What is SRI Investing?
SRI funds are investment funds that have integrated environmental, social and governance factors (ESG) into their investment process. These funds are considered to invest into businesses or activities which are deemed to be environmentally friendly and/or have a positive impact for society.
The term is broad, but this asset class has emerged in the last ten years as a new and growing asset class. Investments in these sectors can take different forms and can be an active investment in a sector which is deemed environmentally friendly, such as solar or wind energy, an investment into a start-up with an ESG agenda or the investment in a blue-chip company fulfilling ESG criteria.
It can also include funds having a strategy for human rights protection or an anti-corruption policy.
Why set up an SRI fund in Luxembourg?
Luxembourg has been a leader in for SRI funds and Luxembourg has a strategy for growing the ESG sector, which is focusing on these main areas:
1.Leveraging on Luxembourg’s expertise in asset management, alternative funds and sustainable finance:
Luxembourg is a globally leading domicile for investment 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 has a total market share of 31% of responsible investment funds in Europe, over 60% of European impact funds, over 61% of global microfinance assets, as well as being amongst the top 4 domiciles for Islamic funds.
2. Introduction of labels for ESG funds, green funds or microfinance funds:
The Luxembourg Government, the Luxembourg Stock Exchange and the European Investment Bank have established LuxFlag, an independent association for the labeling of ESG funds. The aim of LuxFlag is to promote the raising of capital and to reassure investors that the applicant invests in the ESG sector.
3. Supporting innovation:
Luxembourg has established accelerators to promote fundraising and the launch of innovative initiatives, such as the Luxembourg Green Exchange, the world’s first platform for green securities, which now lists 50% of the world’s green bonds.
4. ESG legal framework:
Luxembourg is offering a legal framework that is regularly updated to global ESG standards and provides the ESG sector with flexible investment structuring solutions.
5. EU passport:
The SRI fund can be distributed on the basis of an EU passport. There are different possible options for EU passport, including funds established as a European Social Entrepreneurship Funds (EuSEF). The EuSEF is an EU-wide label of funds that have a specific investment policy and that benefit from the EuSEF label and the EuSEF passport.
Which funds are the most popular for SRI funds?
There are different investment fund types for SRI funds in Luxembourg. The most popular fund types are the following:
1.RAIF (Reserved Alternative Investment Fund):
The RAIF 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. The RAIF allows for an umbrella fund with multiple sub-funds, thus allowing the investors to diversify their portfolio and invest into different assets. The RAIF is a lighter regulated fund and very popular, but certain regulated service providers, such as the AIFM and the Depository are mandatory.
2. Special Limited Partnership (SLP or SCSp) and Common Limited Partnership (CLP or SCS):
The SLP and the CLP 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.
The main advantages of the SLP and the CLP are:
1.Speed: They can be quickly established by private deed, as there is no requirement to form the SLP or the CLP in front of a notary. The funds can therefore be formed through the approval and signing of the LPA by all LPs and the GP.
2. Confidential: There is no obligation to publish the LPA. Only certain information must be published in the public register, such as the identity of the GP, the identity of the managers and the corporate purpose of the fund. The identity of the LPs can remain confidential.
3. Contractual freedom: The functioning of the fund is governed by the terms agreed in the LPA. Matters relating to the issuance of the partnership interests, the distribution of profits or different share classes and voting rights can be freely agreed on without the need to disclose this information.
4. No Minimum Capital Requirements: The fund is not subject to any capital contribution requirements, making the fund a cost-efficient structure to establish. Contributions of the partners can be in cash or in kind.
5. Tax Transparency: The fund is tax transparent to Luxembourg income tax and net wealth tax.
1. Securitisation Vehicles (SV):
The SVs are investment vehicles, that can be set up as an alternative investment vehicle to the fund vehicles mentioned above. The SV is flexible in nature and can either be set up as a corporate entity or a securitization fund. The SV 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 art portfolio. In principle the SV is not supervised, provided that the SV does not issue on a continuous basis to the public.
The main advantages of the SV is that an income stream can be securitized, thus creating transferable securities that can be sold to investors and allowing the creation of liquidity, removing debts and receive funding from investors.
1. Liquidity: assets that are not sellable, but generate a regular income stream can be structured in a SV and provide liquidity.
2. Access to capital markets: An SV may also provide the originator with an efficient way to access capital markets. The bonds issued by the SV could be listed on a stock exchange.
What are the main features of the SLP, the RAIF and the SV?
Reserved Alternative Investment Fund – RAIF:
- Establishment within 4-6 weeks.
- No regulatory approval required.
- Unsupervised fund (indirect supervision through the appointment of the AIFM).
- EU passporting rights through AIFM.
- Can invest in any asset type.
Securitisation Vehicle – SV:
- Minimum share capital of EUR 12.000 or EUR 30.000.
- Establishment within 2-3 weeks.
- No regulatory approval.
- Tax neutral.
- High flexibility.
- Ability to create compartments (subfunds) for different art pieces or art portfolios.
Special Limited Partnership – SLP:
- No minimum capital required.
- Establishment within 2-3 weeks.
- No regulatory approval for the launch required.
- No Custodian required.
- Tax transparent.
- Can invest in any asset type.
- High contractual flexibility.
How long does it take to set up in Luxembourg?
The SV and the SLP are unregulated investment vehicles without the need for any regulatory approvals, provided it does not engage in any activities that require a commercial license or financial supervision.
Once a bank account is available to deposit the share capital, the SV can be incorporated. The SLP requires the incorporation of its GP, if not already existent. The incorporation can thus be finalized within 2-3 days. Upon incorporation before a notary the entity has legal personality and can enter immediately into legally binding agreements.
The RAIF is an unsupervised fund and thus be incorporated without prior approval, the process is however longer as the service providers involved needed to review the fund documents.
Reach out to us, to learn more about using the SLP, the SV and the RAIF for art investment funds.