Italy distressed real estate fund setup in Luxembourg | SCSp & RAIF structures

A Luxembourg special limited partnership (SCSp) can be formed in a few weeks and is the core building block for cross-border funds investing in Italian distressed real estate.

For a sponsor or institutional investor, the choice between a standalone SCSp, an SCSp SICAV RAIF, an SCA SICAV RAIF or an SA SICAV RAIF will drive governance, tax outcomes, regulatory profile and how capital is deployed into Italian regions such as Lombardy, Lazio, Emilia-Romagna or Sicily.

We set out a clear investor thesis and a practical framework to choose and implement the right Luxembourg structure for an Italy-focused distressed real estate strategy.

Investment thesis: why route Italian distressed real estate through Luxembourg

Italian banks and servicers continue to dispose non-performing loans (NPLs), unlikely-to-pay (UTP) positions and repossessed real estate (REO). This creates a steady pipeline of assets with double-digit gross IRR potential when managed by experienced sponsors. Luxembourg offers a neutral, flexible and institutionally acceptable platform to pool international capital into these Italian opportunities.

The core thesis is simple. Investors seek risk-adjusted returns from Italian distressed assets while preserving governance discipline, tax efficiency and regulatory clarity. Luxembourg provides:

• A tested toolbox of vehicles: SCSp, SICAV RAIF in SCSp, SCA or SA form.
• Compatibility with AIFMD and professional investor expectations.
• Robust fund governance, depositary oversight and independent valuation.
• Efficient cash repatriation and exit routes at fund and asset level.

Core Luxembourg structures for Italian distressed strategies

The choice of wrapper must follow the strategy and investor base. Italian asset specifics then drive the details. At high level you will consider four structures.

SCSp master partnership

The SCSp (société en commandite spéciale) is a contractual limited partnership without legal personality. It is tax transparent by default. It is widely used for club deals, single-compartment funds and separate accounts.

Key features for Italian distressed real estate:

• One general partner (GP) with unlimited liability and control over investment decisions.
• Limited partners (LPs) contributing capital and bearing liability up to commitments.
• Waterfall and carried interest terms set in the limited partnership agreement (LPA).
• Look-through treatment for many investors, which can be attractive when matching Italian tax positions.

Typical use case: a small group of family offices and private equity sponsors acquire a €80–120 million gross book value portfolio of secured NPLs backed by logistics properties in Lombardy and Veneto. The SCSp acts as master holding structure, with Italian SPVs acquiring the portfolios and assets.

SCSp SICAV RAIF

A RAIF (Reserved Alternative Investment Fund) is an AIFMD-compliant fund that is not directly supervised by the CSSF but must appoint an authorised external AIFM. A SICAV RAIF with SCSp form combines the partnership economics of an SCSp with the variable capital feature of a SICAV.

Features for Italian distressed strategies:

• Umbrella structure with multiple compartments, each ring-fencing a regional or asset-class sub-strategy (for example “Lombardy NPLs”, “Lazio UTP-backed offices”).
• More scalable fundraising and capital recycling over several vintages.
• Eligibility for a broad range of professional and institutional investors.
• Ability to define compartment-level leverage and hedging policies that match Italian asset cash flows.

Typical use case: a manager builds a pan-Italian distressed real estate platform targeting €400–600 million commitments. Each compartment targets a specific region or asset vertical, such as Emilia-Romagna light industrial or Tuscany hospitality turnarounds.

SCA SICAV RAIF

The SCA (société en commandite par actions) is a partnership limited by shares. It combines features of a company and a partnership. The sponsor usually controls the general partner and holds the management shares linked to carried interest.

Why sponsors like SCA SICAV RAIF for Italian distressed strategies:

• Clear separation between management share class and investor share classes.
• Strong alignment between GP and LPs via share-based carried interest.
• Corporate form that institutions recognize, while preserving partnership economics.
• Suitable for larger club deals or strategies where the sponsor wants visible equity upside at fund level.

Typical use case: a sponsor teams up with two institutional investors to acquire non-core office and mixed-use assets in Milan and Rome from listed Italian groups. The SCA SICAV RAIF holds compartment-level SPVs which acquire shares in Italian REOCOs or asset SPVs.

SA SICAV RAIF

The SA (société anonyme) SICAV RAIF is a classic joint-stock company fund vehicle. It is often chosen when the investor base is predominantly institutional, or when listing or more formal corporate governance is desired.

