The RAIF Regime - Update January 2020

INTRODUCTION

The Law on Reserved Alternative Investment Funds dated 23 July 2016 ("RAIF Law")1, introducing a new type of Luxembourg investment vehicle named "Reserved Alternative Investment Fund" (in short "RAIF"), entered into force on 1 August 2016.

The RAIF is regulated under the AIFMD2 and benefits from the corresponding EU passport but is not supervised by the Commission de Surveillance du Secteur Financier ("CSSF"), making it an attractive vehicle from a time-to-market perspective.

The AIFMD, a managers' directive and a change of paradigm

The AIFMD requires that authorised alternative investment fund managers ("AIFMs") ensure that the alternative investment funds ("AIFs") they manage comply with the AIFMD product rules3, irrespective of whether or not the relevant AIF is subject to a product regulation.

When an AIF is a regulated and supervised product, compliance with product rules is consequently ensured at two levels: at the level of the AIF itself and at the level of its AIFM. Similarly, the AIF is subject to a double supervision system, by its supervisory authority and that of its AIFM, which could be based in a different country.

This double system of approval and supervision is not required by the AIFMD. It entails increased protection, which is not necessarily deemed justified by a series of professional and sophisticated investors performing their own review of the AIF's structure and documentation.

The RAIF

The introduction of the RAIF regime seeks to widen the range of investment vehicles available in Luxembourg, offering a new option to the initiators of Luxembourg AIF projects.

The creation, launch, documentation, activities and termination of the RAIF are not subject to the approval of or any supervision by the CSSF, but still enjoy all the structuring flexibility from which (CSSF approved and supervised) Luxembourg funds benefit.

In order to be eligible for this new regime, the RAIF has to be an AIF managed by an authorised AIFM, both within the meaning of the AIFMD. The AIFM may be established in Luxembourg, in another Member State of the European Union ("EU Member State") or even, once the AIFMD passport is available to third countries, in a third country in accordance with the provisions of the AIFMD.

Due to the necessity for the RAIF to be managed by an authorised AIFM, it is indirectly supervised through the prudential supervision exercised by the competent authority of its AIFM. For the same reason, the RAIF benefits from the European passport granted by the AIFMD for marketing to professional investors in the EU.

The other features of this new Luxembourg investment vehicle are substantially identical to those of the specialised investment fund ("SIF")4 and the RAIF Law has therefore been drafted drawing heavily from the text of the SIF Law5.

The main differences between the RAIF Law and the SIF Law result from the fact that all references to the role and mission of the CSSF found in the SIF Law have been excluded from the RAIF Law. However, certain mechanisms have been introduced to ensure compliance with the law, particularly by the AIF's management body.

The RAIF has become a vehicle of choice for managers and investors looking to combine contractual freedom and short time-to-market together with both the protection of the AIFMD framework and the RAIF Law, and the marketability of an investment vehicle benefiting from an EU passport.

The purpose of this Memorandum is to describe the main features of the RAIF regime.

CHAPTER I: GENERAL PROVISIONS

1. SCOPE

   The RAIF regime is applicable to Luxembourg AIFs (i) managed by an authorised AIFM, (ii) that invest in accordance with the principle of risk-spreading6, (iii) whose securities or partnership interests are reserved for well-informed investors, and (iv) whose constitutive documents7 provide that they are subject to the provisions of the RAIF Law.

   1.1 AIF managed by an authorised AIFM

   RAIFs represent a specific category of AIFs that must be managed by an authorised AIFM. Therefore, unlike a SIF, a RAIF cannot be a non-AIF or be managed by an exempt AIFM8.

   1.2 Not supervised by the CSSF

   An essential difference between the RAIF and the SIF is that the latter is subject to approval and supervision by the CSSF whereas the RAIF is not subject to such approval and supervision.

   There is thus no need for CSSF approval for the creation, launch or even termination of a RAIF and, similarly, no approval is required in the event of changes to its constitutional documents, offering document or other documents governing its functioning. The operations and activities of the RAIF are at no point under the ongoing supervision by the CSSF or any supervisory authority (other than via the AIFM). The timeframe within which a RAIF can be set up and launched is therefore more attractive from a time-to-market perspective.

