Private Assets: What are the requirements for setting up a Luxembourg investment vehicle?

Alison: Hello, everyone, and thank you for joining us at today’s webinar on Private Assets: What are the requirements for setting up a Luxembourg investment vehicle? I’ll pass you over to my colleague Connie Wong. Thank you, Connie.

Panelist Introductions

Connie: Thanks, Ali. Hello, and good afternoon, everyone. Welcome to our webinar, and thanks for joining us today. My name is Connie Wong. I’m the executive director at Waystone based in Singapore. To those who have attend our last webinar, we share with managers an overview of the framework and requirements for setting up funds in Luxembourg. Today, we invited our industry friend Stephane, who we are very familiar with. He’s a partner of Arendt and the head of the Hong Kong office. Stephane has been in Hong Kong for over 15 years, and very well experienced in advising Asia-based clients regarding the European structure. The other speaker, my colleague Kim Kirsch, based in our Luxembourg office. Kim is our head of legal and conducting officer. Kim spent over 20 years with some of the leading names, including Fidelity, Schroders, and Arendt. The roundtable today, we would like to go into details of structuring aid in the EU, the role and responsibilities of AIFM, and of course, the passporting and marketing.

Before we get into the content, as a housekeeping, I just want to remind everyone there’s a Q&A session towards the end of the presentation, and we very welcome you to send in the questions anytime during the webinar. So, without further ado, maybe a question to, not really a question, but maybe a highlight from Kim and also Stephane. I know Luxembourg has been known as the fund addictions for liquid products. So, if you can share with us how you have seen Luxembourg as a fund hub for asset class like private debts, real estates, and infrastructure?

Stephane: Absolutely. Well, thank you very much Connie, Alison, Kim, and thank you to Waystone for inviting us to participate for the second series of webinars dedicated to Luxembourg. So, if we look at the agenda. So, we’re going to speak about all these points. And in the first section, we wanted to give a little bit more flavor on, well, the growth with regards to alternative investment globally as well as in Europe, and what we have seen being developed in Luxembourg over the past number of years. So, if we go in slide number…I think that should be the two following slides, the one with the statistics. Not this one, the next one and the next one. Thank you. Again, thank you so much. So, that’s based on the statistics of Preqin, a well-known data provider.

Global Alternative Investment Statistics

And what we wanted to show here is just to show and illustrate what we’ve all observed over the past number of years. I mean, when you see the growth from 2010 to 2019 was already quite significant. And the perspective and anticipation for 2020 to 2025 is a growth with a compound annual growth rate on average of 9.8% per year. So, that’s something which we also anticipate. And obviously, we’ve seen quite a lot of the alternative investing being structured using Luxembourg, and this is precisely the point of this webinar to tell you how this transition did take place, and certainly, alternative investment fund investing has very bright days ahead.

If you look at the next slide, you see it a little bit spread by strategy. And obviously, the private equity strategy is the one in blue, dark blue, that, according to what is anticipated, will know the biggest growth and almost double over the next number of years. And so, over the next four years, really followed by private debt with an increase of 72% being anticipated. And then hedge fund real estate infrastructure, natural resource being around the 20% growth, which is already quite significant.

Asia, as being shown in the statistics, would account for quite a bit of that, but would also know a significant threefold growth over the next four or five years according to what was published back in 2020. So, you see there quite a lot of positive news. Private equity, private debt will grow by 15%, 11.4% per year respectively over the next couple of years. We see private debt being one of the fastest growing asset class with AUM and the compound annual growth rate also being in the double digits over the next five years. And real estate being a little bit compressed, but depending on which real estate we’re talking about, we may come up with different perspective and different figure.

If we look at Luxembourg in the next two slides, you know, just to re-identify and re-situate Luxembourg fundamentals here. So, very good ratio with regards to sovereign debt, 25%, which is very low compared to many other European countries. A pretty stable and balanced budget. Triple A rating, which is very important. Central location in Europe. And already, if we go on next slide, a very significant market share with regards to liquid funds. And so, we’ve all seen that during the last webinar. So, I encourage you to either re-listen it or review it. But basically, this is primarily mutual funds. If you look at the next slides, these are, again, the fundamentals about Luxembourg, it’s GDP growth. The next one is a summary of the main advantages, again, something which on the next slide we have seen already last time, and which we’re not going to cover.

