What you need to know about setting up funds in Luxembourg - Waystone

      What you need to know about setting up funds in Luxembourg

      Please join Waystone and Arendt as they provide to you the latest framework and requirements for setting up Luxembourg based funds.
      欢迎出席 Waystone 和 Arendt 联合举办的线上研讨会,会议将为您介绍在卢森堡设立基金的最新架构和要求。

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      What You Need to Know About Setting up Funds in Luxembourg.

      Thank you for joining us for today’s webinar on What You Need to Know About Setting up Funds in Luxembourg.

      An Introduction to Waystone & the Speakers

      Waystone is a leading provider of institutional governance, risk, and compliance services to the asset management industry. We are now supporting asset managers with more than a trillion USD in AUM. We’re very delighted to have two subject matter experts speaking with us this afternoon, my colleague, Valentine from our Luxembourg office, and Stéphane from Arendt.

      Arendt is the leading law firm in the Luxembourg market. They are advising more than 4,800 funds and sub-funds worth more than 1.6 trillion USD. Arendt is advising 63% of the 30 largest promoters who have funds domiciled in Luxembourg. Stéphane is a partner of Arendt and the head of the Hong Kong office. He has been advising clients based in Asia Pacific region regarding their European projects and their Luxembourg legal and regulatory questions, including the structuring, setting up, and marketing of the funds under UCITS and AIFMD.

      Valentine is the associate director at Waystone based in Luxembourg. She has extensive knowledge in investment vehicle structuring, cross-border distribution, delegate oversight, and client solutions management. Valentine is an active member of Luxembourg Private Equity and Venture Capital Association where she helps the association in respect of all the marketing and promotion activities to improve the attractiveness of Luxembourg for both regulated and unregulated private equity and venture capital funds.

      The Agenda

      Now, without further ado, today’s agenda, we will be talking about:

      • Luxembourg as a fund domicile
      • The available fund regimes
      • Factors to consider when setting up a fund
      • Where can the fund be distributed?

      This should give managers an overview of the Luxembourg market. And to highlight here, we will be hosting another two to three series where we will dive into the details in AIFs and UCITS, respectively. Stéphane and Valentine, you’re both the advocate of Luxembourg. So tell us why choosing Luxembourg as a fund domicile.

      Luxembourg as a Prima Financial Center Within the EU

      The only grand duchy in the world, the Grand Duchy of Luxembourg, is a landlocked country between Germany, France, and Belgium. We have about 630,000 people residing in Luxembourg, 47% being foreigners. What we like to highlight besides the fact we are a prime financial center in Europe, as we will see soon, is a very sound and balanced public finance. As you can see, 28% sovereign debt, a very small deficit. It’s probably going to be a little bit worse as we will go through the pandemic crisis, but still we have AAA rating, which we’ve always had, never lost it even at the worst of the global financial crisis of 2007, 2008, and we have one of the highest GDP per capita, pretty good employment rates, a very decent growth rate as well, very much linked to the financial center.

      If you look at Luxembourg, it’s a prime financial center within the EU, and if we look specifically on the fund business, it’s a very, very large portion of our activities over there and also for activity as a firm and as service provider. We’re the largest cross-border fund center in the world. The U.S. is the largest, but it’s pretty much a domestic market, whereas Luxembourg is primarily cross-border distribution driven. We have about 3,500+ investment funds based in Luxembourg, 15,000 fund units, meaning share class, sub-funds, etc., representing over €5 trillion of assets under management, which is quite significant. As you can see in the lower part, on the left side of the slide, a very broad diversity of sponsors are using Luxembourg in order to create their funds. We have the U.S., the UK, Germany, Switzerland, Italy, you know, France, Belgium, etc., and we do have also quite a number of Asian players, whereas from China, from Japan, from Korea, from Hong Kong, Singapore, Southeast Asia, etc. From pretty much every country in the region, we do have sponsor using Luxembourg.

