The Reserved Alternative Investment Fund (RAIF)
By Camille Bourke, Partner, and Jérôme Lasserre, Senior Associate, Arendt & Medernach
Published: 30 June 2016
In the rapidly shifting, legal, regulatory and fiscal environments affecting the international investment funds industry, providing a stable and reliable structuring framework while keeping up with the pace of innovation is a delicate balancing act. In order to achieve this, Luxembourg has readily embraced the paradigm shift towards ever-more harmonised regulation in the alternative investment funds industry, precipitated by the G20 in the aftermath of the 2008 financial crisis. The Luxembourg investment funds model has traditionally been based on sound regulation at product level; prior to the 2013 implementation of the Alternative Investment Fund Managers Directive (AIFMD), all Luxembourg investment funds were subject to the prior authorisation and ongoing supervision of the financial sector supervisory authority (the CSSF). The AIFMD introduced regulatory supervision at the fund manager level, as well as certain product regulation features.
In a first step towards the new European approach for regulation of the alternative investment fund (AIF) sector, the Luxembourg legislator implemented the new manager-level regulation, modernised the outdated and unwieldy Luxembourg common limited partnership – société en commandite simple (SCS or CLP), and made an innovative advance by introducing the special limited partnership – société en commandite spéciale (SCSp or SLP), inspired by the Anglo-Saxon limited partnership model. Two years and almost 1,000 new limited partnership launches later, the Luxembourg unregulated limited partnership has become a new norm for the launch of AIFs. It would however be incorrect to state that the modernised limited partnership regimes have entirely replaced the tried and tested investment company in risk capital (SICAR) introduced in 2004 or the specialised investment fund (SIF) introduced in 2007.
While the launch of new SICARs and SIFs has dwindled in comparison to the launch of CLPs and SLPs, there is no one-size-fits-all solution. The unprecedented rise of the limited partnership did however signal to the Luxembourg legislator that the market participants no longer perceived product supervision as a must have. Instead, markets participants prioritised speed to market and structuring flexibility (in the context of regional, international or global offerings).
Two years into the new investment funds landscape created by the AIFMD, the Luxembourg fund structuring toolbox is ready for one further evolution. Shortly before the end of 2015, a bill of law was tabled to the Luxembourg Conseil d’État with the aim to introduce into Luxembourg law a new investment fund framework combining the strengths of the SIF and SICAR regimes with the flexibility of the modernised limited partnership forms under a new acronym: the RAIF (the “reserved alternative investment fund” regime) or FIAR (fonds d’investissement alternatif réservé). The availability of the RAIF will be reserved for authorised AIFMs, which may be based in Luxembourg, any other EU Member State or, if and when the AIFM management passport is introduced, for third country AIFMs.
The new regime will allow fund initiators and sponsors to set up a new type of Luxembourg AIF, allowing efficient access to the pan-European marketing passport of the AIFMD and which provides for the legal and tax features of the well-known, established SIF or SICAR regimes, but without the regulatory supervision of the CSSF. Rather than being directly supervised by the CSSF, RAIFs will be managed and monitored by fully authorised AIFMs subject to the supervision of their competent national authority.
Legal structuring flexibility
Like the SIF and SICAR, the RAIF may be formed under any of the well-known Luxembourg partnership, corporate and contractual legal forms:
- Partnership forms: common (CLP), special (SLP) or corporate (société en commandite par actions - SCA);
- Corporate forms: public limited company (société anonyme - SA), private limited company (société à responsabilité limitée - S.à.r.l.), cooperative company organised as a public limited company (société coopérative organisée comme une SA - SCOSA);
- Contractual form: common fund (fonds commun de placement - FCP).
A RAIF may adopt a variable (e.g., SICAV) or fixed capital (e.g., SICAF) structure and can operate as either an open-ended or a closed-ended fund. The RAIF may also adopt an umbrella structure with fully segregated compartments provided by law and have any number of classes of securities or interests, each with discrete characteristics.
The establishment of a RAIF will need to be performed before of a Luxembourg notary and recorded in a notarial deed. The notary must ensure that the RAIF is then registered with the Luxembourg Trade and Companies’ Register within 10 days of its formation.
The RAIF regime allows full flexibility with respect to the assets in which a RAIF may invest and the investment policies that a RAIF may implement. If the RAIF elects to avail itself of the legal and tax benefits available to a SIF, it will be subject to a minimum risk-spreading requirement (i.e., with a 30% counterparty exposure limit of its aggregate committed capital or NAV). If, however, the RAIF elects to only invest in qualifying risk capital investments (just like a SICAR does), the risk-spreading requirement will not apply.
The RAIF will be available to “well-informed investors”. This category includes institutional investors, professional investors and investors investing a certain minimum amount (EUR 125,000) further accepting a self-certification as to their financial knowledgeability and experience. Persons involved in the management of a RAIF will a priori be considered to be well-informed investors.
The naming convention of the RAIF stems from the legal requirement that a RAIF must be managed by and is thus reserved for fully authorised AIFMs. Each Luxembourg AIF which elects to be treated as a RAIF must therefore appoint a duly authorised external AIFM, whether established in Luxembourg, in another EU Member State or, upon and subject to the implementation of the third-country management passport, a third-country authorised AIFM.
The assets of a RAIF must be entrusted to a depositary for safe-keeping and its central administration must be located in Luxembourg. The annual accounts of a RAIF must be audited by a Luxembourg approved statutory auditor.
With the introduction of fund manager-level regulation via the AIFMD, the Luxembourg legislator identified an opportunity to revise its long standing strategy: continue the strong and recognised regulatory framework applicable to Luxembourg fund products and the Luxembourg service providers surrounding it but replacing the authorisation and supervision by the CSSF at product level with the authorisation and supervision of the product through the authorised AIFM. The CSSF will therefore not have to authorise the launch of a new RAIF or any changes thereto, thereby reducing the time to market for managers and initiators. The outcome will be absolute planning certainty, which will probably be recognised as the most welcome feature of the new regime.
The RAIF will benefit from all EU AIFM’s passporting advantages and can therefore be marketed to professional investors (as defined in the AIFMD) across Europe through a regulator-to-regulator procedure. The marketing of a RAIF to well-informed investors that do not qualify as professional investors within Europe, or to investors outside of Europe, will be subject to local placement rules.
The RAIF will either be subject to an annual subscription tax (taxe d’abonnement) at a rate of 0.01%, like the SIF, with various exemptions, or be subject to the tax regime applicable to SICARs, i.e., be fully subject to tax save for qualifying risk capital income and gains. The VAT exemption applicable to AIF management services will also apply. The RAIF regime therefore merely continues two well-established tax regimes and does not introduce any new tax features.
Existing SIFs, SICARs and unregulated AIFs may elect for the RAIF regime subject to securing the relevant approvals from investors and, where applicable, the CSSF. Under the same conditions, the RAIF could be used in a phased approach to organise a first closing rapidly with investors that do not require direct product supervision, with a transition into another regime, such as the SIF, to follow at a later stage to permit other investors that prefer or are limited to investing in directly supervised products.
The bill of law is expected to enter fully into force in the summer / fall 2016.