“The aim of that bill of law is to improve and modernise the Luxembourg toolbox relating to investment funds by proposing certain targeted amendments to the Luxembourg fund laws,” explained , partner at law firm Elvinger Hoss Prussen.
The --presented by finance minister (DP) on 22 March--proposes modifications to five laws that relate to Sicars (investment companies in risk capital), specialised investment funds (Sifs), Ucits (undertakings for the collective investment in transferable securities), alternative investment fund managers (AIFMs) and Raifs (reserved alternative investment funds).
“In particular, it intends to increase structuring opportunities for sponsors that wish to expand to non-professional investors the access to their private strategies--a trend known as ‘democratisation of private assets’--which is likely to reflect on the attractiveness and competitiveness of the Luxembourg financial centre,” said Rossignon.
This bill addresses the industry needs and the market demand in the alternative investment sector
“It’s not a game changer or a revolution but it is definitely enhancing what we already have today in the Luxembourg toolbox, providing more structuring options, simplifying existing laws and bringing the industry greater flexibility,” said Claire Guilbert, partner at Norton Rose Fulbright. “This bill addresses the industry needs and the market demand in the alternative investment sector, in particular with respect to the access by non-professional investors to illiquid funds.”
New structuring possibilities, fair value, share issuance
The new bill of law provides three key new tools, explained Rossignon. The first is that it provides a wider choice of structuring possibilities for Part II funds. Today, these funds need to be structured either as a common fund or a société anonyme (SA). If the bill passes, the choice will be extended to include options such as partnerships limited by shares, common limited partnerships, special limited partnerships, private limited companies or cooperatives in the form of a public limited company.
“This amendment will also indirectly broaden the scope of available legal structures for Eltifs, which are often structured in Luxembourg as Part II UCIs,” said Rossignon. “It will go in the right direction. It provides more flexibilities for the initiator, in particular, because if the initiator goes for a partnership, then it will have the possibility to have the control over the GP, which allows it to have control over the whole structure.”
Luxembourg is very well-placed to be very successful for investment funds following private strategies marketed to retail investors
The second element “is the possibility to value the assets at fair value instead of last known stock exchange price or probable realisation value,” Rossignon continued. And the third one concerns the possibility to issue shares. For now, “the rules for Part II funds is that shares are issued at the NAV, the net asset value per share/unit. So it’s the value of the assets of the relevant (sub-)fund less its liabilities, and you divide it by the number of shares/units issued.” Should the bill pass, “it will be possible to issue shares at a fixed price--so not necessarily at the net asset value,” he said.
Putting all this together, “I think Luxembourg is very well-placed to be very successful for investment funds following private strategies marketed to retail investors and this will even more be the case with that new bill of law,” said Rossignon.
Harmonised definitions
The new bill of law also aims to harmonise the legal definition of “well-informed investors” for Sifs, Sicars and Raifs, explained Rossignon. “This includes explicit cross-reference to Mifid [Markets in Financial Instruments Directive] to define professional investors and lowering of the current €125,000 minimum investment amount required from well-informed investors other than professional and institutional investors to €100,000 (threshold aligned with Euveca [European Venture Capital Funds] and Eusef [European social entrepreneurship funds] regulations).”
“Positive development”
Delano also talked to , a partner at Simmons & Simmons, regarding the proposed investment funds bill. His point of view aligned with the other lawyers that Delano spoke with. “It’s a positive development, notably in light of the democratisation of private assets,” said de Longeaux. “In particular, the amendment of the well-informed investors definition will increase the attractiveness of Luxembourg funds for distribution to high-net worth individuals.”
The proposed amendments…will strengthen Luxembourg’s offering for Eltif-type funds
“Furthermore, the proposed amendments to the Part II UCI legal framework coupled with the proposed exoneration of the subscription tax for Part II UCIs, Sifs and Raifs qualifying as Eltif will strengthen Luxembourg’s offering for Eltif-type funds,” said de Longeaux.
Exemption from subscription tax
In addition, “the idea of the proposal in the bill of law is to remove the subscription tax” for Part II UCIs, Sifs and Raifs authorised as Eltifs, said Rossignon. “If you have a Part II fund offered to retail investors, then it’s five [basis points] (at the relevant share class level), the subscription tax.”
Ireland, the grand duchy’s main competitor in terms of investment funds, does not have a subscription tax. “It’s good for the Luxembourg state, but it’s not good for the Luxembourg fund industry in terms of competitiveness,” said Rossignon. This proposal to remove the subscription tax, therefore, “removes a disadvantage.”
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Change to the depositary regime
Another item in the bill of law concerns a slight change to the depositary regime for regulated funds. “The provisions dealing with the replacement of a resigning or dismissed depositary of Ucits, Part II UCI, Sif or Sicar are amended in a manner to require that the contract concluded with the depositary must contain prior notice provisions and that a replacement depositary must be appointed prior to the expiry of such notice period, failing which the CSSF [Luxembourg’s financial regulator] will remove the relevant fund from the CSSF’s official list. The change aims at avoiding that there can be a period where no depositary is officially/contractually appointed,” said Rossignon. These “clarifications” will give the markets “clear rules in this respect.”
What could be improved?
“I would like to see a notion of semi-professional investors in the AIFM law with a possibility to market alternative funds to this class of investors, similar to the German regime,” Guilbert told Delano. “Now the proposition in the bill to permit the marketing of certain types of fund vehicles to well-informed investors in Luxembourg is already a good start (although it does not cover all types of fund vehicles yet).”
The key message from that bill of law is that Luxembourg wants to be--even more--part of the democratisation of private assets
An improvement in the bill would be to “take into account capital commitments when you have to assess whether you reach the minimum legal capital required by the relevant investment fund law (such as Sif or Raif law),” said Rossignon. An additional point is that in the context of a judicial liquidation, “the judge will have the possibility to apply the set of rules which relates to bankruptcy. That’s not the case at this stage, but that’s something that will be offered in the new bill,” he added.
Supporting the democratisation of private assets
Along with the changes in the , the draft bill of law seems to be part of a clear trend that expands access to private assets.
“Lowering the eligibility threshold in the various product laws and extending the legal forms available to a UCI Part II fund will definitely help managers cater to a larger pool of investors,” said Guilbert.
For Rossignon, “the key message from that bill of law is that Luxembourg wants to be--even more--part of the democratisation of private assets. That’s really the case.”
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .