Alan Dundon and Gautier Despret of Alter Domus give their opinion on Luxembourg’s newest innovative investment vehicle.
There has been much talk and excitement in the Luxembourg marketplace in recent months with the anticipated launch of the Reserved Alternative Investment Fund (Raif), managed by an authorised alternative investment fund manager (AIFM), moving quickly from idea to reality.
This culminated on November 27, 2015, with the adoption of the Raif Bill of Law by the Luxembourg government, and the expected passing of the Raif law itself by the second quarter of 2016.
The excitement centres around what local practitioners, and indeed the wider industry, see as the ideal product to leverage the advantages of the Alternative Investment Funds Managers Directive (AIFMD), bringing to market a level of efficiency and speed not dreamed of prior to implementation of the directive.
From wishful thinking to concrete reality, the Raif is viewed by industry practitioners as a hugely significant addition to the product armoury of the Luxembourg marketplace, and a key differentiator to its traditional competitors.
So what makes it so special? Essentially, the legal framework of the Luxembourg Raif has the same characteristics and flexibility as a Specialised Investment Fund (Sif) but with a long-awaited major difference: the Raif will not in itself be subject to the supervision of the Luxembourg Supervisory Authority, the CSSF.
Not being subject to the prudential supervision of the CSSF means that the Raif requires neither prior authorisation for its creation and launch nor the ongoing approvals to key documents throughout its life-cycle. This will undoubtedly attract the interest of many players, already set up as AIFMs, looking for the flexibility and speed to market which the traditional regulated fund structures are today unable to provide. The flexibility of the AIFM not necessarily needing to be located in Luxembourg will make it even more attractive to many.
WHAT WILL INVESTORS THINK?
Sceptics may take the view that the hype around this investment vehicle might not last long. And the question begs to be asked – “Why introduce an investment vehicle without prudential supervision from the local regulator? How could this be good for the industry?” Indeed, unlike the Sif and Sicar, the Raif will not benefit from investor protection afforded by the CSSF. In our view, however, this will not unduly concern investors, the Raif being an alternative investment fund, or Aif, managed by an authorised AIFM – itself supervised by its EU local regulator – whose responsibility is, among others, to ensure that the Aif will comply with the directive requirements.
The main idea behind the Raif is thus to avoid a double layer of supervision: one at the manager level and one at the product or Aif level. Additionally, in order to comply with AIFMD, the Raif will be subject to a Luxembourg-based depositary and central administration requirement, and will need to appoint an auditor, all providing comfort to investors, as indeed envisaged by the directive.
From a practical perspective, the Raif, whilst not directly regulated, is set up in the form of an investment fund. Unlike the traditional unregulated product we refer to later in this article, the Raif will be serviced in the same manner as its regulated counterparts, with regular net asset value calculations, transfer agency services and depositary. In particular, reporting common to the regulated fund world, including detailed investor reports, will be fully available to Raif managers and investors. We therefore expect that ongoing administrative and depositary running costs for a Raif will be similar to those of its regulated counterparts.
It is expected that the Raif will have the same features as a Sif managed by an authorised AIFM with no restrictions in terms of eligible assets, structuring flexibility and rapidity combined with noticeable investor protection. It will be open for organisation as a company, partnership or contractual form, subject to a 0.01% p.a. subscription tax (waived under specific conditions), and will have the option of multiple compartments with multiclass shares and investments kept at fair value unless otherwise stated in its articles of association.
Although the Raif is an attractive option for the alternative investments industry, the risk of it overtaking or substituting current Luxembourg structures over time is unlikely. Certain promoters will, for example, continue to favour establishing regulated product, often to respond to investor preferences. It does however represent an additional component to an integrated offer, and indeed a differentiating advantage over other jurisdictions, helping Luxembourg in its drive to offer a one-stop shop to the increasing and varying needs of the alternative investment industry.
WHERE ARE WE TODAY?
It is useful for us to look at what already exists, and will continue to be used, in the industry. In the Luxembourg alternative investments’ domain, two structuring options exist:
• Soparfi: The Soparfi, or Société de Participation Financière, is the most common European alternative investment vehicle used for cross-border investment. It can be organised in various forms (SàRL, SA, SCA and SCS), with access to 75 double tax treaties currently in force in Luxembourg (19 pending) and is not subject to the prudential supervision of the CSSF.
• Limited partnerships: Modernised by the implementation of AIFMD, limited partnerships remain an attractive structure to investors, and indeed have grown significantly in number over the past two years, with around 900 established to date. They are established by contract (LP agreement) for a limited or an unlimited duration. Composed of at least one general partner (GP) and one limited partner (LP), Luxembourg limited partnerships are tax-transparent. In Luxembourg, limited partnerships may be incorporated as a common limited partnership (CLP – Société en Commandite Simple) and partnership limited by shares (PLS – Société en Commandite par Actions), both having legal personality or special limited partnership without legal personality (SLP – Société en Commandite Spéciale). The limited partnership is not subject to the prudential supervision of the CSSF by nature but can opt in by applying the Sif/Sicar regime.
• Sif: The Sif has become one of Europe’s most recognisable alternative investment fund regimes. It can be organised as a company (i.e. SàRL, SA and SCA), a partnership (CLP and SLP) or in a contractual form (Fonds Commun de Placement – FCP) as a mono or multi-compartment vehicle. It is subject to the prior approval and ongoing supervision of the CSSF, its financial statements must be approved by an independent auditor (réviseur d’entreprises agréé) and its financial fixed assets must be recorded at fair value unless otherwise stated in its articles of association.
• Sicar: Launched in 2004, the Sicar is a dedicated structure designed for the private equity and venture capital industry. The Sicar is reserved for qualified investors investing in risk capital only. The Sicar can be organised under company (i.e. SàRL, SA and SCA) or partnership forms (CLP and SLP) as a mono or multi-compartment vehicle. It is subject to the prior approval and ongoing supervision of the CSSF, its financial statements must be approved by an independent auditor (réviseur d’entreprises agréé) and its financial fixed assets must be recorded at fair value.
Undoubtedly the Luxembourg marketplace will continue to fuel the global alternative investment industry with attractive and innovative products. The Raif will certainly play its part in promoting Luxembourg’s innovative character, and we expect further innovation in the coming years, particularly as AIFM market practices continue to develop.
Alan Dundon is chief marketing officer and Gautier Despret is fund services senior manager at Alter Domus