On 23 July 2016, Luxembourg adopted legislation establishing a new type of fund vehicle, the Luxembourg Reserved Alternative Investment Fund (RAIF), developed for well-informed investors and offering much terrific speed to market than the existing specialized investment fund. It is not a surprise that in Asia (China included), many Asian asset managers have choosen to set up a RAIF to structure the portfolio of their investments in Europe.
Luxembourg Reserved Alternative Investments Funds are a new type of vehicle that incorporate the traits and structures of specialized investment funds (SIFs) and investment companies in risk capital (SICARs) qualifying as Alternative Investment Funds (AIFs). But, unlike traditional AIFs, RAIFs are not subject to permission from Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier, also known as the CSSF.
According to the Luxembourg trade register, there are roughly 1,600 RAIFs, and among them, around 380 new RAIFs were created during the year 2021.
Why Luxembourg Reserved Alternative Investment Fund (RAIF) is attractive?
The RAIF is constructed to benefit from the structuring flexibility of non-UCITS collective investment vehicles, which include SIFs and SICARs. However, it enables civil, institutional, and professional investors that do not need dual supervision of managers and funds to dispense with a layer of regulation that adds expenses, delays, and restrictions on the management and asset allocation of the funds. There is no minimum primary investment in a RAIF for institutional and professional investors, but a minimum of €125,000 for well-informed but who are neither professional nor institutional investors.
The RAIF is based on the alternative investment fund regime laid out by the European Union’s Alternative Investment Fund Managers Directive and its application in Luxembourg through the national legislation of July 12, 2013, on alternative investment fund managers. However, the lack of a requirement for authorization or ongoing supervision by the CSSF means that future modifications to the fund’s constitutional will not require regulatory approval either.
The manager of a RAIF must be approved under the AIFMD as an alternative investment fund manager and domiciled in a European Economic Area member state in order to profit from a pan-European marketing passport.
As indicated by the legislation, the manager of the RAIF may follow any kind of investment strategy, with no limitations regarding eligible assets, and funds whose investment policy is limited to risk capital investments will not be required to adhere to risk-spreading rules.
A RAIF can be created as an umbrella structure with numerous sub-funds, as well as multiple share classes, making segregated compartment structures available to Luxembourg non-regulated funds for the first time.
Most RAIFs will enjoy the same tax treatment as SIFs, paying a yearly subscription tax amounting to 0.01% of its net assets but enjoying full exemption from corporate income tax or withholding tax on the distribution of returns, whether in the form of dividends or interest income. RAIFs limited to risk capital investments will be dependent upon the tax regime applicable to SICARs.
Why Luxembourg RAIF is a product of choice for Asian asset managers
To meet the requirements of the Luxembourg fund industry while simultaneously ensuring full compliance with the AIFMD, the RAIF Law was adopted to give a solution to asset managers seeking to avoid this double layer of regulation, and to guarantee greater efficiency in terms of establishment and operating/corporate rules.
The RAIF regime was prompted by the regimes applicable to specialized investment funds (SIFs) and investment companies in risk capital (SICARs), and it incorporates many of the desirable features of both, e.g., the capacity to establish a RAIF as a single legal structure with multiple sub-funds. In distinction to SIFs and SICARs, RAIFs are not subject to any direct approval or supervision by the CSSF. As such, RAIFs offer remarkable time-to-market efficiencies.
Versatility is a major trait of the RAIF regime, which was formulated to allow RAIFs to invest in any type of asset and adopt any type of investment strategy.
As a Luxembourg AIF managed by an authorized EU AIFM, the RAIF also gains from the AIFMD marketing passport and, as such, Asian asset managers may market their RAIF in the EEA to professional investors according to the AIFMD.
The several beneficial elements of the RAIF regime present Asian asset managers, and specifically those familiar with the flexibility of offshore structures, with a significant reason to consider the RAIF as their European product of choice.
For asset managers, selecting the most reasonable investment vehicle and domicile is a crucial strategic decision. Due to its incredible flexibility and versatility, a vast and growing number of asset managers who wish to incorporate some or all of the attractive features of the RAIF, including short time to market, broad contractual freedom in relation to fund terms, a wide diversity of structuring options, excellent distribution range using the AIFMD marketing passport and/or national private placement regimes and the several investor insurances features implicit under the AIFMD, regard the RAIF as their vehicle of choice.
Seeing the desirable features of a RAIF structure, if commercially and legally feasible, some fund-managers may consider converting their existing fund structure, regulated fund or not in Luxembourg or outside into a RAIF.
If you are considering setting up a RAIF in Luxembourg, let’s go ahead together and contact your Damalion expert now.
