Has the Reserved Alternative Investment Fund (RAIF) really increased the competitiveness of the Luxembourg market?
by Pierluigi Meloni
Approximately two years after the entry of RAIF funds into the Luxembourg fund market, enabled by law of 23 July 2016, we try to understand the reasons for their introduction, their characteristics and how they were accepted by the Luxembourg fund market.
The Luxembourg fund market always distinguished itself by the willingness on the part of the government to develop and implement regulation on financial services products and companies, active in the creation and distribution of such products, supporting the development of the financial sector. The entry into force of the Alternative Investment Funds Directive (AIFMD), in July 2013, introduced a double level of supervision, both on the fund and on the manager of alternative investment funds. The Luxembourg government decided to intervene by issuing the law of July 23 2016, with the intention of differentiating its offer, adding to existing solutions, Specialized Investment Funds (SIF) and Risk Capital Investment Company (SICAR), also the RAIF (Reserved Alternative Investment Fund).
The RAIF Fund Directive provides for the possibility of setting up alternative investment funds, therefore compliant and subject to AIFMD, which, although using a variety of corporate and contractual forms having the same characteristics as regulated investment instruments, such as SIF and SICAR, are not directly subject to the regulatory approval and prudential supervision of the Commission de Surveillance du Secteur Financier (CSSF).
RAIF must meet the criteria of an alternative investment fund and is required to appoint a fully licensed alternative investment fund manager, established in Luxembourg, in another EU Member State or in a third country with an European passport. They are often set up as umbrella funds with umbrella structures, are reserved only for “well informed” investors and are subject to a minimum investment amount of 125 thousand euros. As for the SIF, also for RAIF the maximum investment is 30% of its assets in the same investment, even if there are exceptions for particular cases. RAIF funds are subject to an annual subscription fee of 0.01%, but if the fund invests only in risk capital, the subscription fee is not applied and it is therefore possible to choose the SICAR tax regime.
The performance of RAIFs, since the day of their introduction, shows a modest adoption of this solution in the first three months, with about 15 RAIF deposited in the commercial register. During the following 10 months, however, there was a steady flow, with an average of just over 10 new funds registered per month. As of 31 August 2017, 158 RAIF facilities were installed and registered in the Luxembourg trade register, finally reaching 277 in January 2018.
Despite numerous doubts at the time of their introduction, linked mainly to the absence of supervision by the CSSF, which could have discouraged investors, RAIFs were welcomed thanks to a reduced Time to Market, making the product rapidly available to a professional and wealthy clientele. Their introduction did not lead to a decrease in the demand for SIF and SICAR, since the decision to opt for a SIF or SICAR, rather than a RAIF, despite the more complicated approval process, is influenced by the nature of the investors to whom a fund manager is concerned. Some institutional investors, such as pension funds and insurance companies, can apply for a fully regulated and supervised investment structure to invest in.
In conclusion, this product did not replace the use of pre-existing structures, but rather integrated the offer of the Luxembourg market and further increased its competitiveness, allowing the managers to choose a vehicle of funds suited to specific needs. Thanks to the versatility and ease of establishment, RAIFs so far launched include a wide range of alternative investment strategies, such as private equity, real estate, private debt and infrastructure funds. This is due to the flexibility offered by the RAIF law, meant as flexibility in the choice of the asset class, but also as a flexibility of the risk diversification rules. All these characteristics and above all, as already mentioned, the reduced Time to Market led to a growing interest of investors for RAIF.