RAIF: bringing speed and flexibility to the Luxembourg funds toolkit
While Luxembourg is small in size, the Grand Duchy punches well above its weight when it comes to domiciling global funds. The latest figures from the European Fund and Asset Management Association (EFAMA), which assessed the position of 46 countries during the third quarter of 2017, showed that almost one in ten of all global funds were domiciled in Luxembourg, as the leading European centre, while other European countries ranked in the top ten were Ireland (5.3%), Germany (4.6%), France (4.5%) and the UK (3.7%).
In view of the very competitive landscape for funds, leading fund domiciles are always on the lookout for ways to reinforce their positions. The creation of a new instrument for fund structuring in Luxembourg, called the Reserved Alternative Investment Fund (RAIF), looks set to strengthen the jurisdiction’s credentials by widening the range of investment vehicles on offer. Since the regime was launched just over a year ago, a total of 217 RAIFs have been launched in Luxembourg, and there has been an acceleration in launches recently, with around 20 new funds being launched each month, which suggests increasing momentum and demand.
The Reserved Alternative Investment Fund is an alternative investment fund which enables the implementation of non-UCITS investment strategies across any asset class, and it is already proving to be a very interesting option for hedge funds, private equity, real estate, debt and infrastructure funds, amongst others. The RAIF can be set up in a variety of forms, open-ended or closed-ended, leveraged or unleveraged, and structured as a single fund or multi-cell, umbrella structure where each cell or subfund can correspond to a separate part of the assets and liabilities of the RAIF.
The RAIF can be marketed to ‘well informed investors’ including institutional investors, professional investors and those investing a minimum of €125,000, or to investors who have a recommendation from a credit institution, an investment firm or a management company. It is subject to minimum requirements on risk-spreading, which mean that a RAIF may not invest more than 30% of its assets or commitments in securities of the same type issued by the same issuer, unless the RAIF chooses to invest in qualifying risk capital investments, in which case there is no requirement to spread investment risk.
So what does the RAIF have to offer investors which is so appealing? The key differentiator as compared to traditional Luxembourg structures is that there is no requirement for product regulatory approval from the regulatory body CSSF, nor for ongoing prudential supervision. Instead, RAIFs rely on the regulation of the Alternative Investment Fund Manager (AIFM), who must be approved by the CSSF. This means that the RAIF is able to offer greater speed and flexibility as compared to traditional instruments, with minimal formalities, which are limited to certification by a notary within five days of formation and registration with the Luxembourg Trade and Companies Register. The RAIF also benefits from the AIFMD (Alternative Investment Fund Managers Directive) passport, which allows marketing across Europe.
The RAIF is a new innovation in the funds toolkit which is already proving its worth.
There is also flexibility from a legal perspective, since RAIFs can be set up under a contractual ‘common fund’ form, a corporate legal form, a corporate partnership limited by shares, or a partnership form, either with variable capital (SICAV) or fixed capital (SICAF). Some industry experts have highlighted that the Special Limited Partnership (SCSp), similar to the Anglo-Saxon LP, is an ideal fit with the RAIF which allows for maximum flexibility in its organisation, and it is considered that the two go hand in hand in terms of legal structure and fund structure.
Concerning tax, there is an advantageous regime in place with RAIF only being subject, at the fund level, to an annual subscription tax levied at a rate of 0.01% of its net assets as calculated on the last day of each quarter. The RAIF is not subject to corporate income tax, municipal business tax or net wealth tax, and furthermore the distribution of profits does not give rise to a withholding tax, while risk capital RAIFs can opt for different treatment. RAIFs also benefit from the VAT exemption on AIF management services. RAIFs set up as
Special Limited Partnerships also allow investors to claim the benefits of tax treaties as they are considered fully tax transparent. While the RAIF represents a ‘lighter touch’ approach, there are still plenty of checks in the system, and the auditor, depositary and administrator must all be Luxembourg-based.
For example, the depositary will need to conduct its own due diligence on the initiator of the fund, the AIFM and all of the involved parties in the on-boarding process. It has been noted, however, that real time savings in terms of due diligence can be made in the case where a fund initiator launches a series of RAIFs at the same time. Another plus point is that conversions from one regime to another are possible. For example, a fund could initially be set up as a RAIF in order to ensure a quick first closing with investors who do not require a product which is subject to direct supervision – which could be done within 3 – 5 weeks – and this could then be converted to a traditional vehicle like SIF later on, once the approval of the regulatory body CSSF has been obtained, so the fund could be opened to other investors that seek to invest in a directly supervised product. When it comes to closing a traditional fund, a fund can be converted from a traditional fund to a RAIF in order to close a fund more quickly, as there is then no need to notify the CSSF or wait for its approval.
The RAIF structure will not be suitable for all investors, since pension funds and institutional private banks will not normally be authorised to invest in unregulated structures, and some investors may prefer the comfort of directly supervised products, and the RAIF may carry higher costs.
However, for those investors seeking a rapid time-to-market, marketability in Europe, AIFM protection and contractual freedom, the RAIF is a new innovation in the funds toolkit which is already proving its worth at international level, with a quarter of RAIFs already being managed outside of Luxembourg, confirming that Luxembourg will continue to play an important role in the global funds industry.
Group Sales and Marketing Director,