Alternative Investment Funds (AIF)

But the one after the slide coming just after is the one I want to spend a bit more time. Forget about usage for now. We have covered it last time, and we’ll probably cover it in more detail in another webinar. What I want to cover here is the alternative investment funds, AIF, which are the private equity, real estate, hedge fund, private debt infrastructure that we have seen before. This has known a significant and amazing, I should say, growth over the past number of years. We’ve always had in Luxembourg quite a number of these private equity real estate fund managers, quite a lot of them had regulated funds back in the days, and they had their SPVs in Luxembourg and some of their infrastructure in the country.

Now, with the introduction of AIFMD and the growth of alternative investment fund investing, we’ve seen really Luxembourg being used by all those managers to set up their funds with about 96 billion euro of assets into real estate funds, 111 billion in private equity venture capital. I should add, and I’ll do that on the slide, which you’re going to get, loan funds, private debt funds, which account for 65 billion-plus that are figures of 2018 that has only increased since then. So, altogether about 400 billion of assets under management into alternative investment funds in Luxembourg.

What is also very important is that it’s not only fund managers, thanks to the Alternative Investment Fund Managers Directive, and the Luxembourg infrastructure have established themselves in Luxembourg 267 fully authorized AIFMs are based in Luxembourg with a significant human and technical infrastructure on the ground, and Waystone is definitely no exception to that. So, Kim is going to tell us more about that. We also have in Lux quite a number of registered AIFM, which are the below threshold one, the small one that do not necessarily have to comply with the entire sections of the AIFMD. So, we’re about 600 of them. And the last two bullets are reserved alternative investment funds. We’re going to talk about that into a great deal of detail just after, as well as the special limited partnership, 1,300 of them being set up in Luxembourg with an AIFM. We’ll see what that means. In reality, you have over 3,500 of special limited partnership being set up in Luxembourg. So, a third of them being appointing AIFM.

ManCo AIFM Trends

So, all in all, quite interesting numbers. Global numbers being really on the rise, products being set up by managers, being bought by investors across the range of investors, and Luxembourg in the middle of that, capitalizing on its great knowledge with regards to fund setup and fund [inaudible 00:09:05.885] mutual fund space and implementing that into various alternative asset classes. Kim, I hand over to you for your comments.

Kim: Yes, thanks, Stephane. As Connie said, I’m the European head of legal of the Waystone Group. I’m also one of the conducting officers of the management company in Luxembourg. It’s good to be here. So, thanks, Connie, thanks, Ali, for organizing this webinar, and thanks, Stephane, for participating and for your very valid input. What we see as a ManCo AIFM, the trends, confirmed trends I would say, is that there’s a high demand for loan funds in particular. And we see two types of funds. So, those investing into loans. So, that are loans issued typically by small and mid-size enterprises, being it in Europe or elsewhere. And we see the trend also for the loan-originating funds. That means the funds issuing themselves loans.

From a real estate property fund perspective, what we see here is that also there, it’s not only for the European properties, but also properties elsewhere including offshore jurisdictions. We, for example established a property fund with Indian real estate assets. On the infrastructure side, they’re also typically what we see that are funds investing in more important projects like airports, shopping malls, and also those funds are typically targeting institutional investors. So, insurance companies, pension funds. Of course, not only for the liquid asset space, but also for the illiquid asset world. We see also now the debate on the ESG aspects and sustainability factors. So, also in the illiquid asset space, we see now more and more initiators trying to set up so-named Article 9 funds. So those promoting sustainability characteristics. Yeah, that’s the trends we see as an external AIFM ManCo. And, Stephane, I would hand back to you now for the different fund vehicles available in Luxembourg.

Fund Structures for Managers in Asia

Stephane: Okay. Thank you, Kim. So, yes, we are going to cover in more detail what we discussed a bit last time, which was, you know a snapshot of the entire Luxembourg toolbox, and we spend a little bit of time on every single vehicle talking about their features and their specifics and in which case we were using them. So, this time we will entirely forget about UCITS, we’ll focus on the RAIF. So that’s the second box on top, the Reserved Alternative Investment Fund. Very popular, and I’ll explain you what. We may touch on the Specialized Investment Fund, which is the SIF just next to it, which is actually exactly the same as a RAIF except for the regulatory approval, which you need to obtain to set it up and to have it, you know, launched and subscribed to investors. So, these are virtually similar vehicle, one being regulated, the other one being not regulated.