   1.3 Reserved to well-informed investors

   In the same manner as for SIFs, investment into RAIFs is limited to well-informed investors that are able to adequately assess the risks associated with an investment in such a vehicle.

   The RAIF Law defines well-informed investors as (a) institutional investors, (b) professional investors, and (c) other investors who:

   confirm in writing that they adhere to the status of well-informed investors; and either invest a minimum of EUR 125,000; or benefit from an assessment made by a credit institution, an investment firm or a UCITS management company or an authorised AIFM certifying their expertise, experience and knowledge to adequately appraise the contemplated investment in the RAIF. Therefore, sophisticated retail or private investors will be authorised to invest in RAIFs through the use of this latter category (c).

   The aforementioned conditions do not, however, apply to those persons involved in the management of the relevant RAIF.

   1.4 Optional regime

   The RAIF regime is optional. The constitutive documents must expressly provide that the investment vehicle is subject to the provisions of the RAIF Law. Accordingly, any investment vehicle which is reserved to well-informed investors will not necessarily be governed by the RAIF regime; instead it could opt to be established as another unregulated company subject to the general rules of Luxembourg Company Law9 or as a SIF or an investment company in risk capital ( société d'investissement en capital à risque or "SICAR") supervised by the CSSF.

   It should be noted that, those various available Luxembourg regimes can also be combined when structuring an investment project either by setting up different vehicles to meet the specific needs of various investors (e.g. by creating dedicated feeder funds or parallel vehicles), but they can also be combined in a "phased" approach as conversions from one regime to the other are possible. A fund could, for instance, be established as a RAIF to be in a position to organise a rapid first closing with investors not requiring a product subject to direct supervision, and to be converted into a SIF later on, once CSSF approval is obtained to welcome other investors that wish to or must, invest in a directly supervised product.

2. INVESTMENT RULES

   2.1 Flexibility with respect to eligible assets

   The RAIF Law allows full flexibility with respect to the assets in which a RAIF may invest10.

   The RAIF regime is expressly designed to accommodate AIFs that invest in any type of assets and which pursue both traditional and alternative investment strategies.

   It permits the structuring of, inter alia, equity funds, bond funds, money market funds11, real estate funds, hedge funds, private equity funds, debt funds, micro-finance funds, social entrepreneurship funds, venture capital funds, green funds, infrastructure funds and those funds which invest in tangible assets such as art, luxury goods, wines, etc.

   2.2 Applicability of the principle of risk-spreading

   The RAIF Law does not provide for specific investment rules or restrictions, it only requires that RAIFs are subject to the principle of risk-spreading.

   The preparatory works of the RAIF Law clarify that, in the absence of any detailed rules in the law itself, the principle of risk-spreading and its interpretation in relation to SIFs should be taken into account12.

   It is the responsibility of the governing body of the RAIF to ensure that the minimum diversification rules implied by the RAIF Law are complied with.

   As an exception, certain RAIFs investing solely in risk capital13 do not need to spread the investment risk which means that the diversification requirements set forth above do not apply to such RAIFs.

3. LEGAL FORMS

   The RAIF Law specifically refers to the fonds commun de placement ("FCP") and the société d'investissement à capital variable ("SICAV"), but does not limit the legal forms a RAIF may take. Other legal forms are therefore possible14. In this Memorandum we will focus on the legal forms most commonly used by RAIFs, namely the FCP and the investment company.

   3.1 Fonds commun de placement

   An FCP itself is not a legal entity. It represents a co-proprietorship of assets which are managed, on behalf of the joint owners, by a management company established under, and governed by, either Chapter 15 of the UCI Law15 (i.e. a management

   company whose corporate object is to manage at least one UCITS, in addition to the management of the relevant RAIF) or Chapter 16 of the UCI Law.

   Under the FCP structure, investors subscribe for units in the FCP which represent a portion of the net assets of the RAIF and they are only liable up to the amount they have contributed.

   The rights and obligations of the unitholders and their relationship with the...