Use cases in an Italian distressed context:

• Insurance groups or pension funds seeking a familiar corporate structure.
• Strategies with the potential for a listed or semi-liquid share class in the future.
• Pan-European mandates where the Italian distressed sleeve sits alongside other country strategies within the same umbrella.

Typical use case: a €1+ billion pan-European value-add and distressed real estate fund with a 30–40% allocation to Italy. The SA SICAV RAIF structure supports diversified institutional capital and robust board-level governance.

Italian regional focus: structuring examples by geography

The choice of structure is more convincing for investors when anchored in real regional deal flows. Below are examples of how the SCSp and SICAV RAIF variants can map onto Italian regions.

Northern Italy: Lombardy, Veneto and Emilia-Romagna

Northern regions concentrate a large share of bank deleveraging and corporate restructuring cases, especially around Milan, Venice and Bologna. Assets often involve logistics, light industrial and offices with re-leasing or repositioning potential.

• Example 1 – Lombardy logistics NPL pool: An SCSp SICAV RAIF with a Lombardy compartment acquires secured NPLs with warehouses along key transport corridors. Italian SPVs acquire loan portfolios and, where necessary, enforce to take title to the assets.
• Example 2 – Emilia-Romagna sale-and-leaseback distress: A standalone SCSp buys a portfolio of owner-occupied industrial properties from a distressed mid-market corporate. The fund negotiates lease restructuring and capex-backed rent incentives.
• Example 3 – Veneto tourist assets: A compartment of an SA SICAV RAIF focuses on hotel and hospitality assets in Venice and coastal areas. Transactions often arise from banks disposing of UTP exposures to mid-size operators.

Central Italy: Lazio and Tuscany

Central Italy offers city-centre offices, mixed-use assets and hospitality exposure, especially in Rome and Florence. Regulatory processes for redevelopment are more complex, which suits sponsors with local capabilities and patient capital.

• Example 4 – Rome repositioning strategy: An SCA SICAV RAIF compartment targets grade B and C offices in Rome CBD sourced from servicers disposing UTP portfolios. Value creation comes from change of use, ESG upgrades and re-leasing.
• Example 5 – Tuscany hospitality recovery: An SCSp with a small number of family offices backs the turnaround of distressed boutique hotels near Florence and Siena. Italian SPVs acquire assets from insolvency processes or banks.

Southern Italy and islands: Campania, Puglia, Sicily and Sardinia

Southern regions and islands combine higher perceived risk with compelling yields on well-selected assets, particularly in hospitality, retail and residential. Asset selection and local partners are critical.

• Example 6 – Naples residential blocks: An SCSp SICAV RAIF compartment focuses on acquiring partially completed or repossessed residential buildings in Naples and surrounding areas, completing works and stabilising rentals.
• Example 7 – Sicily coastal hotels: An SCA SICAV RAIF sponsors the restructuring of bank-owned hotels near Catania and Palermo. The fund works with experienced operators and targets exits through long-term leases or sales to core investors.

Governance architecture: AIFM, GP and boards

Italian distressed strategies require a robust governance set-up that institutional investors can approve quickly.

• AIFM: A Luxembourg or EU-authorised AIFM assumes portfolio and risk management or at least risk oversight. It ensures AIFMD compliance, risk limits and reporting.
• General Partner (GP): In SCSp and SCA structures, the GP implements the investment policy, signs transactions and manages conflicts. The GP can be a sponsor-owned vehicle but must act within the LPA and AIFM framework.
• Board of directors: In SCA and SA SICAV RAIFs, an independent and diverse board is expected. It approves strategic decisions and oversees service providers.
• Depositary and administrator: They provide asset safekeeping, oversight on cash movements and NAV control. For Italian assets, depositaries pay particular attention to title, security interests and valuations.

Tax and cash repatriation considerations

Each investor profile must be analysed with local and cross-border tax advisors. In practice, a few guiding principles help shape the structure.

• Tax-transparent SCSp: Often preferred for club deals, especially where investors can benefit from treaty networks or specific rules in their home jurisdiction. Income flows from Italian SPVs through the SCSp to investors.
• RAIF in corporate form: In SCA or SA form, the RAIF itself is generally subject to an annual subscription tax on net assets rather than corporate income tax, subject to conditions and asset profile.
• Italian SPVs: Typically corporate vehicles that own the real estate or hold NPLs and UTPs. Structuring aims to manage Italian corporate tax, interest deductibility, withholding tax on upstream payments and potential application of participation exemption on exits.
• Exit planning: Distressed strategies rely on active asset management and clear exit routes, whether via stabilised income-producing sales or portfolio disposals to core or core-plus investors.

