Between a reserved alternative investment fund (RAIF) or a specialized investment fund (SIF), sophisticated investors are curious as to which of these two is a better investment vehicle.
What investors should know is that both investment vehicles have their own set of advantages that match different needs. Factors including time to market, investor profile, place of origin of investors, and target amount of capital are to be considered whenever an investor decides to enter the Luxembourg market.
While these two investment vehicles share similar attributes, they are still technically two different types of wealth management solutions. Let’s first take a closer look at their similarities. RAIF and SIF may invest in all types of assets and offer a wider choice of legal forms. Additionally, both investment vehicles can be established as an investment company with variable capital, such as in the case of a SICAV.
A SIF is typically eligible as an alternative investment fund, whereas a RAIF, in essence, is an alternative investment fund. Both RAIF and SIF also benefit from the same set of tax treatments under Luxembourg law.
SIF, being a regulated vehicle, goes through a meticulous authorization process before it can be a legally established investment vehicle in Luxembourg. It has to pass through the Luxembourg financial supervision authorities, the CSSF, which means investors need to be prepared with all requirements during an SIF setup. A RAIF goes through a faster setup process as it is the main catalyst that introduced the alternative investment fund structure into the Luxembourg legal system. Additionally, RAIF is an investment vehicle that not under the direct supervision of the CSSF; hence it enjoys more flexibility during the life cycle of a fund. While SIF investors need approval from the CSSF to make changes in documentation, RAIF are not required to undergo the same process.
One distinct quality that makes SIF a more attractive investment vehicle is that it can be creates either as an internally or externally managed alternative investment fund, whereas RAIF can only be managed by an external AIFM (except for RAIFs acting in the public’s best interest and managed by supranational organizations such as the EIF or EIB). In some instances, an internally managed vehicle turns out to be a more ideal choice for clients given that it does not earn from all passports eligible under AIFMD. Finally, RAIF is usually the entry investment vehicle that allows investors to gain on the “time to market” facet. Eventually a RAIF transforms into a SIF when decided as a smarter long-term solution. RAIF is typically the preferred co-investment vehicle alongside SIF due to its greater flexibility features.
Brief Overview of RAIF and SIF
Reserved Alternative Investment Fund
Introduced in July 2016, the Reserved Alternative Investment Fund or RAIF was designed to revolutionize Luxembourg’s alternative investment fund landscape. The inherent flexibility and speed of deployment facilitated by an alternative investment fund manager makes it an attractive option among foreign investors.
While the RAIF share many qualities as Luxembourg’s long-established Specialized Investment Find of SIF structures, RAIF has a few key characteristics that make it stand out.
- Faster setup
- Cheaper cost of incorporation
- Managed by an external alternative investment fund manager domiciled in Luxembourg or any other EU member states
- Fund structure protects investors and ensures transparency
- Unlike SICAF and SICAR, RAIF is not under the direct supervision or approval of CSSF and falls under the Alternative Investment Fund Managers Directive.
Since its launch, there has been a considerable growth in the number of RAIF being established in Luxembourg. While the RAIF may not be as successful as SIF, it aims to become a secondary vehicle as investors convert their products into the new fund that ensures faster setup, greater flexibility, speedier closing time, and without any delay in approval from regulating authorities.
While may investors are option for RAIF, there are still many that opt to stay as SIF due to a few factors:
When setting up a RAIF, more lawyers are needed at the time of launch, with fees to be paid on a yearly basis.
While greater regulatory flexibility makes RAIF attractive, some investors (typically unregulated ones) prefer having direct regulatory supervision.
The minimum capital requirement to set up a RAIF is €1.25 million which is required within 12 months upon authorization.
When the fund’s size and scope do not necessarily fall under AIFM rules, fund manager will recommend setting up a SIF or SICAR instead.
Specialized Investment Fund
The Specialized Investment Fund or SIF is a regulated Luxembourg investment fund vehicle for the well-informed, institutional, and qualified investors. A SIF may take the legal form of a mutual common fund or may be incorporated as fixed or variable investment company (SICAF and SICAV).
A SIF is specifically designed to allow investors to invest alternative assets, including:
- Derivatives such as futures and options
- Hedge fund strategies
- Collections such as artworks, old cars, diamonds, wines, and jewellery
- Real estate
- Credit strategies such as bonds, direct lending, high yield, and peer-to-peer options
- Other types of alternative investments with no limitation
By rule, an exception is made that any of the asset of a SIF shall not exceed 30% of its total AUM.
A SICAV and SICAF can be set up in the following legal forms:
- Public Limited Company (PLC)
- Private Limited Company (LTD)
- Partnership Limited by Shares (SCA)
- Co-operative company organized by a public limited company or COOPSA
- Special Limited Partnership or SLP
Each SIF may be established as a solitary fund or an umbrella fund with multiple compartments, each of which features a different investment policy with unlimited share classes, depending on the specific needs of investors and their corresponding fee structure.
Structures may be open-ended or close-ended structures. By rule, a FCP has no legal personality and must be under a separate management company based in Luxembourg.
Eligible Assets for a SIF
The main characteristic of a SIF is the lack of limitations on the type of assets in which it can invest and a lenient supervisory regime. Given investments are allowed for any type of asset, SIF is ideal for setting up anything from a traditional securities, money market fund, hedge fund, private equity fund, and real estate fun. A SIF must have an active portfolio management.
SIF investments that can be made into any type of asset in Luxembourg and overseas:
- Currencies and precious metals
- Real estate (commercial, private, direct, and indirect)
- “Clean Tech” or “Green” investment initiatives
- Distressed such as debt, securitization, and vulture funds
- Private equity such as shares, loans, and funds
- Bonds, shares, financial instruments, ETF, other SIFs and derivatives
- Hedge fund strategies such as commodities, long/short, event driven, managed futures, technology, and CTA
- Artworks, jewellery, watches, wine, and cars
SIF Capital Requirement
For incorporated SICAF and SICAV:
- SCA must have a minimum capital of €31,000 upon establishment
- LTD must have a minimum capital of €12,500 upon establishment
- COOPSA has no minimum capital requirement
A minimum of €1.25 net assets must be reached within a period of 12 months following approval by the CSSF. Only 5% of the capital needs to be paid upon subscription.
TAXATION OF A SIF
SIFS need to pay an annual subscription tax of 0.01% of total asset value to be paid on the last day of every calendar quarter.
Investment such as money markets and pension funds or SIFs investing in other fund are assessed with subscription tax. The same taxation rule applies to microfinance investment funds.
Investment funds that operate as investment companies are required to pay registration duty of €75 at the time of incorporation. In the case of modification of articles of incorporation and transfer of effective place of management, SIFS are required to pay registration duty.
The Right Choice Between RAIF and SIF
The decision to opt for RAIF over SIF, SICAR, or an unregulated vehicle all comes down to the expertise of a fund manager on identifying the best investment opportunities to fund. Institutional investors, insurance companies, and pension funds will prefer to invest in supervised and regulated funds. Additionally, the regulatory framework where the fund falls under is a determining factor when choosing between RAIF and SIF.
Damalion has been working with investors by helping them choose the best Luxembourg investment structure for their needs. If you would like to know more about RAIF and SIF, contact our Damalion experts today.