I’m not going to speak about the SICAR, the investment company in risk capital, just for you to know that we have it, and we can certainly dedicate an entire webinar to the SICAR next time. And we’ll speak about the last box, which is the limited partnership regime, which we have in Luxembourg since 2013. So we look at the next slide, we have another sort of representation of what we are going to talk about here showing from the non-regulated structure, which is the very simple SPV on the left side in the lower corner to the highly regulated UCITS, and everything in between, we are going to focus on the two vehicles that you see in the red frame.

Reserved Alternative Investment Fund (RAIF)

So, let’s start with the RAIF, which is on the next slide. The RAIF is a very popular product that we have included into Luxembourg law in 2016. So, since then, about one RAIF has been set up every business day. So, it’s a very, very popular product, and we set them up very often for a great variety of investors and managers and sponsors including in Asia. This is why it’s primarily relevant to discuss about that here. So, what are we talking about here? A non-regulated vehicle. And it’s no coincidence that it’s been introduced in the Luxembourg toolbox a few year after the alternative investment fund manager’s directive was included in the Luxembourg law and implemented in Lux because the reasoning was and still is, if you do have regulation applying at the level of the manager, you might not need to have regulation applying directly to the fund itself. You already regulate the manager. You do not need to regulate the fund itself.

So, this is the sort of genesis of having produced a fund dedicated to well-informed investors, non-regulated, that has no restriction as to which type of assets it can invest in, low-risk diversification rules and requirements. So, it’s not like a retail fund. Here we’re talking about a guideline of having at least a 30% diversification requirement. It also has lightened accounting requirement and a very friendly tax feature because it’s tax-exempt for the most part except for a subscription tax that applies which is described here. So, the great advantage of these vehicles is that they are by all means fund structure. You can set them up as standalone funds or as umbrella structure for funds for which you would like to add scales and would like to benefit from this ability to have different sub-funds. You can do it within that type of fund vehicles.

This is highly flexible because part of it being because it’s not regulated, so you can very quickly set up a RAIF structure. We’ve set up RAIF structure in a couple of weeks. So, four weeks would be a reasonable and okay timeframe for a very simple and straightforward RAIF structure if all your service providers are already lined up. One requirement by law is that you have to appoint an AIFM, and right now it would be a new AIFM necessarily because it needs to be fully AIFMD compliant. By doing so, it’s a requirement, but the other side of the same coin is that you benefit from the European passport with this vehicle. So, you can sell it on the cross-border basis within the EU based on the passport, which we are going to tell you about in more detail later.

So that’s very popular vehicle we’ve had, and we’ll speak about that as well a bit more later. We’ve had set them up for Japanese sponsor, Chinese sponsors, Korean sponsors, you know, Singapore-based, Hong Kong based. I mean, in Asia, we really have every single jurisdiction and sponsor from the entire region being really attracted to RAIFs. And some of them are being not only sold in Europe, but also sold back in Asia on a cross-border basis in a variety of jurisdiction, and again, we’ll speak about that in a few moments. We’ve set them up for infrastructure debt funds, for real estate funds, for private equity, for all these asset classes that we’ve discussed before. This is really the way to go in terms of fund vehicle. We’ve also set up RAIF for a straightforward, you know, liquid strategies that works as well. I mean, of course, if you can do the other asset class I mentioned, you can also do the more liquid strategy, and it works very well for a great variety of well-informed investors.

Special Limited Partnership (SLP)

The other vehicle I wanted to tell you about in detail is the SLP. So that’s on the next slide. That’s the special limited partnership introduced back in 2013. And we here in Asia, you know, various financial centers proposing now their limited partnership regime. We’ve had ours for a little bit over seven years. Of course, being a civil law jurisdiction, we had to sort of get some inspiration from common law countries and systems of law in order to include that in our system and in our toolbox. It was not available before that and it was somehow missing when we were talking to managers or investors that are, you know, well-versed and used to limited partnerships, and of course, in private equity and for other asset class, this is rather the rule. So, we’ve included that.

