The Specialised Investment Fund (SIF) regime was established in Luxembourg by the Law of 13 February 2007 (the “SIF Law”). The SIF regime’s purpose was to offer great flexibility on investment scope while structuring and providing for an advantageous tax regime. It’s regulated at the fund level by the Commission de Surveillance du Secteur Financier (CSSF).
The entry into force of the Alternative Investment Funds Managers Directive (AIFMD), particularly Recital 10, “This Directive does not regulate AIFs,” took the discussion of the regulation at the fund level a bit further. Indeed, there’s a double layer of supervision in Luxembourg’s regulatory framework: direct supervision from the CSSF and indirect supervision from the alternative investment fund manager (AIFM), which is also regulated by the CSSF.
The Law of 23 July 2016 on reserved alternative investment funds (the “RAIF Law”) introduced a new regime into the Luxembourg toolbox: RAIFs, a fund structure that combines features of the investment company in risk capital (société d’investissement en capital à risque, SICAR), along with SIFs, to be regulated at the level of the AIFM only.
Introducing RAIFs Was a Great Success
Despite RAIFs being available only since 2016, there are already more than twice as many RAIFs than SIF structures: There are more than 2,880 RAIFs registered with the Luxembourg Trade and Companies Register (RCS), and 1,138 SIF vehicles. These RAIF structures numbers evince their popularity with fund managers and trust from investors.
When the asset manager or the fund’s sponsor contemplates the creation of a new investment strategy, alongside the current SIF structure established prior to 2016, it should also consider converting the SIF, including the existing compartments, into RAIF for the following reasons.
RAIF Conversion is Suitable for Open-ended Funds (e.g., Evergreen Funds) and Applicable for Closed-end Funds
Conversion from a SIF to a RAIF is relevant for open-ended funds as a solution for reducing regulatory costs and improving efficiency. This conversion is also applicable for closed-end funds, but its relevance diminishes if the fund’s term is nearing completion. In such cases, particular attention must be paid to the fund’s remaining life cycle to assess whether the conversion is worthwhile.
Maintaining a SIF: Continued Regulatory Oversight, Investor Confidence, and Tax Benefits
In such cases, maintaining a SIF might be a better option due to the following reasons:
- Regulatory oversight: SIFs remain directly supervised by the CSSF, ensuring additional investor confidence.
- Investor preference: For some investors, such as institutional investors, direct CSSF supervision remains a key criterion for investment.
Key Advantages of Launching a New Subfund in the Existing SIF:
- Lower setup costs: The incremental costs are typically lower because the SIF’s operational processes, service providers, and regulatory framework are already in place.
- Operational efficiency: Leveraging existing relationships and processes, leading to quicker setup and potential economies of scale, can reduce operational costs.
- Regulatory continuity: The SIF remains subject to oversight by the CSSF, which may be preferred by investors seeking double regulatory supervision.
Converting to a RAIF: Long-term Strategic Flexibility, Savings, and Faster Market Access
Alternatively, converting to a RAIF could offer significant benefits in the long run, especially in terms of cost and operational efficiency. While the SIF regime requires direct CSSF supervision, the RAIF relies on supervision at only the AIFM level. This allows for more flexibility and fast implementation of investment decisions.
Key Advantages of Converting to a RAIF:
- Greater flexibility: A RAIF is not subject to direct CSSF approval for the launch of new compartments or adjustments to investment strategies. This allows for shorter setup times and faster decision-making, allowing timely responses to market opportunities and investor needs. Such agility can be critical in a rapidly evolving regulatory environment or when deploying complex investment strategies.
- Faster time to market: A RAIF benefits from a streamlined regulatory process, because the absence of CSSF approval reduces the time required to establish new funds or subfunds. This is particularly advantageous for asset managers wanting to quickly capitalize on market trends or introduce new products in a competitive investment landscape.
- Branding and positioning: Establishing a new RAIF allows for distinct branding, which could appeal to investors looking for a separate investment vehicle.
- Investor protection: Despite the absence of direct CSSF oversight, the RAIF remains fully compliant with the AIFMD framework, ensuring investor protections such as risk management, transparency, and reporting are upheld.
- Cost efficiency: Without the need to incur CSSF fees at the level of the RAIF, and with compliance requirements consolidated at the AIFM level, fund managers can achieve a more cost-effective operational model. These savings can be reinvested in other areas of fund management or passed on to investors, thereby enhancing overall fund performance.
- French taxation: Until 2024, using a SIF rather than a RAIF provided a safer tax environment for French real estate investments. Now, RAIFs may be eligible for the same dividend-withholding tax exemption and reductions in France as a SIF, subject to obtaining an advance ruling. This change enhances the RAIF’s attractiveness for real estate in France.
Practical Checklist for SIF Conversion to RAIF
For fund managers considering a conversion to a RAIF structure, a thorough legal and operational review is essential to ensuring a smooth transition. Please consider the following steps:
- Review fund documentation: Ensure that all existing fund documentation is aligned with the requirements of the RAIF regime, with particular attention to investor disclosures and risk management policies in line with AIFMD standards.
- Secure all existing investors’ consent or voluntary early redemption: Engage with existing investors to secure the necessary consent — or voluntary early redemption (in the case of an open-ended fund) for investors who will not consent — for conversion from a SIF to a RAIF, ensuring transparency in the changes in regulatory oversight and any resulting operational benefits.
- Secure CSSF’s approval of the conversion: Ensure approval from the CSSF for conversion from a SIF to a RAIF.
Conclusion: Balancing SIF and RAIF Considerations
Whether maintaining a SIF or converting it into a RAIF depends on a fund's investment strategy, investor base, and regulatory preferences. While RAIFs offer speed, flexibility, and cost savings, SIFs provide a structured and regulated environment that some investors prefer. Before deciding, it is crucial to evaluate long-term strategic objectives, cost implications, and investor expectations.
For fund managers, aligning regulatory structures with investment goals remains a key success factor in navigating Luxembourg’s evolving investment fund landscape.
RAIF vs. SIF: A Comparative Table
The following table highlights the core differences between the different fund types and their main criteria:
[View source.]