Investors expect a concise tax memo summarising expected effective tax leakage, withholding tax assumptions and sensitivities by region and asset type.

Risk management for Italian distressed real estate funds

Luxembourg structures enable a disciplined risk framework across multiple Italian regions and servicers.

• Leverage limits at compartment level, aligned with asset volatility and cash flow visibility.
• Concentration limits by borrower, region and asset type to avoid overexposure to a single Italian province or sector.
• Servicer selection and performance KPIs, given the central role of Italian special servicers for NPL and UTP management.
• Clear valuation policies, including external appraisals and independent review for complex restructurings.
• ESG integration, particularly energy performance and social impact of residential projects.

Key features and benefits of a Luxembourg platform for Italian distressed real estate

This section summarises the main structural and commercial advantages for a sponsor or institutional investor.

• Access to European and global professional investors through a familiar Luxembourg framework.
• Possibility to combine multiple Italian regional or asset strategies in one RAIF umbrella while ring-fencing risk.
• Flexible structuring of carried interest and co-investments through SCSp or SCA share classes.
• Efficient governance with clear roles for AIFM, GP, board, depositary and local Italian partners.
• Transparent and predictable regulatory environment that supports institutional due diligence.
• Ability to scale from a €100 million club deal to a multi-compartment €1+ billion platform.

Which structure for which investor profile?

Matching the vehicle to the investor base is essential for a smooth fundraising process.

• SCSp: Best suited for concentrated club deals, family office capital or bespoke mandates. Works well when investors are comfortable with tax transparency and direct look-through.
• SCSp SICAV RAIF: Attractive when you want the partnership features of an SCSp but within a RAIF umbrella that can host multiple compartments and accept a wider range of professional investors.
• SCA SICAV RAIF: Good fit where sponsor economics are central and control rights need to align clearly with management shares, while still offering institutional-grade governance.
• SA SICAV RAIF: Appropriate for predominantly institutional investors, potential listing discussions, or where internal policies prefer corporate vehicles.

Step-by-step roadmap to set up an Italy distressed real estate fund in Luxembourg

Damalion supports you to keep the process manageable and focused.

1. Define the investment thesis and target regions: Clarify whether you focus on NPLs, UTPs, REO or a mix, and which Italian regions and asset classes you prioritise.
2. Map investor base and preferred structure: Identify whether investors are mainly family offices, pension funds, insurers or banks and decide between SCSp, SCSp SICAV RAIF, SCA SICAV RAIF or SA SICAV RAIF.
3. Appoint the AIFM and service providers: Select an AIFM experienced in real estate and private credit, a depositary comfortable with Italian assets and an administrator with strong reporting capabilities.
4. Draft constitutional documents and LPA: Align the LPA or articles with the term sheet, waterfall, governance and risk limits agreed with cornerstone investors.
5. Structure Italian acquisition SPVs: Design the Italian layer in coordination with local tax and legal advisors, considering security packages, enforcement routes and asset management requirements.
6. Fundraising and first close: Secure commitments, execute subscription documents and complete regulatory and operational onboarding.
7. Deploy capital and manage assets: Implement disciplined underwriting, active asset management and transparent reporting to LPs.

Summary for investment committees

For an investment committee, the decision often comes down to three questions.

• Does the Italian distressed asset pipeline justify a dedicated vehicle and multi-year strategy?
• Is the proposed Luxembourg structure aligned with our governance, tax and regulatory requirements?
• Is the sponsor’s platform able to originate, execute and manage complex Italian restructurings across regions and asset types?

A well-designed SCSp or SICAV RAIF in SCSp, SCA or SA form can deliver a clear “yes” to these questions when backed by an institutional governance framework and a credible Italian operating capability.

Damalion supports project sponsors and international clients wishing to setup their investment funds in Luxembourg. Please contact your Damalion experts now.

Frequently Asked Questions

What is an Italy distressed real estate fund set up in Luxembourg?

It is a Luxembourg alternative investment fund or partnership that pools capital from professional investors to acquire Italian distressed assets such as NPLs, UTPs and repossessed properties, using Luxembourg structures like SCSp or SICAV RAIF for governance, tax efficiency and investor protection.

Why do investors use Luxembourg to invest in Italian distressed real estate?

Investors choose Luxembourg because it offers tested fund vehicles, robust AIFMD-compliant governance, a sophisticated service provider ecosystem and flexible structures that can host multiple Italian regional or asset strategies within a single platform.

What is a Luxembourg SCSp in this context?