      Cross-Border Distribution in Luxembourg

      One big particularity of Luxembourg on which I would like to insist is the cross-border element. As you see on the lower right corner of this slide, 67% of funds that are distributed in over 2 jurisdictions, in addition to their home country, are Luxembourg incorporated or Luxembourg established. So, we’re talking here primarily about UCITS funds, but as you can see, when you compare to other jurisdictions, Luxembourg really stands out. And so, Luxembourg very much is well known for many years, over 30 years, for its UCITS product, and we’ll see in detail what UCITS is about in this first series of webinars dedicated to funds made in Luxembourg, but what we should also be aware is that Luxembourg, from the early 2000s to now, has been tremendously growing with regards to alternative investment funds. For vehicles, we have introduced in the Luxembourg toolbox non-regulated and regulated alternative investment fund vehicles and also driven by the Alternative Investment Fund Managers Directive, AIFMD, which we are going to talk about in more detail, which has been introduced in the EU in 2011, then implemented in various member states.

      Assets Under Management in Luxembourg

      Let’s continue this introduction by having a look at the assets under management in Luxembourg. So as Stéphane said, as we speak, we have approx. €5 trillion invested in UCITS and AIF products. This makes Luxembourg the largest investment fund center in Europe and, as we said, the second largest in the world. We can say that Luxembourg funds have a dominant share in both the retail and the institutional marketplace in Europe, and they are also the vehicle of choice outside of Europe, in many parts of Asia, LatAm, and the Middle East. Needless to say, that Luxembourg is well known for the UCITS industry, which has grown over the last 25 years, and Luxembourg was indeed the first country to implement the UCITS directive back in ’85. But as you can see on this slide, out of the €5 trillion I mentioned, more than €4 trillion are invested through UCITS vehicle with more, as we speak, than 1,600 UCITS funds. So, as we said, the attractiveness of the UCITS brand goes certainly beyond Europe, and Luxembourg is seeing more and more initiators launching fund, both to break into European markets and also to sell back in their domestic markets.

      Luxembourg is Also a Major Center for Alternative Assets.

      The quick implementation of the IFM directive, granting also an EU passport to alternative managers, has certainly helped Luxembourg to further develop as a regulated hub for alternative products, building, obviously, on the success and experience in UCITS. And as we said, the introduction a few years ago not only of the RAIF regime but also of the SLP regime have contributed to this success. As you can see, we count already more RAIF and SLP vehicles than UCITS, with more than 1,000 RAIF vehicles already launched and more than 1,000 SLP vehicles already launched.  It is also important here to mention that the statistics that we have at end do not allow us to capture the total number of SLPs but only the ones with what we call an authorized AIFM. Numbers are much higher. Authorized IFM, by the way, which counts already for more than 260 established entities in Luxembourg, with local substance and workforce. These two vehicles are of particular appeal to initiators willing to expand their assets and limited partner base. Similar to the vehicles that we see in offshore centers, the RAIF and the SLP do not require the direct intervention from the Luxembourg regulator, also known as the CSSF, in order to be launched, and accordingly, there were definitely a great and a long-awaited addition to what we call the Luxembourg toolbox.

      Okay. Valentine and also Stéphane for a great introduction why we should be considering Luxembourg as the fund domicile. And I guess the next question many managers including myself will ask is, what are the available fund regimes in Luxembourg that we can consider? And I guess before we get into that, Valentine, did you want to share from your experience what needs to be considered first when deciding a structure?

      What Need to Be Considered When Deciding a Fund Structure

      When describing all the structuration options available in Luxembourg, we often refer to what we’ve known as the toolbox. We have a long-established tradition of innovation in our industry, with a broad range of investment vehicles, with different legal forms, regime, tax qualification, and regulatory framework. I think it’s fair to say that whatever you need or almost whatever you need, Luxembourg has it. Luxembourg is a very flexible jurisdiction for investment and fund structuring, and when it comes, as you said, Connie, to understanding market needs, I’d like always to refer to what I call the three Is. The first one being the initiator view, the second one being the investors’ view, and the third one being the investments.

      So, to start is:

      1. What does the initiators, i.e., the sponsor of the project, need?
      2. What do the investors need? For example, in terms of protection, right, tax or legal framework, and compressing the vehicle.
      3. How will the initiator accommodate the target investments? For example, in terms of asset type and maybe diversification requirement.