Again, same idea since you do have regulation potentially applying at the level of the manager, you do not necessarily need to have regulation applying at the level of the fund, and this is what SLP is about. This is really a straightforward, limited partnership which is not regulated, and which will have a GP in Luxembourg. And as we will see later, this GP can opt-in to appoint an AIFM making the structure entirely AIFMD compliant should you wish to, but it’s not an obligation. It’s more an option. It only becomes an obligation when you reach certain threshold of AUM at the level of the general partner. So that’s what I wanted to say.

The difference with the RAIF is that again, you do not have the ability to have sub-funds, but this is not necessarily a constraint for quite a number of managers that work rather by vintages of funds rather than having sub-funds within the platform, but that’s something that you need to know. Other than that, it’s entirely flexible. You can invest in anything. It can be sold to any type of investor. This really, the entry-level fund vehicle that we propose to managers that after that can even decide to upgrade the structure into something fully AIFMD compliant. So, I stop here perhaps to give Connie or Kim the ability to comment on those two very successful vehicles.

The Role & Responsibilities of an AIFM

Connie: Thanks, Stephane. I think that’s really helpful. That the content you share about the two available structures for managers in Asia, they can consider when they look into alternative investment asset class. So, I guess maybe we can turn into, I know you also mentioned about the requirements potentially for these funds to have an AIFM to be appointed. And maybe perhaps we’re just turning to Kim, if you can share to us, you know, the role and responsibilities of an AIFM. I know the regulations these days can seem a bit onerous and also complex to some of the managers in Asia. So, if you could give us an overview, I think that would be very good for the audience today.

Kim: So, good. So, Connie, for your questions on the role and the responsibilities of the alternative investment fund manager, thanks, Ali, we have at the one side the European directive, the so-named AIFMD regulating the alternative investment fund managers, not the product, but the managers. We all know this now, I think. And this directive clearly describes four main functions and responsibilities of the alternative investment fund manager. That’s number one, the portfolio management. So, not to be forgotten because it still remains the most important function for fund. The second is the risk management. The third is the valuation, and the fourth one is the passporting. So basically, the AIFM opens the gate for the product for the alternative investment fund to be marketed, commercialized in the other jurisdictions.

On the CSSF Circular, or we have also at the other hand, we have a CSSF Circular 18/698. It is setting clearly the minimum expectations of the regulator when it comes to the organization, the substance, the human and technical infrastructure of a ManCo of an alternative investment fund manager. And it is also regulating and describing the expectations when it comes to AML, but also setting a clear frame for delegating different functions. There, it’s always under the ultimate control of the delegating AFM and minimum requirements are, for example, a sorrow, initial and ongoing due diligence to have an agreement in place describing the delegation with the need to have a minimum content like terminations, etc.

And what should be highlighted is that for the unregulated funds, we wanted to focus today on, so speak RAIFs, SLPs or SCSPs, those funds are not directly regulated by the CSSF, so the Luxembourg regulator, but indirectly by its AIFM. So, the regulation and the supervision would be indirectly performed by Waystone in its capacity as alternative investment fund manager. A concrete example is, for example, we don’t want to overdo it always partnering with our clients, but we would, for example, take the forms of the CSSF when it comes to the honorability of the board members or the GP managers. That’s a bit the frame in Luxembourg when it comes to the AIFM role and responsibilities. Connie, if you want…

Connie: Thanks.

Kim: Yep.

Connie: Sure. Kim, just on this slide, I know you mentioned about a few things that of a role and responsibility of AIFM including, you know, the portfolio management, the delegation, and also the valuation function. So, maybe two questions to you are, what are the common models for a portfolio manager, no, management and what kind of things that can be delegated? And the second question is if you can also, you know, elaborate a little bit more on the valuation. I know that’s also being covered by you earlier when we mentioned about the AIFM role and responsibilities.

Models for a Portfolio Manager

Kim: Yes, thanks, Connie. We have two types of models for the portfolio management. Again, as I said before, portfolio management is one of the core responsibilities of the AIFM. And usually, in case of a regulated entity, so entity performing the day-to-day portfolio management, the AIFM delegates to this entity, the portfolio management function again, subject to the different conditions as framed and outlined in the directive and the CSSF Circular. And these entities should be subject to an equivalent supervision. Most of the main Asian regulators are considered to perform an equivalent supervision. So, we have existing funds with Asian portfolio managers. And the second model would be sometimes the group initiator would not have a regulated entity within its group. There, we would appoint an investment advisor. So, providing advice to the AIFM being then itself in charge of portfolio management.

