Strategically located in the heart of Europe, Luxembourg’s AAA-rated economy and social and political stability are just a few reasons it attracts investors and fund managers from all over the globe. Officially known as the Grand Duchy of Luxembourg, it’s the largest fund center in the world after the U.S. and the largest in Europe with over 1 trillion euros in AUM in alternative investment funds alone[1]. With its central, multilingual, international environment the Duchy has grown popular with fund managers for its business-friendly operational, legal, and regulatory considerations.
A founding member of the EU Member State, Luxembourg has sound public finances and fiscal policy and a robust, diversified economy. Luxembourg’s central location and high standard of living attract a talented pool of professionals from around Europe in a variety of industries, and particularly in the investment fund industry. The financial services workforce employs 51,000 people, with more than a third in the fund industry[2].
Luxembourg is especially attractive to alternative investment funds (AIFs). Both its legislator and its supervisory authority, the Commission de Surveillance et du Secteur Financier (CSSF), have extensive expertise in AIFs, providing a competitive advantage as a global platform.
Two of the most prominent fund structures in the domicile are Reserved Alternative Investment Fund (RAIF) and Special Limited Partnership (SLP). Both allow for quick time to market because the CSSF doesn’t require review and approval of documentation upfront.
Features and Considerations of the RAIF
The RAIF was developed by Luxembourg authorities in 2016 to provide a type of alternative fund that combines some of the legal and tax features of existing regimes in an unregulated fund. As noted above, it eliminates the need for prior authorisation and oversight by the CSSF and allows for utilization of an authorized Alternative Investment Fund Manager (AIFM) instead.
If the authorized AIFM is domiciled in the EU, the RAIF can be marketed via European passport, providing a broad base of “well-informed” investors. “Well-informed” investors are defined as any institutional investor, professional investor, and investors who have confirmed in writing that they adhere to the “well-informed” investor status, and who either invest a minimum of 125,000 euros in the RAIF or have been assessed by a credit institution to certify the investor’s expertise.
A RAIF can invest in any kind of asset or investment strategy. However, there are risk spreading requirements. No more than 30% of a RAIF’s assets or commitments may be invested in securities of the same type issued by the same issuer.
Importantly, a RAIF may be set up as an umbrella structure providing the flexibility to launch sub-funds as needed. The features of each sub-fund must be detailed in the RAIF’s issuing document, but each sub-fund can have distinct features. Each sub-fund can have its own investment policy, have a different investment manager or adviser, its own fee structure, and its own liquidation policies.
A RAIF can be set up as a Special Limited Partnership (SLP) or a Société d’investissement à Capital Variable (SICAV). However, private capital managers tend to set up funds as SLPs. RAIFs set up as limited partnerships (LPs), like similar structures in other fund domiciles, have more structuring flexibility including defining voting rights for partners in the limited partner agreement (LPA) and defining the shares of profits and losses to partners in the LP.
Features and Considerations of an SLP
The SLP is also known as société en commandite spécialé or SCSp. As with U.S./U.K. partnerships, the limited partner’s liability is limited to their contributed participation interest while the general partner is liable for commitments of the company on their private assets and property. Since its introduction in 2013 it has grown to become one of the leading forms for fund structuring in Luxembourg and across Europe.
Like U.S. LPs or Irish LPs, the SLP provides extensive contractual freedom and flexibility—a limited number of mandatory rules apply which allows fund initiators to determine most of the content of the agreement. Particularly attractive to investment managers is that they can replicate provisions of a predecessor or parallel non-Luxembourg fund.
The SLP is deemed tax transparent under Luxembourg tax law, meaning the partnership will never become taxable itself–just the partners of the partnership may be taxed. The tax exemption of the partner’s incomes applies only if the general partner holds less than 5% of the partnership interests and is a Luxembourg capital company.
It is far more flexible in terms of setting out partners’ rights and obligations, governance model, and other key structuring aspects such as the distribution waterfall, redemption rights, the procedure and conditions of liquidation, and quorum and majority rules as well as the voting thresholds.
How CSC helps
CSC helps managers of the most complex funds across the globe meet their regulatory and investor requirements. We have relationships with more than 60% of the top 100 global alternative asset managers, providing best-in-class solutions to clients of every size across fund types, jurisdictions, and corporate and partnership structures.
Our fund administration and depositary services together with our special purpose vehicle and agency and trustee services teams provide a tailored solution that fits into your existing operating model and infrastructure. With a deep understanding of the alternative funds industry, our team streamlines the process and makes it a seamless experience for asset managers with an unflinching focus on providing a consistent quality of service.
At CSC we support funds in all major financial centers—including, but not limited to, Delaware, Ireland, Luxembourg, The Netherlands, U.K., Singapore, Hong Kong, Cayman Islands, Bermuda and BVI.
[1] ALFI estimate Q1 2022
[2] https://www.luxembourgforfinance.com/en/publication-article/nurturing-the-human-dimension/