Raising capital from investors is already a difficult undertaking, but when deciding to choose the right fund vehicle to raise capital it often becomes complex, as the promoters have to consider many legal and tax implications, as well as choosing the right jurisdiction.
In contrast to other financial centers, Luxembourg offers the full range of solutions to offer to investment managers, companies, originators, or private individuals.
Which vehicle to choose to raise capital?
Fund promoters, companies or private individuals have the choice between unregulated or regulated private equity funds and vehicles: Depending on investor demands, they can either opt for:
- 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),
- an issuer to issue securities and finance the activities of a corporate
- a fund that is supervised by the CSSF, or
- a fund that is not supervised but has appointed a supervised Alternative Investment Fund Manager (AIFM).
Which unregulated fund can be used to raise capital?
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 private equity transactions around the world and is used by multinational corporations, sovereign wealth funds, investment funds, as well as family offices.
Special Limited Partnership (SLP) and the Common Limited Partnership (CLP) are highly flexible fund vehicles that have been very successful in the last years. The benefits of the limited partnerships (CLP/SLP) are:
- 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.
RAIF: (Reserved Alternative Investment Fund) has been a highly successful fund type since its introduction in 2016. The RAIF allows for a significantly reduced time to market, with the option to transform later to a SIF or SICAR.
1. The RAIF is structurally similar to the SIF or SICAR regime but is not subject to a direct supervision by the CSSF.
2. 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. Establishment within 4-6 weeks.
4. No regulatory approval required.
5. Unsupervised fund.
6. Can invest in any asset type.
Which Issuer vehicle is typically established in Luxembourg?
Promoters regularly choose the Luxembourg securitisation vehicle (SV), when launching a new issuance of securities, such as bonds, notes, sukuk or more recently security tokens. The SV is particularly useful to provide corporate with funding, when funding through banks is difficult.
Luxembourg has since 2004 the Securitisation Law in place, which is a flexible and innovate legal framework that is specifically designed for cross-border transactions.
This framework remains highly popular and has been used in some of the largest Pan-European securitisation transactions. As of 2020 there were:
- more than 1,319 securitisation vehicles with,
- more than 6,000 compartments existing in Luxembourg,
- representing a market share of 30% of all European SVs.
The main benefits of the SV are:
1.Liquidity: assets that are not sellable but generate a regular income stream can be structured in an SV and provide the originator with liquidity.
2. Access to capital markets: A securitisation may provide an originator with an efficient way to access capital markets. If for example a corporate has a BBB-rating but is able to securitise assets that may obtain a AAA-rating, then he may be able to access funds at a lower cost, despite having the cost of setting up the SV.
3. Diversify funding sources: By receiving funding from investors, a corporate is able diversify funding, in particular in times in which funding it is difficult to obtain bank financing.
4. Variety of choice: Promoter can choose between various legal forms, as well as corporate or fund type and non-supervised or supervised SVs.
5. Tax treatment: SVs are tax neutral vehicles
6. Investor protection: through the statutory recognition of limited recourse and bankruptcy remoteness.
7. Segregation of assets: the creation of compartments is allowed, and the segregation of assets and ring-fencing is explicitly recognized by the Securitisation Law
8. Limited recourse: The Securitisation Law recognizes the enforceability of limited recourse, subordination, no seizure of assets and no petition provisions
On the investor-side, investing into an SV may have the following benefits:
(i.)Higher return on quality assets: Investors may be able to invest into assets that are of higher quality than the corporate and generate better, more stable return, only depending on the performance of these assets and not depending on the overall performance of the corporate.
(ii.)Combination of yields and risks: Securities issued by an SV usually offer different forms of securities, paying different yields, depending on the risk exposure or maturity. The investor thus has the choice according to his risk appetite.
Which supervised funds to raise capital?
The most commonly offered solutions are the following:
- UCITS: (Undertaking for Collective Investment in Transferable Securities) is the leading globally distributed investment fund product.
- UCITS is a highly regulated retail fund, supervised by the CSSF.
- It is subject to strict rules in investment and diversification and may only invest in listed securities, bonds, index components and assimilated assets.
- UCITS funds benefit from a European passport, meaning that once authorised by the CSSF in Luxembourg, they can be distributed to the public in all other EU Member States, on the basis of a formalized procedure.
- Due to its global reputation as a European retail fund, many countries around the world recognize the UCITS standard, making this the globally leading fund type distributed around the world.
- SIF: (Specialised Investment Fund) is a highly flexible fund.
- The SIF is reserved for well-informed and professional investors.
- The fund can either hold participations or hold assets directly.
- The SIF requires a low level of diversification of around 30% per asset.
- The fund may also qualify for the AIFMD passport, provided the conditions are met.
How much does it cost to establish?
The establishment and running cost greatly vary between the solution chosen and the service providers. We can guide you to decide on the right structure and find the right securitisation platform for your project.
Reach out to us, to learn more about setting up in Luxembourg.