Luxembourg launches Reserved Alternative Investment Funds

Alice Tchernookova
25 October 2016

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Luxembourg’s parliament recently passed a law that paves the way for a new type of fund within the Grand Duchy. Alice Tchernookova examines the implications

A new fund structure has been approved in Luxembourg, shortly following the amendment of Luxembourg's company law – on which unquote" reported in August – that made the société à responsabilité limitées (SARL) structure more flexible and easier to use for joint ventures and private equity investors.

The new fund type, Reserved Alternative Investment Fund (RAIF), significantly widens options for private equity, real estate and hedge fund managers. They are described as tax-neutral-vehicles benefiting from regulations related to other fund types, and were designed to allow fund managers to accommodate various investments and/or investors' tax needs or constraints.

More specifically, RAIFs provide the existing benefits associated with current private equity fund structures in Luxembourg – Specialised Investment Fund (SIF) and Investment Company in Risk Capital (SICAR) – while exempting applicants from requiring product approval by regulatory body CSSF in addition to managerial approval. As a result, RAIFs bring accelerated and privileged go-to-market capabilities, comparable with those of offshore funds.

RAIFs have already proven successful. It has only been three months since launch and investors have been very responsive" – Nathalie Dogniez, PwC

By virtue of the fact that RAIFs are managed by an authorised alternative investment fund manager (AIFM), they still benefit from the EU marketing passport granted to the fund manager, while being indirectly subject to AIFMD regulation via the AIFM.

Nathalie Dogniez, partner at PwC Luxembourg, says: "A reflection was conducted on whether, now that fund managers are being controlled by the AIFMD, product regulation and approval were needed too. The conclusion was that they weren't necessarily."

According to Dogniez, RAIFs are a response to fund managers' demands. Besides their will to gain accelerated access to the market, fund managers were keen to have a structure that would grant them the same flexibility as SIF funds, while still remaining within the regulatory frame of the AIFMD.

Introduced in 2007, SIFs are characterised by their greater flexibility with regards to investment policy and a more relaxed regulatory regime, compared to other funds for collective investments in Luxembourg.

This is particularly likely to appeal to non-EU-based investors, which might have hitherto been reluctant to use European structures because of the double layer of costs related to both the AIFM and the fund itself.

Flash success
Since the introduction of the new fund type, 13 launches have already been made by international firms. The first of these was global private equity house Quilvest, which set up two funds shortly after launch in July.

"RAIFs have already proven successful," says Dogniez. "It has only been three months since launch and investors have been very responsive. The structure is still being outlined but there is clearly great enthusiasm and interest around it."

Other current RAIF managers include global private equity firm Partners Group, Germany's Golding Capital Partners, Australia's Cromwell Property Group, US-based Dynamic Hedged Equity, and Swiss group Baloise Alternative Investment Strategies.

The European Securities and Markets Authority has also assessed 12 non-EU countries to test their regulatory compliance, with criteria including investor protection and competition. To date, Australia, the US, Bermuda, the Cayman Islands, Hong Kong and Singapore have been given qualified approval, while Canada, Switzerland, Japan, Jersey and Guernsey received positive feedback. The next step will be for the European Commission to give its final assent and grant these countries application rights.

Says Dogniez: "RAIFs are very much in the spirit of the AIFMD and are in line with the idea of making the Grand Duchy an ever-more modern and attractive place for investors to set up their funds.

"We expect they will become increasingly popular, but it doesn't mean preceding structures will be abandoned – SIF and SICAR funds have been around for a while, and some investors might prefer those if they are more inclined to have a regulated fund structure."