In the past two decades, Luxembourg has experienced continued growth in the alternative investment fund (AIF) space. This has accelerated year-on-year since the introduction of the alternative investment fund managers directive (AIFMD) in July 2013. This growth was further facilitated by the development and launch of a new type of investment vehicle, the reserved alternative investment fund (RAIF).
The RAIF regime, governed by the law of 23 July 2016 on reserved alternative investment funds (the RAIF Law), came into effect on 1 August 2016 and affords asset managers the well-established benefits of Luxembourg investment funds, as well as fully complying with the AIFMD, without, however, being directly regulated and supervised by Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF).
Since its introduction, the RAIF has proved an extremely popular investment vehicle and has established itself as a preferred investment fund form across all alternative investment strategies and asset classes. As of 15 July 2019, 707 RAIFs have been registered in Luxembourg. This averages approximately 20 RAIFs per month since 2016.
The implementation of the AIFMD in Luxembourg resulted in a double layer of regulation in respect of AIFs with supervision and regulation at the manager level (alternative investment fund manager [AIFM]) and regulation at the fund level. A double layer of regulation is not required or foreseen by the AIFMD.
In order to meet the needs of the fund industry while at the same time ensuring full compliance with the AIFMD, the RAIF Law was adopted to provide a solution to asset managers seeking to avoid this double layer of regulation, and to ensure greater efficiency in terms of establishment and operating/corporate rules.
The RAIF regime was inspired to a large extent by the regimes applicable to specialized investment funds (SIFs) and investment companies in risk capital (SICARs), and it combines many of the attractive features of both, e.g., the ability to establish a RAIF as a single legal structure with multiple sub-funds. In contrast to SIFs and SICARs, RAIFs are not subject to any direct authorization or supervision by the CSSF. As such, RAIFs offer impressive time-to-market efficiencies.
Versatility is a key characteristic of the RAIF regime, which was designed to allow RAIFs to invest in any type of assets and follow any type of investment strategy.
The RAIF regime is only available to AIFs within the meaning of the Luxembourg AIFM law, and RAIFs must always be managed by an external AIFM that is established in a member state of the European Economic Area (EEA) and authorized under the AIFMD. Although the RAIF will not be authorized or supervised by the CSFF, the AIFM must, nevertheless, ensure that each RAIF managed by it complies with the terms of the AIFMD.
As a Luxembourg AIF managed by an authorized EU AIFM, the RAIF also benefits from the AIFMD marketing passport and, as such, Asian asset managers may market their RAIF in the EEA to professional investors in accordance with the AIFMD.
On 16 July 2019, the RAIF Law was amended in order to:
- Provide that FCP (common fund) RAIFs may be managed by Luxembourg management companies authorized pursuant to chapters 15, 16 and 18 of the law of 17 December 2010 relating to undertakings for collective investment; and
- Permit the conversion of FCP-RAIFs into SICAV (investment company with variable capital) RAIFs. The former is a welcome development for the fund industry and has been welcomed, in particular, by Japanese asset managers.
The many beneficial features of the RAIF regime presents Asian asset managers, and in particular those familiar with the flexibility of offshore structures, with a compelling reason to consider the RAIF as their European product of choice.
For asset managers, choosing the most appropriate investment vehicle and domicile is a key strategic decision. Due to its unparalleled flexibility and versatility, a large and growing number of asset managers who wish to combine some or all of the attractive features of the RAIF, including short (and predictable) time to market, broad contractual freedom in relation to fund terms, a wide variety of structuring options, excellent distribution range using the AIFMD marketing passport and/or national private placement regimes and the various investor protection features implicit under the AIFMD, regard the RAIF as their vehicle of choice.
The RAIF offers Asian asset managers another effective and truly versatile Luxembourg investment vehicle that is a meaningful onshore alternative or compliment to AIFs domiciled in the Cayman Islands, the British Virgin Islands or Delaware.
Johan Terblanche is managing partner of Maples Group’s Luxembourg office, where he is head of the Luxembourg funds & investment management team. Michelle Barry is an associate in the same team
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