      I will say that those are the three main questions to be answered when you come to the most appropriate solution among the Luxembourg toolbox options.

      A Toolbox Full of Tailored Solutions for Luxembourg Fund Managers

      Our toolbox offers tailored solutions for fund managers and also for their investors, allowing a combination of features from non-regulated option as the special purpose vehicle to what we all know as being the highly regulated option, the UCITS. And in the middle of this, you can see that the RAIF that we mentioned, which is actually an indirectly regulated vehicle as it is regulated via its authorized IFM. You may remember those 260 established entities we highlighted in the beginning of the discussion. The Luxembourg Toolbox offers a large spectrum of legal, regulatory, and structural choice, and we thought it would be a good idea to have today a few concrete scenarios, starting with the most regulated products, maybe the UCITS.

      The UCITS Vehicle

      So UCITS vehicle, as we speak, accounting for more than €4 trillion assets under management in Luxembourg, just as a recap. What are their main features, and for what type of project may they be the go-to solution?

      A UCITS fund is, first of all, a regulated vehicle under the direct approval and supervision of the regulator, the CSSF. A UCITS vehicle is also a vehicle that can be structured as an umbrella. This means that the umbrella, the fund, can accommodate different investment strategies, each of those being in one segregated sub-fund. A UCITS vehicle benefits from the European passports, and accordingly, it’s a vehicle with shares. Our units can be promoted to all type of investors in the EU, speaking from retail to institutional investors. It is a vehicle that has to reach within the first 6 months a minimum amount of 1.25 million and a vehicle that has, prior to launch, to be approved by the CSSF.

      Something important to note is that it is a vehicle that can accommodate liquid strategies and that has to provide to its investors liquidity at least twice a month. But true to say that it’s also a vehicle that has strict investment restriction with diversification rules, and risk trading requirement that has to be taken in consideration. This is why UCITS vehicles are perceived as a safe and well-regulated investment and are very popular among many investors looking to invest across Europe.

      Just maybe what we can also say on this is that from what we see on the market, non-EU initiators select the option of a UCITS vehicle if, for example, they were to consider launching a parallel vehicle to their existing non-EU fund to gain access to EU investors by replicating their strategy. Accordingly, local managers can utilize their experience and expertise to participate through the platform management of a fund, which will be promoted to EU investors. And as Stéphane reminded me just before this webinar, it’s true that UCITS are well-known to be the vehicle of choice for liquid strategy and to accommodate retail investors, but we should bear in mind that still approx. 70% of the cash invested in UCITS is invested by institutional investors, such as family offices, private banks, or insurance companies.

      AIF Vehicles

      Looking at the AIFs and if you remember the sort of list of vehicles which we have, I mean, one of the purposes of this would be to shed some light on each of them, but we’ll not go through so much detail for all of them. The two vehicles I’m going to talk about now are very relevant, but we’ll spend more time on the RAIF and the SLP because, to the Asian market, certainly, the RAIF and the SLP are the more relevant.

      UCITS Distribution

      Just a word still on UCITS, we see quite a lot of them being set up by sponsors in Asia, indeed, liquid strategies, Chinese strategies, which we’ve done quite a lot with sponsors in the region as well, for a distribution in Europe, as well as South America, Middle East, and back to Asia. I must say that what I see quite often is Asian sponsors having a UCITS structure in order to sell on a Pan-Asian basis, whether in Singapore, which is a prime market for UCITS distribution, as well as in Hong Kong, in Taiwan, in Korea, in Japan, and in many different places. UCITS are also quite heavily invested by QDII from China.

      HUCI Domestic Public Fund in Luxembourg

      Let’s speak about the UCI in just a few words. That’s basically the domestic version of UCITS made in Luxembourg.  It’s a domestic public fund in Luxembourg. The big advantage of that is that it’s not bound by UCITS rules, so it can invest in a variety of assets, including real estate, including private equity, venture capital, which a UCITS cannot do, as you understood from what Valentine mentioned. But it’s still a public fund, and it’s still relevant for quite a number of investors.

      We’ve seen QDII from China willing to invest into UCIs, and we’ve seen Japanese FCP UCI, so the contractual version of the UCI being set up in order to be invested by a feeder fund made in Japan. Basically, we see that quite often in practice, and we have quite a number of them. In Asia, it’s primarily the two aspects I mentioned just now.

