LUXEMBOURG: An Introduction to Investment Funds

Luxembourg and the Alternatives Fund Markets: From Institutional to Private Wealth and Retail Investors with the Part II UCI Fund Regime 

From a Leader in UCITS to a Leader in Alternatives

Luxembourg has steadily built its position as the largest European fund centre (based on AuM) and second worldwide, after having given birth to UCITS by being the first country to implement the UCITS Directive in 1988. Based on the combination of an international and multilingual workforce, specialist service providers with a strong multi-sector expertise, a stable political and fiscal environment, as well as an experienced regulator, Luxembourg has over the past two decades progressively created a second, ever stronger, pillar in the funds market, namely in alternative investment funds. The creation of the SICAR and SIF fund regimes in 2004 and 2007 respectively, the modernisation of the company law simultaneously with the implementation of AIFMD in 2013, as well as the creation of the RAIF regime in 2016 have each been milestones setting the stage for further growth in the alternatives market. Luxembourg has indeed become the largest single domicile for alternative funds in Europe, increasing its market share of European assets steadily from 2010 to 2022, growing from 15,6% to 61,8% .

In the context of the democratisation of alternative investment funds, which has progressively emerged under ELTIF 1.0, Luxembourg has started to position itself as the jurisdiction of choice for retail ELTIFs (with, to date, roughly 65% of all ELTIFs being domiciled in Luxembourg). In addition, Luxembourg Part II UCIs have in recent past been resurging, in particular thanks to US asset managers increasingly exploring ways to facilitate access by retail investors to private assets.

With a view to remain agile and based on years of regulatory and market practice, as well as developments at European and international levels, including ELTIF 2.0, and the increased appetite of non-professional investors for alternative asset classes, Luxembourg modernised its legal framework for fund managers and alternative fund regimes in 2023 to further align it with the needs of fund managers.

Increased Attractiveness of Part II UCIs & Use of Partnership SICAVs

While in the past, Part II UCI SICAVs had to bear the form of a public limited company (société anonyme or SA), the new structuring options for Part II UCIs allow for the use of additional legal forms under which such funds can be established, including the partnership limited by shares (société en commandite par actions or SCA), the common limited partnership (société en commandite simple or SCS) and the special limited partnership (société en commandite spéciale or SCSp).

These changes will undoubtedly moving forward constitute a further catalyst to the resurgent success of Part II UCIs, in particular as umbrella structure (ie, with the option to launch multiple sub-funds within the same legal entity), with or without ELTIF label at sub-fund level. It is very likely that specifically the SICAV-SCA will progressively replace the SICAV-SA as the form of choice as investor facing vehicle. Indeed, the combination of variable share capital and control through a manager-owned general partner provides the manager with operational flexibility and stable governance in the context of a retail or private wealth investor base.

Part II UCIs & ELTIF 2.0: A winning combination

While Part II UCIs were only used by a limited number of alternative investment fund managers over the past decade, they have been “rediscovered” over the last couple of years with private wealth investors’ growing interest in alternative asset classes and private markets players looking into broadening their investor base. Indeed, Part II UCIs allow for the launch of open-ended subscription-based funds, including as feeders or fund-of-fund structures investing in traditional illiquid alternative investment funds that are, normally speaking, restricted to professional investors only. Part II UCIs are also available for all types of investors with minimum investment tickets significantly lower than the EUR 100,000, which apply under other Luxembourg product laws and the marketing to retail or semi-professional investors, subject to certain local restrictions, has been accepted in many European jurisdictions.

Due to their flexibility, Part II UCIs are also expected to remain to be the most popular vehicle for ELTIFs established under ELTIF 2.0, in particular for retail ELTIFs availing of the EU distribution passport to retail investors.

It is also worthwhile noting that following a recommendation made in light of the European Capital Market’s objectives on the European level to take measures on the national level to fiscally support these (European) initiatives, amongst others, Part II UCIs that are established as ELTIFs are moving forward altogether being exempted from subscription tax.

Part II UCIs: More Than Just a Resurgence 

While there is no one-size-fits-all solution for alternative investment fund managers when it comes to tapping into the retail investor base, considering the very wide bandwidth of the retail concept, Part II UCIs structured as an umbrella fund, will quickly establish itself as the fund regime of reference to cover the (real) retail and private wealth investor markets.

Indeed, in an environment where evergreen funds are poised to become ever more popular, the umbrella Part II UCI provides the ideal platform under which various (semi) open-ended strategies (through one or more sub-funds with an unlimited duration) marketed to private wealth investors, could be combined with either closed-ended (with limited duration) or (semi) open -ended ELTIFs (with longer duration, albeit mandatory specific term) marketed to either professional, private wealth or (real) retail investors. Considering also the costs of setting up and maintaining these regulated structures and the typical ROI being potentially hampered by the (required) liquidity pockets in the case of (semi) open-ended (sub-) funds, using an umbrella Part II UCI as platform assists in achieving substantial economies of scale, while facilitating the management from an operational side.

The solid success of Part II UCIs will only be further sustained by regulatory updates expected during 2024, including clarifications as to the applicable investment restrictions and, potentially, a faster regulatory approval process.

On this basis, Luxembourg is poised to further strengthen its position as leading pan-European hub for retail alternative investment funds.