INTRODUCTION

The specialised investment fund ("SIF(s)") was first introduced by the Law of 13 February 2007 ("SIF Law")1 and has since enjoyed great success. The SIF offers a regulated label whilst maintaining flexibility in terms of investment scope and structuring and also benefits from an attractive tax regime. The scope of eligible investors includes not only institutional investors and professional investors but also other types of well-informed investors, such as sophisticated private investors meeting certain conditions.

The SIF regime was amended among others by the Law of 12 July 2013 on alternative investment fund managers ("AIFM Law") which transposes the AIFMD2 into Luxembourg law. Although the AIFM Law mainly regulates alternative investment fund managers ("AIFM(s)"), it also contains various provisions that apply to alternative investment funds ("AIF(s)"), for which SIFs may qualify. The SIF regime was also amended by the Law of 21 July 2023, which modernises the Luxembourg toolbox relating to investment funds (including SIFs), namely to take into account certain legal changes and market requirements.

The SIF Law is divided into two parts. The first part contains the general provisions applicable to all SIFs, while the second part contains specific provisions applicable only to those SIFs which qualify as AIFs ("SIF AIF(s)") and which are managed by an AIFM that is authorised in accordance with the AIFM Law or AIFMD provisions. SIF AIFs that are managed by an AIFM authorised in the European Union ("EU")3 may benefit from the AIFMD passport in order to be marketed to professional investors in the EU through a regulator-to-regulator notification regime.

In addition, the European long term investment fund Regulation ("ELTIF Regulation")4, the European venture capital Regulation ("EuVECA Regulation")5 and the European social entrepreneurship Regulation ("EuSEF Regulation")6 may also offer new opportunities as they enable AIFMs to market SIF AIFs with an ELTIF label to retail investors in the EU and SIF AIFs with a EuVECA/EuSEF label to certain eligible investors other than professional investors in the EU, provided that the relevant investors qualify as well-informed investors under the SIF Law.

CHAPTER I: GENERAL PROVISIONS APPLICABLE TO ALL SIFS

The SIF regime is applicable to undertakings for collective investment ("UCI(s)"):

  • whose securities or partnership interests are restricted to one or several well-informed investors;
  • whose exclusive object is the collective investment of their funds in assets in order to spread investment risks and to provide their investors with the benefit of the result of the management of their assets; and
  • whose constitutive documents7 and offering documents provide that they are subject to the SIF regime.

1. SCOPE

1.1. Undertakings for collective investment

SIFs represent a specific category of UCIs that invest in accordance with the principle of risk-spreading. They are regulated UCIs subject to prior authorisation, and thereafter permanent prudential supervision, by the Luxembourg Commission de Surveillance du Secteur Financier ("CSSF").

1.2. Well-informed investors

Investment into SIFs is limited to well-informed investors that are able to adequately assess the risks associated with an investment in such a vehicle.

The SIF Law defines well-informed investors not only as (a) institutional investors and (b) professional investors within the meaning of Annex II of MiFID8, but also as (c) other investors who:

  • confirm in writing that they adhere to the status of well-informed investors; and
  • either
    1. invest a minimum of EUR 100,000; or
    2. benefit from an assessment made by an EU credit institution, MiFID investment firm, UCITS management company or authorised AIFM certifying that they have the adequate expertise, experience and knowledge to appraise the contemplated investment in the SIF.

Therefore, sophisticated retail or private investors will be authorised to invest in SIFs through the use of this latter category (c).

The above conditions do not apply to the directors and those other persons involved in the management of the relevant SIF.

1.3. Optional regime

The SIF regime is optional to the extent that the constitutive or offering documents must expressly provide that the investment vehicle is subject to the provisions of the SIF Law. Accordingly, any investment vehicle, which is reserved to one or more well-informed investors, will not necessarily be governed by the SIF regime. Instead it could opt to be established as an unregulated company subject to the general rules of Luxembourg Company Law9

2. INVESTMENT RULES

2.1. Flexibility with respect to eligible assets

The SIF Law allows full flexibility with respect to the assets in which a SIF may invest, subject to the CSSF's prior approval of the investment objective, strategy and policies.

The SIF regime is expressly designed to accommodate UCIs that invest in any type of assets and which pursue both traditional and alternative investment strategies. It indeed permits the structuring of, inter alia, equity funds, bond funds, money market funds10, real estate funds, hedge funds, private equity funds, debt funds, micro-finance funds, social entrepreneurship funds, venture capital funds, green funds, infrastructure funds, funds which invest in tangible assets such as aircraft, ships, art, etc.