      SICAR Vehicle

      The second vehicle is the SICAR. Just to mention it, it’s investment company in risk capital. So, for you to know, and as you see, it’s quite a popular vehicle as well, with 55 billion in them and 225 SICARs being set up as of end of February, for you to know that we have this vehicle, it’s a totally specific regime for investment in risk capital, and so these are available to you in Luxembourg.

      Specialized Investment Fund & Reserved Alternative Investment Funds

      Let’s go to SIF. That’s the specialized investment fund. I want to speak about the SIF together with the RAIF, which is the reserved alternative investment fund, because these are almost the same thing, except the SIF is regulated and the RAIF is indirectly regulated, but as a vehicle, it’s not regulated. SIF was the first attempt back in 2007 to introduce a vehicle that would be lightly regulated, dedicated to professional investors, institutional investors, well-informed investors, with pretty light risk diversification rules, 30% diversification rules, and no restriction as to what you can invest in. Basically, you can invest in a great variety of assets. 1,415 SIFs later, we have now about 600 billion in those funds. It’s a huge success, great success. Since the introduction of the RAIF in 2016, we do a little bit less of them, because as I said, the only difference is that the SIF is regulated, RAIF is not. And if your investor is not requiring you to invest into a regulated fund, most managers now would do a RAIF as opposed to a SIF.

      RAIF, is virtually the same thing, except it’s not regulated as a vehicle. The only requirement it has by law is to appoint an alternative investment fund manager in the EU that has the full-fledged AIFMD license. That’s the requirement, and it’s not necessarily directly applicable to the specialized investment fund. A few more features similar to SIFs is the umbrella feature that Valentine mentioned just before for UCITS.  You can have a fund that has different sub-fund within the same umbrella and implement totally different strategies, or similar strategies, or accommodate certain investors. Those sub-funds can even invest into one another, which can help you to have some sort of blended strategy for investors. It’s a huge success, 1,134 RAIFs. Since the introduction in 2016, it’s almost one new RAIF set up every business day. So that gives you an idea of the success of that.

      SIF & RAIF in the Asian Market

      And if I look at it from an Asian point of view, that was a game-changer. I’ve been based here 10 years, when I’ve been discussing with typical Cayman fund managers in the region to set up a SIF back in 2009 when I was here, we only had the SIF really to offer them, the stretch was just too big for them to switch from a Cayman structure to a lightly regulated SIF structure. But since 2016 and for a variety of reasons we’ll see later, there’s a huge interest for RAIFs that has started back in 2016, and we’ve had quite a lot of managers making the step, having fund one, two, three in the Cayman and fund four is in Luxembourg as a RAIF. And we’ve seen that from all the region, China, Korea, Japan, big success in Japan, with institutional investors in Japan, also Hong Kong, Singapore, and the rest of Asia, in particular, Southeast Asia.

      Special Limited Partnership

      If I now look at the last vehicle, we wanted to talk about is this special limited partnership. This, as you understand in 2007, we moved towards a sort of lightly regulated fund vehicle next to the UCITS and UCI. In 2016, we’ve introduced the RAIF, which is, as such, not regulated. Still, something was missing. A full-fledged limited partnership that is inspired by common law and Anglo-Saxon systems was not available as such in Luxembourg. We had something similar, but it was still a corporate vehicle bound by a number of rules, and it was not exactly what investors were willing to see and what sponsors were willing to set up. We’ve introduced that in 2013 when we modified a company law in Luxembourg and we decided to include in a very clever way a regime that is greatly inspired by Anglo-Saxon rules, leaving a lot of freedom to sponsors to, you know, have a limited partnership agreement that would cover what they would typically cover in an LPA of a Cayman structure of an Anglo-Saxon structure.

      Differences between Special Limited Partnership & RAIFs

      Two differences or even three differences with RAIFs that I would like to highlight to you:

      1. Not possible to have sub-funds or umbrella, these are standalone structures. 

      You can have underneath different SPVs, we’ll see that later, but still, it’s one given vehicle.

