up depends on whether the VC 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.
How much does it cost to establish a VC 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 fund which is not supervised, is less costly than a supervised fund targeted for retail clients.