Luxembourg for Private Funds
By Jean-Christian Six
Posted: 17th July 2015 12:12The term “private fund” does not bear a specific legal meaning in Luxembourg. However, Alternative Investment Funds (AIFs) that do not offer their shares or units to the public at large and that are reserved for investment by sophisticated investors are frequently referred to as “private funds”. Examples of private funds include for instance hedge funds, private equity funds, real estate funds, infrastructure funds and debt funds.
After breaching the symbolic threshold of €3 trillion in September 2014, the net assets of Luxembourg funds have continued to grow steadily during H1 2015, reaching an amount in excess of €3.6 trillion as at 31 May 2015. Although UCITS still represent the bulk of that total amount, AIFs (i.e., non-UCITS) have grown considerably – with net assets as at 31 May 2015 in excess of €574 billion. This amount only represents a portion of the Luxembourg AIF market, as an increasing number of AIFs are established as unregulated vehicles, for which no statistics are publicly available for the time being.
In the course of 2014 and H1 2015, Luxembourg has consolidated its position as a leading European fund domicile, both for UCITS and AIFs. Clearly, as a European onshore centre, Luxembourg has benefited from the introduction of the AIFMD regime. The AIFMD introduced a passport enabling duly authorised EU AIFMs to market their AIFs across the EU on the basis of a marketing passport. Not surprisingly, Luxembourg – as a leading hub for the global distribution of funds – is emerging as a jurisdiction of choice for the establishment of AIFs to be marketed on a cross-border basis under the new regime.
The AIFMD regime fully entered into force on 22 July 2014, with the end of the grand-fathering period. Nearly one year after that important milestone, the industry has now a much better understanding of what is expected of it under the new regime and the benefits of the passport. Clearly, complying with the new regime requires significant investment, but in many cases these costs are outweighed by the advantages linked to the pan-EU passport. Also, pragmatic solutions have emerged to ensure compliance with the new requirements. Not all fund managers need to set up their own fully-fledged AIFM. Of course, some fund managers may rely on various exemptions available under the AIFMD, such as the exemption available for fund managers managing portfolios of assets not exceeding €100 million (or €500 million for managers of unleveraged funds with a minimum five-year lock-up period). However, exempted AIFs do not benefit from the AIFMD passport, and this may restrict their ability to raise funds within the EU. Certain fund managers may get access to the AIFMD passport without setting up their own AIFM by appointing a third-party AIFM. The use of third-party AIFMs is not appropriate in all circumstances and is subject to compliance with certain requirements set out in the AIFMD. However, in certain cases it may be a very attractive solution for fund managers without any European presence, be it as an intermediary step before launching their own AIFM.
Key trends of the Luxembourg private fund market over the last two years include (i) the growth of infrastructure funds and debt funds and (ii) a shift from using regulated vehicles to unregulated vehicles.
In terms of assets under management and number of structures, hedge funds, private equity funds and real estate funds (and funds of funds focussing on these asset classes) clearly represent the majority of Luxembourg AIFs. However, we have seen over the last two years a major uptake in the number of infrastructure funds and debt funds launched in Luxembourg. A combination of factors has been the impetus for the growth of funds investing in those asset classes. On the one hand, asset managers have to fill in the gaps left by cash-strapped public authorities that are no longer in a position to fund global infrastructure needs and by banks that have significantly reduced their lending activities in the wake of the financial crisis. On the other hand, in a prolonged low-yield environment, investor appetite for infrastructure and debt funds has grown considerably. We can expect that infrastructure and debt funds will continue to grow steadily in the years to come. Luxembourg has a strong track-record in those asset classes and is therefore uniquely positioned to continue benefiting from this trend.
Another trend relates to the evermore frequent use of Luxembourg’s unregulated vehicles for the structuring of AIFs. One of the key strengths of Luxembourg as a fund domicile is the wide range of fund vehicles available. However, until two years ago all these fund vehicles were regulated: UCITS (retail funds investing in liquid assets), part II funds (retail non-UCITS), SIFs (funds reserved for investment by sophisticated investors) and SICARs (funds investing in risk capital). All such vehicles are subject to the on-going supervision of the Luxembourg supervisory authority, the CSSF. In July 2013 (in the context of the implementation of the AIFMD), the range of Luxembourg vehicles available for the structuring of funds was extended through the modernisation of the Luxembourg limited partnership. Luxembourg limited partnerships (sociétés en commandite simple, “SCS”) have existed in Luxembourg since the early 19th Century. However, historically, SCSs have not proved to be very popular for the structuring of investment vehicles, because of certain statutory provisions applicable to SCSs that were no longer in line with modern business needs. The modernisation process carried out in 2013 involved a complete overhaul of the SCS regime and the creation of a new form of limited partnership: the société en commandite simple (“SCSp”), the main difference between an SCS and an SCSp being that the latter has no legal personality of its own. The SCS and SCSp may be used for the structuring of regulated (SIFs or SICARs) or unregulated vehicles. Unregulated SCSs/SCSps are generally used for the structuring of AIFs investing in illiquid assets (such as private equity and real estate). However, they can a priori be used for the structuring of AIFs investing in any asset class. The new Luxembourg limited partnership regime is extremely successful. Hundreds of unregulated SCSs/SCSps have been launched under the new regime.
The trend towards a wider use of unregulated vehicles is likely to be further reinforced in the near future following the adoption of a new type of Luxembourg fund. It is anticipated that a bill of law will be tabled shortly with the Luxembourg Parliament in order to create a new type of Luxembourg fund. This new fund would be subject to a regime similar to that applicable to SIFs, except that it would not be subject to CSSF supervision. This vehicle would be reserved for the structuring of funds that appoint a duly authorised AIFM (or are themselves authorised as an internally managed AIF). This would be a welcome new addition to the range of Luxembourg vehicles available for the structuring of AIFs and would further enhance Luxembourg’s attractiveness as a leading AIF domicile.
Jean-Christian has significant expertise in advising clients in relation to the structuring, setting up and registration of regulated funds (UCITS, Part II funds, SIFs and SICARs) as well as non-regulated funds (limited partnerships) for institutional and non-institutional investors in all asset classes, including real estate, private equity, infrastructure, debt and hedge funds. He also has experience in advising foreign entities on their investments in Luxembourg investment vehicles.