Credit funds Insight - issue 7
29 Nov 2016
Reserved Alternative Investment Fund (RAIF)
A new Luxembourg regulated fund with no direct supervision
A new type of investment fund has been launched in Luxembourg, the RAIF, which provides the protections and flexibilities typical of a Luxembourg regulated fund but free of CSSF supervision, representing a new way of bringing funds quickly to market.
What you need to know
- The RAIF is a new type of regulated Luxembourg fund which is not supervised by the CSSF.
- A RAIF may be set up with compartments, with variable capital (e.g. as a SICAV) and/or as a limited partnership.
- Unregulated Luxembourg funds (usually set up as limited partnerships) remain an attractive structuring option for fund promoters.
As with a SIF and a SICAR, the RAIF regime takes the form of a regulatory wrapper around a Luxembourg fund vehicle, which may be a company (typically an SA or an SCA, including an investment company with variable capital or “SICAV”), a limited partnership (an SCS or SCSp), or a contractual arrangement (an FCP).
Comparison with other regulated fund structures in Luxembourg: RAIF vs SIF/SICAR
No direct supervision by the CSSF
A RAIF will qualify as a regulated fund, however, unlike other regulated funds in Luxembourg, RAIFs will not be supervised by the Commission de Surveillance du Secteur Financier (“CSSF”).
This is the key advantage of the RAIF regime compared to the SIF and SICAR. Instead, a RAIF will have its regulatory compliance supervised by its alternative investment fund manager (“AIFM”). All RAIFs will qualify as alternative investment funds (“AIFs”) under the Alternative Investment Fund Managers Directive (“AIFMD”) and will be required to appoint a fully authorised external AIFM, established in Luxembourg or in another EU country (or in a non-EU country if the AIFMD passport is extended to non-EU countries). In common with other Luxembourg AIFs, each RAIF will also need to appoint a Luxembourg domiciled depositary, administrator and auditor.
The role of the CSSF (or another regulator) is restricted to the supervision of the AIFM appointed by the RAIF (i.e. an indirect supervisory role). Accordingly, the CSSF will have no direct involvement with the fund vehicle. This means that, unlike a SIF or a SICAR, the CSSF will not need to approve the constitutional or marketing documents of a RAIF prior to its launch; nor will it need to approve amendments to a RAIF’s constitutional or marketing documents during the life of a RAIF. It will be, principally, the responsibility of the AIFM of the RAIF to ensure the compliance of the RAIF with the AIFMD.
This streamlined regulatory approach will make the RAIF a much quicker and more efficient fund to establish than a SIF or a SICAR and should considerably shorten the time necessary to bring a Luxembourg regulated fund to market. It should also mean the ongoing operation and management of a RAIF is more efficient than that of a SIF or a SICAR.
Just like a SIF or a SICAR, a RAIF may be established as an “umbrella fund” comprising a number of separate “compartments” with assets and liabilities that are legally segregated from each other under Luxembourg law. Again, like a SIF or a SICAR structured as an umbrella fund, a RAIF may create new compartments for new funds or mandates from time to time. Many managers are attracted to the efficiency of having as many of their funds and segregated mandates as possible consolidated in one platform and the ease and efficiency with which new compartments may be established in a RAIF makes this more achievable with a RAIF than with a SIF or a SICAR.
A RAIF will need to comply with certain risk diversification rules. These diversification rules are the same as for a SIF or a SICAR. SIF-like RAIFs, which are allowed to invest in any type of assets, may not generally invest more than 30 per cent of their net assets or commitments in one asset. SICAR-like RAIFs, which voluntarily decide to only invest in what is defined as “risk capital” (meaning broadly investments in view of an asset’s launch, development or listing) are not subject to any diversification requirements and may hold just one asset. The diversification rules will apply on a compartment-by-compartment basis for RAIFs established as umbrella funds.
Provided the RAIF satisfies the relevant risk diversification requirements it will enjoy the same tax treatment as either a SIF or a SICAR depending on the assets it holds. For example, generally a SIF-like RAIF will be tax exempt, save for an annual subscription tax of 0.01 per cent of its net assets (a “taxe d’abonnement”). Subject to that, a RAIF which is structured as a limited partnership (an SCS or an SCSp) should be treated as tax transparent for Luxembourg tax purposes. In addition, the Luxembourg VAT exemption on management services will apply in relation to a RAIF in the same way as it applies to SIFs and SICARs.
Comparison with unregulated Luxembourg fund structures
While Luxembourg’s funds industry historically focused on the regulated and supervised fund vehicles (such as SIFs), since the implementation of the AIFMD and the introduction of the modernised limited partnership regime into Luxembourg law in 2013, the use of limited partnerships (a common limited partnership or “SCS”, with legal personality and a special limited partnership or “SCSp”, without legal personality) as unregulated AIFs has become increasingly popular among the promoters targeting professional investors.