      1. No diversification requirements, so that’s rather an advantage compared to RAIFs. 

      You can invest in one single asset, that’s all okay, which is not the case for a RAIF.

      1. You may appoint an AIFM, so an alternative investment fund manager, whereas in the RAIF, you have to, It’s not an option, it’s a must. 

      In the SLP, it’s an option until you reach a certain threshold, which we are not going to mention here. But above 100 million or 500 million, subject to certain conditions, then you have to appoint an AIFM. But if you do not wish to, if you lower under those thresholds, you do not have to, in an SLP.

      That’s basically, what I wanted to stress on those alternative investment vehicles which we have in Luxembourg.

      I think that’s really helpful. I think the way that you and also Valentine to put out there the type of funds available in Luxembourg and also, of course, a very comprehensive, I think, overview of the toolbox, that gave us an idea, the type of fund vehicles available depends on the investment strategies and, of course, the three ‘I’s that Valentine, you mentioned. And I just also wanted to remind everyone that we will be hosting another field series where we’re going to be diving to some more details of the UCITS and also maybe the use of the AIFS, as Stéphane mentioned, on a different type of available vehicles under the AIF. Just to let you guys know that there will be another more detailed chapter coming up that you guys might be more interested.

      Key Factors Worth Considering When Setting Up a Luxembourg Fund

      I guess we have a brief idea of the type of fund regimes in Luxembourg. And the next question would be, how can we set up a fund, and what are the key factors that managers worth considering when they’re setting up a fund? So maybe, Valentine, you can share. I know you have some experience from your side as a third-party management company. What typically do sponsors come to you, and what kind of question they ask?

      Understand the Rules & Responsibilities of Stakeholders

      It is true that when discussing the factors fund initiators or manager need to consider when setting up a fund in Luxembourg, we often start by referring to branding, track record, local substance as key elements to run a successful fund project. But from our experience as a third-party independent management company in Luxembourg, we also see that stakeholder’s setup and distribution plan are key. At the structuration phase of a Luxembourg investment vehicle, being it UCITS or AIF, the understanding of the rules and responsibilities of all stakeholders is paramount. The choice of the service providers is an important step to tackle, any administrative and also operational burden that may, but also will, arise from the operation of the project.

      We were willing to give you an overview of the various stakeholders that a fund initiator has to consider when forcing the launch of a vehicle, an investment vehicle in Luxembourg. While the investment decision and the asset raising efforts can be undertaken by the initiators acting as fund manager and/or distributor of the fund, daily management function, such as:

      • Governance
      • Risk management
      • Valuation
      • Oversight
      • Accounting
      • Reporting

      only to name a few, are to be undertaken by other providers and most of the time local. Which are those providers? Which are those stakeholders?

      Central Administration

      Let’s start with the central administration at the center of the slide. Central admin, which will usually the entity that will provide the fund with its domicile, the NAV calculation, and the transfer agency services to the fund, so the services towards the investors.

      Depository Bank

      Next to it, you can see the depository bank. That is the entity that will take care of the safekeeping or ownership verification, depending on the asset class, and monitoring of the assets.

      Audit Firm

      You also have an audit firm, which will be in charge of, for example, the semi-annual and/or the annual audit of the fund.

      Legal Advisor

      Obviously, a legal advisor, which will be in charge of the structuring, tax, aspect, and other legal advice to the fund, its initiators, but also the investors when we speak about limited partners.

      Proprietary or Third-Party Management Company

      And also, an in-house, also called proprietary management company, or a third party management company, or AIFM, which will take care of the governance, the delegates oversight, the risk management, the valuation, and the passporting.

      Investment Manager

      And least, the investment manager, so often also the sponsor or the initiator of the fund, that can also, from time to time, act as distributor, referred in the slide as global distributor, two roles that are generally undertaken by the initiator of the fund.

      This was to set the scene of the value stakeholders and now, happy to provide you also with additional details about a typical setup.

