Raising capital from investors is a challenging task to say the least, more so when choosing the right fund vehicle to raise capital in Luxembourg. Promoters typically face various legal and tax implications, as well as choosing the right jurisdiction. Unlike other financial centers with limited options, Luxembourg offers a wide range of solutions to companies, originators, managers, and private individuals. Listed below are some investment vehicles that foreign investors can choose from when raising capital in the Grand Duchy of Luxembourg.
What is the best vehicle to raise capital in Luxembourg?
Fund managers, companies, and private individuals may choose between regulated and unregulated private equity funds and vehicles. Depending on investor requirements, they may choose from the following options:
- An issuer to issue securities and finance the activities of a corporation
- A supervised investment fund under direct supervision of the CSSF
- An unregulated fund or vehicle swiftly set-up and needs no approval by the CSSF
- An unsupervised fund with an appointed alternative investment fund manager (AIFM)
Unregulated Fund for Raising Capital
SOPARFI is used as an unregulated fund for raising capital due to its highly flexible financing policies, structural features, lack of investment constraints, and double tax treaty benefits. It’s one of the most commonly used vehicles when structuring cross-border private equity transactions. Furthermore, it is used by multinational companies, sovereign wealth funds, and family offices when raising capital in Luxembourg.
Special Limited Partnership or SLP and Common Limited Partnership or CLP are also considered highly flexible fund vehicles that have been proven successful in raising capital during recent years. There are many benefits to opting for a SLP or CLP:
- No minimum capital requirement
- Can be quickly established within 2 to 3 weeks
- No required regulatory approval for launch of fund required
- Unsupervised fund
- Appointment of regulated AIFM is not mandatory in case the sub-threshold goes below EU100 million
- EU passport access possible through AIFM
- No requirement for custodian in case of sub-threshold cases
- Can invest in any type of assets
- Tax transparent funding
- High contractual flexibility
Reserved Alternative Investment Fund or RAIF has been highly successful since its establishment in 2016. RAIF is easiest and fastest to set-up with an option to transform into a SIF in SICAR later on.
- In terms of stricture, RAIF is similar to a SIF or SICAR but is not under the supervision of the CSSF
- A RAIF needs to appoint an AIFM based in Luxembourg, which is directly regulated by the CSSF but with benefits of an AIFM passport
- Unsupervised fund
- Can invest in any type of asset
- Establishment within 4 to 6 weeks
Issuer Vehicle in Luxembourg
Fund promoters usually opt for the Luxembourg securitization vehicle or SV when launching issuance if securities, including notes, bonds, security tokens. SVs are specifically useful for corporate funding purposes when traditional funding channels such as banks become difficult or too complicated to complete.
Since 2004, Luxembourg has enacted the Securitization Law, a highly flexible and innovative legal framework that is designed for cross-border transactions. SVs are still popular and have been the fund vehicle for major pan-European securitization agreements.
As of 2020, the track record of securitization vehicles in Luxembourg are as follows:
- More than 1,319 securitization vehicles
- More than 6,000 compartments operating in Luxembourg
- Currently representing a market share of 30% of SVs in Europe
Main Advantages of Securitization Vehicles
While assets cannot be sold, they can generate a regular stream of income, providing originators with liquidity
Access to Capital Markets
Securitization vehicles provide originators with an efficient and easy access to capital markets. For instance, a corporation with a BBB-rating that is able to securitize assets can successfully obtain AAA-rating to secure funds at reduced cost.
Highly Diversified Funding Source
A corporation can diversify funding opportunities especially during instances wherein it can be difficult to obtain bank funding.
Wide Variety of Solutions
Fund promoters can choose from a long list of legal forms, as well as corporate or fund type, and finally between regulated and unregulated SVs.
In essence, securitization vehicles are neutral investment vehicles.
The best interest of investors is protected through statutory recognition of limited recourse and bankruptcy remoteness.
SVS are allowed to create compartments to segregate assets. Ring fencing is allowed under the Securitization Law.
The Securitization Law enforces limited recourse, no seizure of assets, no petition provisions, and subordination.
For investors, investing into a securitization vehicle carries the following benefits:
Higher Return on Quality Assets
Investors are allowed to invest into high-quality assets that generate more stable returns.
Reasonable Yields and Risk Ratio
Securities issued by an SV offer various types of securities, paying different yields and largely based on the risk of exposure or maturity. Investors can then choose according to their respective risk appetite.
Supervised Funds to Raise Capital
Undertaking for Collective Investment in Transferrable Securities or UCITS- This is the most commonly used distributed fund product across the globe.
- highly regulated retail fund under direct supervision of the CSSF
- follows struct investment and diversification rules, thus may only invest in listed securities, brands, assimilated assets, and index components
- UCITS benefit from European passport. Once authorization is issued by the CSSF in Luxembourg, they can be offered and distributed to the public across all EU Member States
Specialized Investment Fund or SIF is a highly flexible fund meant for well-informed and professional investors.
- SIFs may hold participations or hold direct assets
- SIFs feature low level of diversification at 30% per asset
- SIFs also grant AIFMD passport, provided certain conditions are met and fulfilled
Cost of Setting Up an Investment Vehicle in Luxembourg
Set-up and running operational costs will depend on the solution or investment vehicle you’ve chosen for your business. Damalion will expertly guide you in choosing the right structure and determine the right securitization platform for your activities. Contact our experts today to learn how you can set up an investment vehicle to raise capital in Luxembourg.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.