The unregulated AIFs remain a structuring option for promoters. In addition, if desired, unregulated AIFs with a fully authorised external AIFM may upscale to a RAIF at any time during their lives. Below we compare and contrast the two regimes.
A RAIF must appoint an external authorised AIFM and will therefore be fully subject to the AIFMD, hence always benefiting from the EU marketing passport.
Unregulated AIFs may also appoint an authorised AIFM and benefit from the EU marketing passport. However, they are not obliged to do so and may still benefit from the sub-threshold AIFMD regime, be internally managed or appoint a registered AIFM (as opposed to an authorised AIFM).
Regulation by law
Unregulated AIFs are governed by the provisions applicable to the chosen legal form under the Luxembourg 1915 Commercial Companies Law1 and by the AIFMD (full scope or sub-threshold) but otherwise will enjoy full contractual freedom.
RAIFs will be governed by the relevant provisions of the 1915 Commercial Companies Law, the AIFMD (full scope) and their constitutional documents but will also have an additional layer of regulation since they must comply with the RAIF law. The RAIF law imposes certain additional restrictions on the AIF but also grants certain flexibilities which are not available to unregulated AIFs (such as compartments or variable capital).
Unregulated AIFs may not be established with legally segregated compartments.
Therefore if a promoter wishes to establish a compartmentalised platform, with, for example different investment strategies or portfolio managers on each compartment, then the platform must be established as a regulated AIF and the RAIF is the most simple straight-forward regulated fund to establish and operate that is in Luxembourg armoury. An umbrella can provide certain economies of scale for promoters.
Variable capital (SICAV)
Only RAIFs can be set up with variable capital and use the label “SICAV” (a “société d’investissement à capital variable” or an investment company with variable capital). A SICAV may issue and redeem its shares without limitation. The shares of a SICAV are issued with no par value and their value (and the SICAV’s corporate capital) automatically fluctuates with the value of the SICAV.
An unregulated AIF structured as a limited partnership (as opposed to a corporate) may also achieve similar results through operation of the partnership agreement.
RAIFs (and each of their compartments) must, by law, follow the risk diversification principle described above (unless they invest in “risk capital”, i.e. are SICAR-like), save that it is possible to provide for a ramp up period. It is expected that RAIFs will be required to comply with the risk diversification requirements appropriate to SIFs or SICARs depending on the type of assets in which the RAIF invests.
Unregulated AIFs are under no legal obligation to comply with any risk diversification rules save for those set out in their fund documentation.
A RAIF must prepare an offering document which must include certain information prescribed by the RAIF law and the AIFMD. In the case of a multi-compartment RAIF, offering documents may be prepared per compartment or, alternatively, all compartments may be covered by one umbrella offering document.
An unregulated AIF is subject only to the AIFMD disclosure requirements which are listed in the AIFMD.
A RAIF may adopt a legal form of a fonds commun de placement(an “FCP”) which was widely used in the past for investors seeking a tax transparent vehicle and which is still a vehicle of choice for certain investor jurisdictions (e.g. Japan), although it is increasingly being replaced by limited partnerships.
Unregulated AIFs may not take the form of an FCP.
RAIFs must achieve a minimum capital within a certain timeframe and the RAIF may be subject to winding up if its capital falls beneath its minimum capital.
Unregulated AIFs are required only to comply with the rules applicable to the legal form they have adopted as per the 1915 Commercial Companies Act, e.g. limited partnerships are not subject to any minimum capital requirements.
RAIFs (unless they invest exclusively in “risk capital”, i.e. are SICAR-like) will be subject to annual subscription tax of 0.01 per cent of their net asset values.
Unregulated AIFs are not subject to the subscription tax.
What will RAIFs mean for managers?
The RAIF is a credible and attractive new structuring option to add to the existing options available to managers and investors in Luxembourg. As far as Luxembourg regulated funds are concerned, we believe that the more user-friendly RAIF will replace the SIF and the SICAR regimes and become the go-to vehicle for managers which are structuring their funds to appeal to investors which require (or prefer) regulated funds (e.g. certain European insurance companies and pension funds) and for managers which have the aim of consolidating their funds and mandates within different compartments of the same umbrella fund vehicle.
Notwithstanding the introduction of the RAIF, unregulated AIFs (especially in the form of limited partnerships) remain an attractive structuring option and we anticipate that they will continue to be used widely by promoters targeting investors who do not require a regulated fund vehicle as well as by promoters raising smaller funds who may wish to use the sub-threshold AIFMD regime.
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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.