      How Stakeholders Are Structured Around the Fund Structure

      The aim of this slide was to refer, again, to the value stakeholders that we mentioned, describing their responsibilities, but to help you to understand how they work together and how they are structured around the fund structure. If we were to take the example of an alternative investment fund, being it a RAIF, SLP, or a SIF, to see how those providers are coordinated and work with each other. At the center of the structure, you have the fund itself, being in a company or a corporate fund. The decision body of the fund, so its board of directors, will have to appoint the stakeholders, the service providers that we were referring to, namely, as we said, a depository, an audit firm, a law firm, a central administration, and the AIFM to the fund. This entity will be the ones taking care onsite of the daily management of the fund, allowing the initiator to focus on its core activities, being alpha generation and investor relation.

      If we were to start on the left-hand side of the slide, the fund, via its board of director, will have to appoint the distributor, the depository, the admin, the auditors, and to entrust them with the function we mentioned before via several agreements, which will be drafted and coordinated, also sent to the legal advisor that the fund appoints. On the right-hand side of the slide, you can see that the fund will also have to appoint the AIFM. When we speak about a RAIF, this will be necessary, but when we speak of an SLP, like Stéphane mentioned, it’s an option. The AIFM can be a proprietary entity established by the initiator or third-party entity. And the AIFM, so the alternative investment fund manager to the fund, will be in charge of four core functions. Those functions are, as per the directive, the portfolio management, the risk management, the valuation, and the passporting.

      From our perspective, the approach of our clients is to work with established and knowledgeable local business partners rather than setting up their proprietary AIFM. But as mentioned, our clients can act as the discretionary investment manager to the fund provided that the entity is an asset manager supervised by a regulator, which has conducting MOU, so a memorandum of understanding, with Luxembourg. And if this is the case, the portfolio management function, so the discretionary management of the underlying assets, can be delegated by the AIFM subject to satisfactory due diligence to this entity.

      By using a local and established provider, it’s obvious that initiators select a quick, cost effective, and compliant solution for their cross-border project, and by doing so, it’s also true to mention that somehow, they transfer the bulk of the administrative burden of the AIFM directive compliance, such as the organization of a company portfolio, as we said, risk management, delegates oversight to a third-party entity. In other words, and maybe to conclude on this before to leave the floor to Stéphane, these solutions simplify complexity, and it helps initiator to realize their investment strategies and add true value to their investors.

      Third-Party AIFM in Asia

      I think it’s a good transition to say a few things, seeing this from Asia. We see quite a very big majority of managers, obviously, using this AIFM of a third-party provider model. So almost none of them have set up their own AIFM somewhere in Europe or in Luxembourg in order to be the AIFM of their own funds. They use that possibility to use a third-party AIFM for all the good reasons that you mentioned here.

      One thing that I would like to comment on the slide is that there are, basically, two model, the one you described, which is the AIFM delegates back portfolio management to the manager itself here in Asia, and you were mentioning MOUs that are necessary in order to have the delegation model. And most countries in Asia have MOUs. China does not.

      It’s interesting to mention. But most other countries do have MOUs with regards to AIFMD with European regulators and the delegation model works well. And if it doesn’t, one model which works well as well, and it’s quite popular, is not to delegate a portfolio management but appoint the entity in Asia as an advisor, and the AIFM then is performing fully its function as alternative investment fund manager. It will make the decision based on the advice provided by the investment advisor. That’s another model that is probably a bit less demanding on the MOU side and on the license side for the advisor compared to the delegated portfolio manager model.

      Parallel Fund Model

      Two more things are that the structure that you have there on the slide, we see it quite often, not necessarily as a standalone structure. We see, for example, the very same structure often being set up as a European parallel vehicle to an existing Asian, U.S., or Cayman structure. You can see that this Cayman structure would be, you know, dedicated to certain Asian investors, Japanese investors, for example, U.S. investors, and then a manager would be setting up a fund following this typical fund structure for their European investors. Both would be investing in an aggregator, and that would be investing into the target assets.

      So that’s the parallel fund model. We see this very same vehicle being set up for co-investment vehicle, for carried investment vehicle. Needless to say, we do have many applications for this kind of fund structures, and as Valentine mentioned, this fund that you see there as a triangle could be an SLP, could be a RAIF structure, and it would work in a very similar manner.

      The Main Drivers of the Luxembourg Fund Market

      Now, what are the main drivers? We tried to summarize them a bit from experience.