2.2. Applicability of the principle of risk-spreading

The SIF Law does not provide for specific investment rules or restrictions applicable to the SIF, it only requires that SIFs are subject to the principle of risk-spreading. The CSSF has issued guidelines in its Circular 07/309 as to the meaning of risk-spreading in the context of SIFs, which are detailed below.

Circular 07/309 stipulates the following guiding principles:

  1. A SIF may not invest more than 30% of its assets or subscription commitments in securities of the same type issued by the same issuer11.

    However, this restriction does not apply to:
    1. securities issued or guaranteed by an OECD Member State or its regional or local authorities or by EU, regional or global supranational institutions and bodies; and
    2. target UCIs which are subject to risk-spreading requirements at least comparable to those applicable to SIFs12.
  2. Short sales may not, in principle, result in the SIF holding a short position in securities of the same type issued by the same issuer representing more than 30% of its assets.
  3. When using derivative financial instruments, a SIF must ensure risk-spreading comparable to the above, by means of an appropriate diversification of such derivatives' underlying assets. In order to secure the same objective, the counterparty risk in an OTC transaction must, where applicable, be limited in consideration of the relevant counterparty's quality and qualification.

These guidelines shall, in principle, apply to all SIFs, although the CSSF may grant exemptions to the risk diversification requirements under Circular 07/309 on a case-by-case basis13.

Furthermore, the CSSF may accept a "grace period" during which SIFs may depart from the aforementioned diversification rules. This grace period should be disclosed in the SIF offering document and may vary depending on the type of assets under management14.

Whenever a SIF is structured as an Umbrella SIF (see Section 3.2 (a) of this Memorandum), any reference to the SIF in the foregoing guiding principles must be understood as a reference to any of its compartments.

3. STRUCTURAL ASPECTS AND FUNCTIONING RULES

3.1. Legal forms

The SIF Law specifically refers to a fonds commun de placement ("FCP(s)") and a société d'investissement à capital variable ("SICAV(s)"), with multiple legal forms available.

This Memorandum focuses on the legal forms most commonly used by SIF, namely the FCP and the investment company

(a) Fonds commun de placement

An FCP itself is not a legal entity. It represents a coproprietorship of assets which are managed, on behalf of the joint owners, by a Luxembourg management company generally 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 SIF) or Chapter 16 of the UCI Law.

Footnotes

1. The SIF Law is available on our website www.elvingerhoss.lu in both English and French.

2. "AIFMD" refers to Directive 2011/61/EU on alternative investment fund managers, as amended.

3. For the purposes of this Memorandum, the terms "European Union", "EU" and "EU Member States" also refer to and include the European Economic Area ("EEA") and the States that are contracting parties to EEA agreement other than the Member States of the European Union, within the limits set forth by this agreement and related acts.

4. "ELTIF Regulation" refers to Regulation (EU) 2015/760 on European long-term investment funds, as amended.

5. "EuVECA Regulation" refers to Regulation (EU) 345/2013 on European venture capital funds, as amended.

6. "EuSEF Regulation" refers to Regulation (EU) 346/2013 on European social entrepreneurship funds, as amended.

7. i.e. mainly the articles of incorporation (statuts), the management regulations (règlement de gestion) or the partnership agreement (contrat social), depending on the legal form of the SIF.

8. "MiFID" refers to Directive 2014/65/EU on markets in financial instruments, as amended.

9. "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended.

10. Since 21 July 2018, SIFs, which qualify as money market funds ("MMF(s)") under Regulation (EU) 2017/1131 on MMF, must be specifically authorised as MMF. In addition, the manager of an MMF must be specifically authorised to manage a MMF (Article 5 of the MMF Regulation).

11. For the purpose of this restriction, in the case where the issuer is a target UCI with multiple compartments, each compartment is deemed to be a distinct issuer if the compartments of that target UCI are "ring-fenced" against the claims of third parties.

12. This flexibility allows a SIF to be structured as a feeder-fund of another Luxembourg or foreign investment fund (the master fund) provided that the constitutive or offering documents of the master fund provide sufficient evidence that it is subject to appropriate risk-spreading requirements.

13. For instance, the CSSF has indicated, for specific infrastructure investments, that it would relax the aforementioned maximum 30% ratio if certain conditions are met. The CSSF recognises that infrastructure funds often make very sizeable investments and may therefore have difficulties in complying with the risk-diversification ratio.

14. For example, Luxembourg investment funds investing in real estate usually benefit from a four-year grace period.

15. "UCI Law" refers to the law of 17 December 2010 on undertakings for collective investment, as amended.

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