Loyens & Loeff New York regularly posts ‘Snippets' on a range of EU tax and legal topics. This Snippet describes when it would be beneficial to opt in for the Luxembourg reserved alternative investment fund law during the EU fundraising process.
For US fund managers (“USFMs”), an EU investor-facing vehicle is often a key ingredient for conducting a successful EU fundraising. The Luxembourg special limited partnership (“SCSp”) is the default legal form for such a vehicle.
An SCSp can opt in for the Luxembourg reserved alternative
investment fund law (“RAIF”). Opting in, which is not
subject to approval by the Luxembourg regulator, entails that the
SCSp's limited partnership agreement (“LPA”)
defines that the SCSp is subject to the RAIF law and that an EU
authorized alternative investment fund manager (“EU
AIFM”) must be appointed.
A RAIF-SCSp can offer segregated compartments referred to as
“sub-funds”, which is usually the driver for opting in
for the RAIF law. Each sub-fund can conduct a different investment
and ESG strategy, have different liquidity profiles (i.e., open vs.
closed-ended), use different base currencies and target different
types of investors. The RAIF-SCSp's sub-funds do not
cross-contaminate each other.
Key upsides of a RAIF-SCSp: (i) a RAIF-SCSp with e.g. 5 sub-funds leads to a reduction of legal and maintenance costs of about 30% compared to 5 separate SCSps, (ii) the one-off onboarding process for service providers (e.g., the EU AIFM) reduces exposure to the burdensome EU onboarding rules and (iii) time to go to market for each sub-fund is 2-3 months, while it's 3-5 months for a new SCSp.
Key downsides of a RAIF-SCSp: (i) the “luxification” of an LPA is easier for a standalone SCSp than a sub-fund of a RAIF-SCSp, (ii) US tax law is not entirely clear on whether a US check-the-box election is possible at sub-fund level, (iii) a delay in the financial reporting process of a sub-fund would delay the reporting process of the SCSp-RAIF as a whole as the RAIF-SCSp must produce “consolidated” accounts for all its sub-funds.
Other specifics of a RAIF-SCSp that are usually not decisive for the choice between an SCSp and RAIF-SCSp: (i) a RAIF-SCSp pays an annual 0.01% subscription tax (“ST”) on AUM, (ii) certain matters (e.g., GP removal) require a majority vote of all the investors across sub-funds, (iii) a RAIF-SCSp is subject to a 30% concentration cap on a sub-fund basis (subject to relaxation rules for infra funds). A RAIF-SCSp that invests exclusively in “risk capital” qualifies for an exemption from the 0.01% subscription tax and is not subject to the concentration cap. Those types of RAIF-SCSps (“RAIF-SICARs”) are only used in very specific circumstances.
In certain cases, there may be a need to organize a fund as a Luxembourg limited liability company as opposed to an SCSp. In that case, RAIF status is needed to secure the fund's Luxembourg tax neutrality, save for ST.
When USFMs offer a range of different investment strategies to EU investors, a RAIF-SCSp with sub-funds may be beneficial in terms of maintenance costs and time to launch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.