      The Reputation of Luxembourg

      One is the very big reputation of Luxembourg. The very high standards of regulatory and compliance requirements that we abide for in Luxembourg, mostly European driven AIFMD, UCITS rules, etc., are extremely relevant, and the fact that we’re a leader on the market in Europe and worldwide for UCITS and non-UCITS structure is clearly a very big advantage.

      European Distribution Passports

      The second, if we focus on AIFMD, but we could say the same for UCITS, is it gives you a passport, and we’ll speak about that with the marketing in just a second. But both AIFMD and UCITS give you a slightly different but, in essence, working similarly European distribution passport whereby you can buy one single approval in one single jurisdiction reach the entire European Union. So that’s very important.

      Concentration of Substance in One Jurisdiction

      Another aspect is the concentration of substance in one jurisdiction, and where I’m coming from is that one tax principle that is around is the principal purpose test and this idea that if you do have a vehicle somewhere only to benefit from certain tax advantages or double tax treaties, and things like that. Well, if the only reason for which a vehicle is there is that reason, that’s not enough. That’s the principal purpose test, and that’s driven by the base erosion and profit shifting rules and principles that are accepted globally.

      The big advantage of having the fund, the GP, the AIFM, the administrator, the depository, the SPVs in Luxembourg is that you concentrate everything in Luxembourg in one given jurisdiction and that all pieces are interlinked, and their only principle is obviously not to benefit from any sort of favorable tax treatment, is just that the entire fund infrastructure is consistently being designed in one jurisdiction as opposed to having the fund in one, the SPV in another, and the GP in a third jurisdiction. That’s very important, and that is a very big driver for quite a number of our clients.

      Tax Neutrality

      Tax neutrality is also important. Whereas we are not necessarily looking for tax optimization, we at least want to have tax neutrality, avoiding tax leakage, which is achieved with this kind of vehicle, thanks to the double tax treaty network of Luxembourg, which is very broad, as well as the tax exemption applicable to our vehicles, which are obviously a must for a fund structure.

      The Role of AIFM

      I would add two more. One is the role of the AIFM. What we are seeing, in particular, with Japanese institutional clients, but it goes beyond that, is that they very much like having a third party AIFM looking into what the manager has done and producing independent reports that the fund sponsor can then translate in Japanese, for example, and provide its investors. That’s extremely valuable to them, and we see the role and the fees that are being paid to the AIFM very much valued the two as well, on top of the compliance, the passport, and everything else that is provided by the AIFM. So that’s important.

      Time on the Market

      Another one is time to market. I must say that with our SLPs and the RAIF, time to market is extremely efficient. When we set up a RAIF structure, we can go as fast as three to four weeks. What takes most of the time is actually the account opening to do the KYC and the other aspects, and an SLP structure is just a matter of couple of days, having the LPA drafted. If the documentation is pretty simple and straightforward, that can go very, very fast.

      Increased Substance from Offshore Jurisdictions

      And one last aspect, which is often brought up by clients is, in particular, those that are used to Cayman and other offshore centers, which have to go through a certain, you know, regulatory review in order to increase transparency, increase the substance which they need to have, is that if we do increase that, at least with a European structure and Luxembourg vehicle, they get the passport and they get the double tax treaties, which they cannot typically from an offshore jurisdiction. So that’s what we are hearing are being the main drivers for our clients.

      Costs to Set Up a Luxembourg Fund

      I think that’s really also very helpful, knowing that the number of drivers which kind of lead to some of the factors to consider when they’re trying to set up the funds on the rationale. And I know you have one point here on this slide, I also see a question that just came in, which is relevant to the point that you brought up in this slide, which is the setup cost and maintenance cost. So maybe, Stéphane and also Valentine, just tell a little bit of the range of what’s going to be considered to be a more relevant cost for the manager to consider when they are setting up funds in Luxembourg.

