In a Q&A with Real Deals, TMF Group's Simon Bodjanski discusses why Luxembourg's RAIF fund regime has been so popular with fund managers, how Brexit is influencing GP decision-making and the role technology can play in managing increasing regulation and compliance.
Luxembourg introduced its RAIF fund regime in 2016, and the structure has proven incredibly popular with fund managers since launch. What was the thinking behind the launch and why has uptake been so enthusiastic?
Luxembourg has always been a jurisdiction best known as a domicile for UCITS funds, but it has made remarkable progress to develop its alternative assets offering. It first introduced the SICAR, SIF and Simplified Partnership structures and now the Reserved Alternative Investment Fund (RAIF) is in place.
What the RAIF does is focus on regulating the management company rather than focus on regulating the underlying funds. It can take between eight and nine weeks to get the green light for a new fund from regulators - under the condition that all filing documents have been properly produced and defined - but under the RAIF a regulated alternative investment fund (AIF) manager can proceed to launch funds without each vehicle requiring a long sign off process from the regulator. Putting the responsibility on the manager rather than the fund streamlines the process materially.
The regulatory scrutiny the alternative assets industry faces will only go up and Luxembourg has always looked for ways to adapt to increasing regulation by creating structures that are flexible and help to control compliance costs.
Do GPs then have to set up their own AIF management companies if they want to domicile their funds in Luxembourg under the RAIF?
Many GPs will go down that route, particularly those who are managing a number of funds. There are also, however, third-party AIF managers who oversee a portfolio of funds from different managers. It gives private equity managers more choice and flexibility.
Anyone visiting Luxembourg will notice how fast the Grand Duchy is growing and how busy it has become. What do you put this down to?
The area has undergone a large transformation. I arrived here 16 years ago and it was quieter. That has changed significantly. There is so much more activity here and the vibe is totally different now. The financial services industry has expanded and is more sophisticated. As fund managers have come to Luxembourg they have built up genuine operational substance here.
Luxembourg has a number of advantages in its favour. Firstly, it has a stable economic, political, legal and tax framework, which means private equity managers can objectively benchmark the different vehicles on offer with a better time outlook. Secondly, it has a deep ecosystem of lawyers, accountants and specialist service providers. Managers enjoy full support and can tap into rich expertise when domiciling their funds in Luxembourg.
Finally, Luxembourg has all the infrastructure in place to meet the requirements of the OECD's Common Reporting Standard (CRS), which calls on jurisdictions to obtain and share information with each other.
You can invest or raise money from Africa, South America, Asia, Europe or the United States and know that you will have the support to vet all your investors and comply with regulations.
So, if a manager decides to use Luxembourg where does the process start and how does the manager know which of the fund structures to choose?
The selection of a structure will be based on the needs of the manager. What is the strategy? Where is the LP base? What type of assets and size of deals is the manager targeting? All those elements determine whether the SIF, SICAR, Simplified Partnership or RAIF is the best option.
The ecosystem of advisers come in here. They know the jurisdiction and will take manager through the process from the start to finish.
What impact, if any, has Brexit had on fund formation activity in Luxembourg?
As you can imagine the fundraising passport is very important to UK managers, and we still don't know whether UK managers will retain passporting rights after Brexit happens, especially if there is a hard Brexit.
What UK managers are looking at is how to put parallel
structures in place. They will set up an AIF here to secure
passporting rights and run this in parallel with a structure inside
the UK or offshore.
Some fund managers have done this already, while others have contingency plans in place and have everything ready to set up as an AIF manager in Luxembourg if necessary.
I don't think anyone in Luxembourg wanted to see Brexit, but there is no doubt that it has sparked a huge amount of activity here.
On slightly separate note, how is technology changing the way finance works and what opportunities is this creating in Luxembourg?
Technology is adding huge value. I mentioned how the regulatory burden on fund managers is increasing year by year. Technology is already used to make that easier to manage and to control costs.
But technology is not just a tool to cut the costs of compliance. It can also add value by helping LPs and GPs to connect and match the investor base with the opportunities it wants. There is huge upside and we are only at the beginning.
This article originally appeared in the October 2018 edition of Real Deals magazine.
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