How are we doing this? Typically, we would set up an investment committee. This investment committee is composed by the colleagues being in charge of portfolio management and potentially other experts. And Waystone has a very flexible setup and model when it comes to the investment committees. So, if, for example, the investment advisor says, we would like to have a member in this committee, we say, that’s absolutely fine. And to a certain extent, it makes sense because of course, that other person’s bringing the expertise. And then it can be openly discussed in the committees what is needed as information, etc. to take the investment decisions. So, from that side, we are pretty flexible. The CSSF Circular 18/698 says, in this case, it should be non-voting members, but we believe as long as the AIFM has the last words to be able to demonstrate that it took the investment decision, ultimately, that’s also fine with us.

Valuation

An important note here to do is that the AIFM cannot delegate both risk management and portfolio management. If not, it would become a letterbox entity which was heavily criticized by ESMA. So, it needs to keep either the portfolio management or the risk management. For the second part of the question Connie raised, when it comes to the valuation, there, in theory, we have two models, but in practice, we see three models being applied. The first is that the AIFM delegates the valuation to an external valuation agent as defined by the AIFMD. That’s important to be mentioned because sometimes we see that there are, yeah, later discussions with those entities. And then they say at the beginning, yes, we would like to do the valuation, but then we see they imagine it a bit different, and they don’t want to take the liability for the valuation function. So here, clearly if we speak about an external valuation agent as defined by the AIFMD that are entities also being willing to take the liability for this function.

And we see also that this model can be, depending on the size of the fund, very expensive. So, they are also, Waystone elaborated two different models. The one is we look, what do we have already in place from the client side? Are they working already with data vendors, etc.? Could we also have these types of sources available? So, more the plugin based on existing procedures on the portfolio manager side or investment advisor side. And we would add this valuation agent for the alternative investment fund. And the third model would be depending, of course, on the availability of the sources and the asset class that we would be the valuation agent without any data vendor being needed. So that are, Connie, in short, the different models when it comes to portfolio management and valuation.

Connie: Thank you, Kim. I think this is very useful, you know, for managers to consider when they come to either they are setting up their own AIFM or potentially they’re looking for third party for such kind of housing solutions that Waystone offer. And I guess we have touched on the role and responsibility of the AIFM. Stephane also shared with us available structure, that’s for the client that can consider including the RAIF and the SLP. I think maybe a very experienced in structuring different type of vehicle for managers in Asia. So, perhaps maybe if you can share with us a few examples, maybe a few case studies today with some of the audience that joined us on this webinar, the type of the case study that you can share.

Case Studies

Stephane: Well, thanks, Connie, for the question. Indeed, very practically, when we are, you know, meeting with Asian-based managers, they have quite a number of questions with regards to the best manner structuring their investment vehicle in Luxembourg and in Europe generally. I mean, a lot of them already have either local fund vehicles or most likely a Cayman structure. And they’re thinking, you know, what should I do? Should I set up my standalone fund in Europe in Luxembourg? Should I set up a parallel vehicle in Luxembourg to cater to needs of European investors, etc., and benefit from the passport? I mean, a lot of this is driven by whether or not you want to have the passport. And if you do want to have the passport, you know, how much are you relatively confident you can raise with that passport to justify the cost of the structure?

So, we are seeing really practically three options. Option one, which is the slide just after this one, it’s really the entry-level vehicle. That would be the next slide. That’s really the entry-level vehicle. Just the same as you would set up a Cayman structure, you can set up a Luxembourg limited partnership structure with a GP based in Luxembourg, has to be based in Luxembourg, doesn’t have to have a license provided that it is a subthreshold, meaning that it doesn’t have an AUM exceeding 500 million for closed-ended and non-leveraged funds, or 100 million in any other cases. So, it’s sort of for smaller managers that would like to use a limited partnership made in Luxembourg with a view perhaps to upgrade into an AIFMD-compliant structure later. There is no obstacle to start with that. And as a matter of fact, this GP can delegate to an Asian manager, an Asian advisor the portfolio management of the structure, and this is perfectly fine.