      A very, very straightforward answer to that, what we are seeing with most of the managers we’re interacting with is at the end of the day, prices are pretty similar to what they are required to pay in the Cayman, in other places. Think about it this way. If you set up an SLP structure, you’ll need to set up a GP that would be the same in an offshore center. You need to draft an LPA. This document is roughly similar to what they do. So, at the end of the day, it’s the same amount of work, time, and effort that needs to be put into the LP, in the offering memorandum. So, at the end of the day, it’s a little bit more of a process because as we said, we are a high standard regulatory and compliance jurisdiction, and so we do need to go through all these checks. But in terms of pricing, that’s not going to be a material difference in any way. And the solution, worth the cost.

      Where Can a Luxembourg Fund Be Marketed

      I’m sure when we circulate both of your content, we’re getting a lot of the questions from the manager, exactly the type of structure they’re looking into and the relevant solution that you will be able to offer. And thank you for that one. And I guess last but not the least question a lot of the managers are also very interested to know is, so they know that the available funds that they can use and how to set up, and the next one will be, where can a Luxembourg fund be marketed?

      I think that we cannot go through all the questions regarding marketing. When we prepared this first chapter, we said we would focus on the passport. I think that you need to know that there are various ways to approach European investors, but if we need to look at an efficient way to approach investors in more than two, three jurisdictions, that’s really one way, which is the AIFMD passport for AIF products and, obviously, the UCITS passport for a liquid strategy and the UCITS product.

      On top of Europe where all those products can be sold to investors based on these passports, they’re also quite popular outside Europe. There’s no restriction as to where a Luxembourg fund can be marketed. Outside the EU, you would not typically benefit from a passport, but you could benefit from either national private placement rules or rules whereby you benefit from a fast-track approval process. And this is what we’ve done quite a bit. For example, with RAIF structure, if I need to speak about my experience in Asia is that we’ve had them approved for institutional distribution in Korea, in Japan. We’ve had some being sold on a safe harbor basis in Hong Kong. Chinese investors have been invested in RAIFs, you know. Now, with the QDLP coming and QFLP coming in China, there will be other opportunities for money to be invested into Luxembourg RAIF structure. So really no restrictions as to where you can sell your product outside the EU. And within the EU, the big advantage is benefiting from the European passport, whether UCITS passport or AIFMD passport currently.

      From what we see on the market, establishing a Luxembourg vehicle, being it, again, a UCITS or an AIF, is within the EU block, the most efficient solution, if you were to compare that with setting up several funds in each and every European jurisdiction, for example, true to say that, as we already mentioned, Luxembourg is the go-to jurisdiction when it comes to distribution, even in status as the EU largest cross-border distribution center. But we also see an increasing interest from non-EU initiators due to, first, I would say, their willingness to attract European investors using, as we said, for example, parallel vehicle to their existing non-EU investment vehicle, and also, two, the investor’s interest in allocating assets to new markets, including, for example, something that we see nowadays, Mainland China. So, when we refer to marketing, the distribution plan is a key step in the success of a fund. That’s always what we told our client. The distribution can either be done via the AIFM itself, the appointment of a placement agent, and the initiators can rely on the license of the AIFM, which will open, as Stéphane mentioned, the relevant European jurisdiction.

      And something maybe that can also be used to wrap up on the marketing subject, we always recommend our client to gain local knowledge about the diverse distribution channels and also investor’s behavior, behavior which can very much vary between different jurisdictions, even in Europe. And it’s always important to engage with local sales force when you are not used to the jurisdiction to obtain local market intelligence, as marketing is, as you know, often the first line of investor interaction. So, Luxembourg has welcomed, over the last 25 years or even more, more than 50 or 60 country managers that have decided to establish their international investment fund hub in Luxembourg, and we can certainly say that we anticipate that Luxembourg will not only remain the gateway to Europe but also to the rest of the world.

      Conclusion & Acknowledgments

      Thank you, Valentine and also Stéphane, for sharing all these valuable thoughts on this one. And we do have quite a bit of questions came in, and I guess we’re also running out of time. We won’t get a chance to take it now, but we will take those questions offline and address them individually, given that we’re running out of time. But we appreciate you all being here. And thank you, Stéphane and also Valentine, and also everyone today for joining us. We will be sharing our presentation after the session, and we look forward to seeing you all in our next series. As we mentioned, we will have a few more series coming in to dive into details of each of the available vehicles. And thank you all and have a good rest of the day.

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