GP demand remains strong for Luxembourg's RAIFs

Two years on from its launch, Luxembourg's RAIF structure is proving popular with fund managers. It has been described as a game-changer and a simple evolution of fund structures available in the Grand Duchy. "There was a great deal of excitement around the RAIF, and we saw that excitement reflected in the demand for the structure from managers," says Aztec Group's director Ganash Lokanathen.

Some of the core features of the RAIF are that it provides the existing benefits associated with current private equity fund structures in Luxembourg – specialised investment funds (SIF) and investment company in risk capital (SICAR) – but removes the requirement for product approval by regulatory body Commission de Surveillance du Secteur Financier. "The RAIF offers investors the comfort that the structure is being managed by a regulated authorised alternative investment fund manager," says Lokanathen. "But as the fund vehicle itself is not regulated, the time to market is greatly reduced, which is attractive to managers."

A TMF Group report suggests that the adoption rate of RAIF since launch has been considerable, with 463 such funds as of 10 July 2018, according to the Association of the Luxembourg Fund Industry. However, the body also points out that 608 SIFs were established within the first 20 months of their launch in February 2007.

In terms of costs, other than a 0.01% subscription tax, the vehicles are not subject to corporate, income or other taxes in Luxembourg. However, TMF's report exploring the advantages and setbacks of the RAIF highlights that it entails more expensive legal fees than other vehicles.

New dimension
A significant advantage of the RAIF is that it can operate as a single fund or an umbrella fund with multiple compartments. Says Lokanathen: "This ability to have compartments within a single fund gives the RAIF a competitive edge, as each compartment can have a different investment policy, a different investment manager and different investors." Asked whether expectations were met, he says: "Of course, for some managers and strategies, the SIF or SICAR remain the best options, but the RAIF adds another dimension to Luxembourg's offering."

Ogier partner Bertrand Geradin is pleased with the new structure: "The RAIF has exceeded my expectations and we see most of our clients using it. It is going to prove more popular in the future, as even more types of GP will legally be able to set them up." However, a fund administration professional told Unquote that, while RAIFs make the fund offer in Luxembourg more varied, it has not created a watershed moment.

Several aspects determine whether the RAIF structure is the most suitable option for a new fund. Sources cite the size of the fund in question as being a determining factor. Additionally, while the vehicle provides regulatory flexibility, this can – perhaps counter-intuitively – prove problematic for some investors, especially those that are themselves regulated.

As the fund vehicle itself is not regulated, the time to market is greatly reduced, which is attractive to managers" – Ganash Lokanathen, Aztec Group

The location of the GP itself is another key determining factor. The fund administration professional told Unquote that continental investors are particularly suited to it, while UK GPs tend to register their funds locally. Ipes senior manager Stephane Pesch cited RAIF directly in 2017 when arguing that Luxembourg was home to the most industry-specific legal innovations introduced over the past decade. This, he said, was partly behind German GPs' increased investment in the jurisdiction.

Nevertheless, Ogier's Geradin says: "Some German investors, mainly institutional investors, have not been able to set up an RAIF due to restrictions in their investment guidelines, which only allow them to invest in fully fledged regulated funds. However, they are slowly adapting to the new arrangement and allowing it."

Furthermore, Geradin explains that Italian sponsors have encountered problems due to uncertainties surrounding tax treatments of RAIFs, while Spanish regulation facilitates the setting up of such vehicles. He adds that many of the uncertainties for Italian firms have since been clarified. Geradin says that, in time, European tax authorities will harmonise their approaches and adapt to the RAIF, allowing more GPs to make use of the structure.

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