This would not benefit from the passport. We are going to see, in which case we have the passport, in which case we don’t have it within the EU. So that doesn’t have it, but it’s a very nice and convenient way to start. Doesn’t need to have an AIFM. It doesn’t need to have necessarily a depository. You know, so it’s kind of the entry-level. If you go to the next slide, which also is the next level, that would be a standalone AIFMD-compliant limited partnership, in this case, with a general partner. Knowing that the fund, which is in this slide could be an SLP, it could also be a RAIF structured as an SLP. You know, the RAIF law and the RAIF regime is more to be considered as an overlay in order to benefit from the flexibility I mentioned before rather than really a different, sort of, corporate or limited partnership type of vehicle. It’s not. It’s a regulatory regime that you will apply to the fund.

And so, in both case, these can be SLPs. The GP would, in this case, appoint an AIFM. So, it would do so, for example, if it succeeds the threshold of 500 million or 100 million, I mentioned before in AUM. It still can appoint an Asian-based manager or an advisor. And then, in this case, it benefits from the AIFMD passport. And so, this is actually the way to go as a standalone fund in Luxembourg. And if you do want to use it as a parallel fund vehicle, this is the next slide, this is perfectly fine as well. So, we actually do that quite a lot over the past number of years including in Asia where we see Asian managers with either a fund in the Cayman, a fund in Singapore, a fund in Hong Kong or in other places willing to accommodate the needs of European investors having a parallel fund in Luxembourg.

And so, by all means, this is similar to option two, except that this time, the fund in Luxembourg is on the right side of the screen and will be only directed to European investors with the European AIFMD passport. On the other side, you would have a non-European fund for other investors around the world, U.S. investors, Japanese investors, for example, using Cayman structures. And they would both invest in the same portfolio of private equity investment, real estate, hedge fund, infrastructure, you name it. Both funds would appoint the same investment manager or investment advisor. You may or you may not have a pooling vehicle or an aggregator underneath. I mean, of course, I spare you all the engineering to just remain a bit high level here. But that works very well, and we are doing that quite a lot in Luxembourg nowadays. Certain managers put their standalone fund or their main fund in Luxembourg. Others will use it as a parallel fund when it makes sense. And in most cases, it does make sense.

What is the Marketing Passport?

Connie: Thanks, Stephane. And it’s really good that you share, you know, the three options available that managers can consider. And I guess you also raised a very interesting point, which lead to another part of conversation, which is the passporting and marketing. And perhaps I will invite Kim first, and maybe you can share with us, you know, what is the marketing passport and how would that be made available to managers?

Kim: Sure, Connie. Thank you. Just also to come back on what Stephane just alluded to, we clearly see this trend also of the parallel structures. We have a lot of those. It’s an interesting setup. So, that’s also confirmed from our side. When it comes to the structures with or without AIFM subject to all the conditions is clearly, of course, the AIFM is also enabling the passporting. So basically, as I explained before and opening the gate for the fund, for the product, but also from practical perspective, the AIFM is coordinating a lot of relationships, being it with the central administrative agent, being it with the depositors, being it with the auditors. So basically, our aim is to partner with our clients in a way that we let the clients focus on what they want to do, what they can do the best, and we would basically take care of the rest, and also coordinating a lot with the different service providers.

For the passporting and marketing, again here reemphasizing also the unregulated funds, so the RAIFs, the SLPs, the SCSPs, qualifying as an AIF and appointing AIF can be passported into the different EU jurisdictions. I think that’s very important as a principle. So, it’s not only the regulated funds, but also the unregulated funds. In practice, we see that usually there’s a MIFID-licensed entity being appointed as a distributor for the marketing in the different EU countries. We have also clients, of course, not having a MIFID entity within its group or within their groups. And there, again, the Waystone Group can offer distribution support services by a segregated entity, duly, of course licensed MIFID entity in Dublin.

When it comes to the passporting, that’s also service, the Waystone Group is offering and further developing. And there we have also a specialized team doing this on a day-by-day basis. For the marketing in the Asian countries, that’s typically done based on the local private placement rules or the exemption regimes. And perhaps, Stephane, if you would like to share your experience, what you see when it comes to the marketing on a more limited base in the Asian countries that might be interesting for the audience.

