Setting up a Fund in Luxembourg

The latest upheaval surrounding ongoing Brexit negotiations was a vote of no confidence from the UK parliament – as MP’s rejected the prime minister’s EU withdrawal agreement by 342 votes to 202, the largest defeat faced by any prime minister in history.

As the UK continues to face political turmoil the uncertainty surrounding Brexit with just 70 days until the exit deadline, means that asset managers with funds in the UK must be prepared with contingency plans. With the possibility of a hard Brexit becoming increasingly real, Brexit-proofing has become a priority for managers in Europe. The two main jurisdictions presenting themselves as a solution for maintaining passporting ability are Luxembourg and Ireland.

We have put together a helpful guide for how to set up a fund in Luxembourg, with the same for Ireland to follow shortly.

First Steps

1. Choose a jurisdiction. Do you want to go for a UCITS, AIF or rather the latest Luxembourgian speciality? The RAIF? FCP or SICAV?

Different types of regulated fund:

• Setting up a UCITS Fund
• Setting up a AIF
• Setting up a RAIF

Why Luxembourg?

Luxembourg is the largest fund location in Europe and the second largest in the world. National legislation enables for investment structures delivering a unique scope across Europe (“Luxembourg structures”) and provides an extensive range of investment fund solutions. Multilingual, flexible employees with extensive experience from a wide range of European countries come together in Luxembourg to deliver an exceptional talent pool rivalling international competition. With a strong regulatory environment and an accessible and responsive regulator, Luxembourg also benefits fund managers as a jurisdiction of choice through its long-standing stability in economic, legal, tax political, social factors. Combined, these features make Luxembourg an attractive location to set up a fund.

1. Setting up a UCITS Fund

It is possible to set up an Undertaking for Collective Investment in Transferable Securities (“UCITS”) fund as a single or umbrella fund with several compartments.

Legal Framework: The Luxembourg law of December 17, 2010 (“2010 Law”) governs UCITS. It states that the constitutional documents must provide information on the fund structure, while the prospectus must include the investment policy.

The Depositary must be in Luxembourg, whereas the Management Company and Central Administration may be in any EU Member state (including Luxembourg).

All UCITS funds are supervised by the Commission de Surveillance du Secteur Financier (“CSSF”) and comply with the relevant regulatory specifications to deliver the highest possible investor protection. All annual reports must be audited by an authorised external provider with appropriate professional experience.

Capital Base: A Fonds Commun de Placement (“FCP”) is an open-ended mutual fund with a common contractual ownership and without a legal personality. FCPs must be managed by a Luxembourg Management Company and its net assets must be at least EUR 1,250,000.00, a  figure that must be reached within six months of the date of authorisation. A Société d’investissement à capital variable (“SICAV”) fund is an open ended investment company that must either appoint a Management Company or designate itself as “self-managed”. Its minimum capital must be EUR 300,000.00 at the time of authorisation and increase to EUR 1,250,000 within six months of that date.

2. Setting up an AIF

An Alternative Investment Fund (“AIF”) may be set up as a single fund or umbrella fund with multiple compartments.

Legal Framework: The Luxembourg law of July 12, 2013 (“AIFM Law”) governs the AIFs. The constitutional documents must provide information on the fund structure, while the prospectus must include the investment policy.

An is only for professional investors (i.e. institutional investors or investors with a commitment of at least EUR 125,000.00 etc.)

AIFs require the approval of the CSSF and must appoint an Alternative Investment Fund Manager (“AIFM”). The AIFM can be established in any EU Member State, including Luxembourg, or in a third country. According to their legal form, AIFs can either appoint an external AIFM or choose to be internally managed. AIFs managed by an EU authorised AIFM benefit from an EU product passport that allows cross-boarder marketing.

There are two core functions the AIFM must perform: risk management and portfolio management.

Capital Base: The same requirements as for UCITS apply (see above).

3. Setting up a RAIF

A Reserved Alternative Investment Fund (“RAIF”) combines the positive characteristics and structuring flexibilities of various different fund regimes. RAIFs qualify as AIFs that are managed by an authorised AIFM and may be set up as a single funds, or umbrella funds with multiple compartments.

Legal Framework: The Luxembourg Law of July 23, 2016 (“RAIF law”) introduced the RAIF as the latest investment vehicle in the Luxembourg.

RAIFs are not subject to CSSF approval prior to launch, which significantly shortens the time-to-market for new fund launches. The constitutional documents must expressly detail that the fund is subject to the provisions of RAIF Law, which indicates no restrictions to eligible assets.

RAIFs may only be managed by an external authorised AIFM and this must be detailed in the notarial certificate and registered in the official RAIF list held by the Luxembourg trade and companies register. For each RAIF, an offering document must be prepared which indicates on its front page that the fund is not subject to supervision in Luxembourg (by the CSSF). RAIFs can be transformed to a regulated fund at a later stage.

Capital Base: A RAIFs net assets can not be less than EUR 1,250,000.00, a figure which must be reached within twelve months of authorisation. Only 5% is required to be paid up on subscription.

Apex – supporting your investment idea

The Apex Group is able to assist with all relevant matters for setting up a fund in Luxembourg – Click Here to enquire about your options.

By Markus Weimann and Rosie Guest