A Luxembourg SCSp is a special limited partnership used as a master vehicle or standalone fund. It is usually tax transparent and governed by a limited partnership agreement that sets out commitments, distributions, waterfalls and governance for Italian distressed real estate investments.

When should I use an SCSp SICAV RAIF for Italian distressed assets?

An SCSp SICAV RAIF is appropriate when you want partnership-style economics but need a RAIF umbrella with multiple compartments, for example to separate Italian regions, asset classes or vintages while fundraising from a wider professional investor base.

How does an SCA SICAV RAIF structure the sponsor economics?

An SCA SICAV RAIF allows the sponsor to hold management shares through the general partner and align carried interest and control rights at share class level, while investors participate through separate share classes with clearly defined economic and voting rights.

When is an SA SICAV RAIF more appropriate for Italian deals?

An SA SICAV RAIF is more appropriate when the investor base is primarily institutional, internal policies favour corporate vehicles, or there is a potential medium-term objective to list a share class or provide a more formal board-led governance framework.

What types of Italian distressed assets can a Luxembourg fund target?

A Luxembourg fund can target secured NPLs, UTP positions, repossessed properties, partially completed developments, corporate sale-and-leaseback restructurings and special-situation hospitality or residential assets across different Italian regions.

How are cash flows from Italian properties repatriated to Luxembourg investors?

Cash flows typically move from Italian asset or loan-holding SPVs to the Luxembourg fund via dividends, interest or other distributions, then from the Luxembourg level to investors according to the distribution waterfall defined in the LPA or fund documentation, subject to tax and regulatory constraints.

What is a typical timeline to launch a Luxembourg RAIF for Italian distressed assets?

A typical timeline ranges from three to six months from initial structuring discussions to first close, depending on complexity, investor readiness, AIFM selection and the time needed to finalise tax, legal and service provider documentation.

Do I need an authorised AIFM for a RAIF investing in Italian real estate?

Yes, a RAIF must appoint an authorised external AIFM that is responsible for portfolio and risk management or at least risk oversight and ensures that the fund complies with AIFMD requirements for professional investors.

How is leverage managed in a Luxembourg Italian distressed real estate fund?

Leverage is defined in the fund documentation and monitored by the AIFM, typically with limits at compartment level and additional metrics such as loan-to-value, interest coverage and stress scenarios adapted to Italian asset cash flows.

How can I ring-fence different Italian regions or strategies within one SICAV RAIF?

You can create separate compartments within a SICAV RAIF, each with its own investment policy, leverage limits, investors and share classes, so that a Lombardy strategy, a Lazio strategy and a Sicily strategy are legally and economically ring-fenced.

What is the role of the depositary for a RAIF targeting Italian assets?

The depositary is responsible for safekeeping of assets, oversight of cash flows and monitoring of certain investment restrictions and valuation processes, working with local Italian counsel and servicers to confirm title and security interests.

How are Italian NPL and UTP portfolios typically held in the structure?

Italian NPL and UTP portfolios are usually acquired by Italian SPVs or REOCOs held by the Luxembourg fund. These entities contract with Italian servicers, hold the security package and manage enforcement or restructuring processes.

Which investors are best suited for this strategy?

The strategy is best suited for professional and institutional investors such as family offices, private equity sponsors, insurance companies, pension funds and specialised credit funds with an appetite for complex, higher-yielding real estate-backed exposures.

How are management and performance fees structured in these funds?

Management fees are often charged on committed or invested capital, while performance fees or carried interest are based on preferred return and catch-up mechanics defined in the LPA, with clear alignment between sponsor and investors.

Can a Luxembourg RAIF co-invest with Italian banks or servicers?

Yes, co-investment with Italian banks or servicers is common, provided conflicts of interest are managed transparently and terms are clearly documented, often through separate compartments or co-investment vehicles.

What are the main tax considerations for investors?

Key tax considerations include the treatment of income and gains at investor level, withholding tax on Italian distributions, the impact of double tax treaties and the classification of the fund in the investor’s jurisdiction, which must be analysed case by case.

How does governance work between the AIFM, GP and investment committee?

The AIFM manages or oversees portfolio and risk, the GP executes decisions within the LPA, and the investment committee provides structured decision-making on deals and key portfolio actions, all within a documented governance framework.

What are the first steps to start structuring an Italy distressed real estate fund in Luxembourg?

The first steps are to define the investment thesis and target regions, map the investor base and target structure, hold structuring sessions with Luxembourg and Italian advisors, and approach potential AIFMs and service providers to validate feasibility and timelines.

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