Stephane: Absolutely. Thanks, Kim. I would perhaps make a comment on Europe and Asia, starting with Europe. So, we’ve seen that the marketing is available, actually in one and only one scenario is when you have a European fund with a European AIFM, right? This is the only scenario. If you have a non-European fund, no passport. If you have a non-European AIFM, no passport, and all the combinations thereof. So, this is really the only way to go. Still in Europe, and we are going to talk about that in a second, you do have the national private placement rules that still are available to managers. What we see practically though is that as a result of reporting requirements and the relative complexity of dealing with national private placements, which are still non-coordinated within the EU, and which you need to deal on a case-by-case and country-by-country basis and regulator by regulator, it becomes very, very complicated quite quickly.

If you have more than two, three jurisdictions, which you approach on the national private placement, that’s usually sort of the maximum you can do before it really becomes too complicated practically, and a compliance, you know, risk for you. So that’s perhaps where we see managers really thinking, okay, I have an Asian-based manager that has a Cayman fund or a Singapore, Hong Kong-based fund. They’re thinking about, you know, approaching a couple of investors in the EU in a couple of jurisdictions that might be okay to do it on a private placement basis for them. But if we want to go beyond that, usually it doesn’t work anymore. And so, we need to look at RAIF, SLPs in order to cater to their interest and benefit then from the passport. So that’s one.

For Asia, it’s a bit the same idea because obviously we don’t have coordinated rules in the region. I mean, we do for mutual funds to an extent, but it’s still not quite what we have with the passport and the UCITS or AIFMD Europe. And so, you need to deal country by country with the relevant national private placement rules or what they call also safe harbors or registration for accredited or institutional investors, etc. So, what we’ve seen with RAIFs in particular…not so much SLP. We’ve seen a number, but not as much. I think RAIF being more a fund than…an SLP is as well a fund, but I would say that the RAIF is a full-fledged fund and is recognized as such. We’ve seen them, you know, widely and accepted in Korea, in Japan, and registered in those two countries for distribution to institutional investors.

In Hong Kong, it’s more working on the safe harbors and the national private placement. In Singapore, we’ve seen them, you know, as well distributed in this way. So, although, you know, we’re not qualified to advise under any of these systems of law, we work with local advisors and law firms and so forth and service providers that can help us on the ground. And as Connie mentioned in the beginning, I’ve been here for quite some time now, and I can see that there’s really a buy-in that’s quite strong by local investors. And as a result, you know, sort of the various markets towards having, you know, relatively easily registered or accepted under national private placement regimes in Asia. Kim.

Impact of Cross Border Distribution Regulation

Connie: Thank you, Stephane. I think it’s really good to hear, you know, this is being widely accepted in the market, you know, those you mentioned. And I guess we are also kind of conscious about the time that we have this afternoon, and maybe it will be just the last question to you both realizing that I know that there’s a new regulation is going to come effective in August, which is next month. I think that I believe it’s a new cross-border distribution regulation. So, maybe to you both, if we can get some take away from you both on, you know, what will be the impact to some of the non-EU managers here, in particular to the Asia-based managers?

Kim: Perhaps, Stephane, if you allow, I will give it a start. Thanks, Connie, for the question. And yes, I think it’s a very important regulation and directive. It’s coming soon. So, the effective date is beginning of August this year. These new requirements are framing a bit what we saw already to a certain extent, but putting clearly the conditions around it and more formalities and what would need to be done. A very important point these new regulations are covering is pre-marketing. The pre-marketing is to a certain extent, a bit similar to the procedure we explained before, and for the passporting, so it’s a regulator-to-regulator process. That means the alternative investment fund manager also here opens a gate. So that would be, for example, an initiator saying in the phase of setting up the fund they say yes, but we would like to perform already pre-marketing in some countries because we have a limited circle of investors being interested in our product.

In this case, the AIFM would send a pre-marketing notification form to its own state regulator, here in our case, the CSSF, and the CSSF would transmit it then to the other host state regulators. The main conditions about pre-marketing you can read in both the directive and the regulations is clearly to distinguish pre-marketing from reverse solicitation and the marketing activity. So basically, during that period of time, allowed for pre-marketing, so, 18 months, the reverse solicitation and the marketing is not possible. That’s very important because it’s often a fine line. So, what is reverse solicitation versus pre-marketing, etc.? But I think there, again, in the whole value chain, everybody has interest to a certain extent to comply the best we can.

