The dynamic demands of ultra-high-net-worth families and their family offices have evolved considerably over the past decade, leading them to borrow more sophisticated, institutional-like practices and vehicles in their wealth structuring. As such, private funds are coming to the fore--and all eyes are turning to Luxembourg.
The globalisation and increased sophistication of UHNW families and their investments, along with increasingly stringent government policies and taxation, prolonged low (but rising) interest rates, and an unprecedented global pandemic, have all changed how wealth structuring is being approached, including the toolkits used. Family offices and UHNW investors are now looking beyond traditional wealth-holding structures and embracing the private fund; a vehicle traditionally used by professional asset managers.
Luxembourg has a reputation for having an attractive, investor-friendly ecosystem that’s served asset managers, private clients and family offices well for many years. With a veritable array of reputable international banks, law firms and advisors, everything is on hand to provide sophisticated solutions. With AAA ratings from three major credit rating agencies, the country is considered a stable, safe ‘pair of hands’ when it comes to economic management.
Not only that, but it has a unique regulated environment that is tailored towards multi-family offices--thanks to a 2012 law that ushered in comprehensive rules to ensure a high level of service and investor protection.
More and more family offices are choosing Luxembourg to set up their private funds.
As the second largest funds industry in the world and the largest in Europe, Luxembourg is perfectly poised to respond to any private fund need--through a variety of regulated and unregulated vehicles. The grand duchy has cultivated and nurtured a broad array of investment structures that are appropriate for wealth management, offering both regulatory supervision and flexibility.
Private funds serve to collect interests, be they intra- or inter-family, into public assets and directly into private assets such as family businesses, private equity, venture capital and real estate. There are a number of factors that separate private funds from other funds, including efficient structuring which allows for fund interests to be allocated to family members, increasing transparency for younger generations, and tax neutrality as private funds don’t bear the burden of corporate taxes.
Selecting the right structure
Once a family has decided on a private fund, the next step is choosing which vehicle to utilise: Sif, SPF, sub-threshold AIFs or Raif.
Luxembourg’s Specialised Investment Fund (Sif) allows for UHNW individuals or their family offices to structure and professionalise their private assets and alternative investments while remaining self-managed. A Sif can be set up as a single fund or as an umbrella structure with multiple compartments and central administration of a Sif must be in Luxembourg.
The Luxembourg Société de gestion de Patrimoine Familial (SPF) regime is an interesting alternative to the Sif. It offers a legal and tax environment similar to a fund and is very popular among investment clubs and new family office investors looking to set up a flexible and efficient investment vehicle in Europe. However, because of how it is structured, it limits liability to investors’ respective contributions.
Alternative investment funds (AIFs) whose assets under management do not exceed a certain threshold can benefit from an attractive framework with lighter requirements. The threshold is €500m worth of assets or, where leveraged, a maximum of €100m. AIFs are not subject to direct supervision by Luxembourg’s financial regulator, the CSSF, and are not required to appoint a depositary nor a fully authorised AIFM. Beyond the light cost of maintaining sub-threshold AIF structures, AIFs also offer the same technical features as more complex funds, such as dedicated share classes per generation, and the flexibility to choose their corporate form.
Finally, the Reserved Alternative Investment Fund (Raif) can invest in all types of assets, qualifies as alternative investment fund and is not itself subject to product approval from the CSSF. However, unlike the other vehicles listed, which are all self-managed, Raifs must appoint an authorised external alternative investment fund manager (AIFM). If the AIFM is EU-domiciled, Raifs can market their shares, units or partnership interests via a specific passport to investors across the EU.
More and more family offices are choosing Luxembourg to set up their private funds. This is testament to the country’s proven reputation as reliable, regulated, stable and user-friendly--an environment that private investors are clearly drawn to. Luxembourg may be a small European country, but it’s certainly packing a big punch when it comes to private funds--not only in the asset management space, but now also in the preservation of family wealth.
Richard Behmer is head of private wealth, Luxembourg, at the fund and corporate services provider IQ-EQ. Behmer joined IQ-EQ in May 2022. He previously held client-facing, legal and compliance roles at UBS, Credit Suisse and Schroders.