Managing The Complexity Of Luxembourg Structuring And Product Options

Brexit has unleashed a tsunami of interest in Luxembourg funds, but anyone from the UK picking-up with a local adviser is likely to be confronted by a bewildering matrix of different products (such as UCITS, Part II's, SIFs, SICARs, RAIFs, SVs, Soparfis, ETFs, EuVECAs, EuSEFs, ELTIFs and MMFs) that can take numerous different forms (most commonly, one or more of SICAVs, SICAFs, FCPs, funds, SCAs, SCSs, SCSps, SAs and Sarls) and be listed or listed and traded on a range of different exchanges and markets (such as LxSE or TISE).

This broad spectrum of options in 2018 reflects the rich legal heritage of Luxembourg that makes use of international concepts to accommodate all types of investor. This is a huge plus for industry and an obvious draw for Luxembourg, but, unfortunately, such complexity can also leave UK-based sponsors unsure where to start. This problem can easily be avoided though, if industry sticks to the essentials.

In Luxembourg, as in the UK, it is best to divide funds into the following three categories:

Limited partnerships

These are classic limited partnerships in a format almost identical to common law jurisdictions, where investor interests are represented by a series of separate capital accounts. These partnerships can either be incorporated (SCS) or unincorporated (SCSp) and whether or not managed by an AIFM, they do not typically make use of a product regime (such as the RAIF). This is because these partnerships are structured in a tax transparent and illiquid manner, and the benefits of a product regime are unclear.

Limited partnerships should be understood as commercial contracts that are freely negotiated between counterparties, namely: sponsors, cornerstone investors and any other founding partners. The parties are usually institutional in nature and, despite well-defined market parameters, each partnership contract tends to become quite bespoke.

Luxembourg is often favoured as a domicile where a limited partnership will operate in the EU (for example, originating loans) or its limited partners comprise EU-based institutions that are more comfortable investing in a passportable product (that may also attach a lower risk-weighting under any applicable investor regulation). In addition, operating in Luxembourg is practical where a partnership makes investments through a number of Luxembourg-based SPVs and in a BEPS context, the extended use of one domicile can be seen as reinforcing the direct tax analysis.

Where...