Also, there Waystone has its own internal working group assessing all the new requirements. There will be very soon a client memo to be sent out and to be published going into further details, but also highlighting how can Waystone help its clients, again, with some added value services when it comes to these new requirements. In summary, perhaps to the other points covered by this new frame, they’re focusing also on the content of the marketing communications and materials, and very broadly defined. So, what is marketing material? It’s including websites, it’s including other means of communication, etc. It’s not only the standard fact sheets or brochures or presentations.

Then it’s referencing to the local facility agents or information agents that’s more for the retail investors. Here there’s a new element that it does not need to be local agents. It could be a centralized agent. I think it’s still not clear what type of licenses agents should have. The CSSF will not goal plate to the best of our last knowledge. So, they will not ask for a specific license, but I think it’s not excluded that some other regulators might do so. Then it’s covering the fund deregistration or denotification, and there’s also a pretty formalistic procedure. So, for both UCITS and alternative investment funds. And it’s covering the post notification in case of material changes. Also there, what is a material change? It depends really on the regulator. Typically, we say when there’s a material impact for the investors of the fund. And in theory, there should be a one-month prior notification sent to the regulators in case of material change. Perhaps, Stephane, I took already I think a lot of time, if you would like to add something.

Stephane: Sure. I think that you summarized it very well, so I have very little to add. I think that there are different aspects, as you pointed out, under this cross-border distribution regime that will indeed enter into 2nd of August. So, laws are being discussed and passed by the various European parliaments. The real important point besides denotification and a few upgrades, which they do to UCITS and AIFMD is this pre-marketing point that you mentioned. And there is I think a few benefits to that. It adds a lot of clarity to the regime. You mentioned about, you know often a fine line between what the pre-marketing is. Well, now we do have a clear definition. It’s pretty wide. And we also have a very clear consequence and sort of sanction. If you have done pre-marketing, you will no longer be authorized to rely on reverse solicitation.

And reverse solicitation always was tolerated. It was mentioned here and there. You had a few circulars from regulators that were sort of trying to shed some lights and put some colors around the concept. But still, it was more tolerated that being, you know, properly covered by the law. And so now we do have a definition of pre-marketing. If you’ve done that, you can forget about reverse solicitation and say, well, the client came to me and just subscribed for my product. No, you cannot do that. And this is 18 months after the pre-marketing took place. So obviously, you know, 18 months later it’s unlikely that your product still is going to be the flavor of the month for investors.

So, I think it’ll achieve the purpose. And the consequence will be that if you do want to onboard investors after having done the pre-marketing, well, use your passport if you can have it. So, do an AIFMD-compliant product, appoint your AIFM, and sell it on a cross-border basis after you have assessed interest from investors. If you do not have the passport, use the national private placement rules. And I think what is important is that most likely there will be a level playing field in this respect between European AIFM and non-European AIFM. We’ve seen that for other rules contained by the directive. And so, a manager coming from outside the EU will most likely be subject to the exact same rule with regards to not being authorized to onboard investors based on the reverse solicitation. And that’s a game changer. That would be a game-changer. And in this case, they will be forced to national private placement rules. With the practical limitation I mentioned before, you cannot do that for five or six jurisdictions. You will have then to opt for a Luxembourg parallel vehicle, which would then be the perfect solution for you. So, on that note, I hand over to you, Connie.

Concluding Remarks

Connie: Thank you, Stephane, and thank you, Kim. I think you both sum up really nicely, you know, with regards to the implication that manager need to consider with the upcoming new regulations, whether for the pre-marketing and also the reverse solicitation. And of course, in the earliest session of our webinar, we also mentioned what are the available structure or the three options that manager can consider and also the roles and responsibilities of the AIFM. So, thank you both, Stephane, and also, Kim, for joining us this afternoon. And again, to everyone who joined us to this webinar, as usual, we will share our presentation slides and also address every single individual questions. We are also looking to host another follow-on chapter. I know we did one last time about the overview, a very high-level introduction of the Luxembourg fund industry. With this one, we touched mostly on the alternative investments, and with the next one, if you guys have any suggestions or any feedback, we always welcome, and hopefully, we’ll see you guys again very soon for our next chapter. And thank you both for joining us again. You all have good day.

Stephane: Thank you.