News & Analysis

Souped-up SIF

Luxembourg has always been an attractive location for establishing alternative asset vehicles, including those used by private equity firms. New specialised investment fund (SIF) legislation may make it more attractive still.

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Luxembourg and private equity have always been good to each other. But the country's new specialised investment fund (SIF) legislation promises to take the relationship to an even more intimate level.

The legislation was passed on February 13, 2007, replacing the existing law of July 19, 1991. Though Luxembourg always planned to update the legislation this year, it was timely in allowing certain restrictions in the existing legislation to be removed.

The new SIF is designed to offer a more flexible and simplified structure compared with its prior manifestation, as well as continuing to offer investors an attractive tax environment. Its relevance extends to managers of various types of alternative assets, including real estate, hedge funds and private equity.

It has a number of specific benefits. For one thing, private equity and venture capital funds had often been restricted in their ability to use such vehicles in the past as they found it difficult to qualify for so-called ?promoter? status. Now, promoter status is irrelevant: SIFs may be set up as soon as they have been registered with the authorities and prior to approval. Examination of the SIF managers thereafter will come down only to their professional reputation and expertise.

In addition, the new legislation opens the doors to investors that faced restrictions under the 1991 Act ?specifically extending the remit beyond institutional investors to professional and private, well-informed investors who are able to invest a minimum of €125,000 ($164,000).

Summarising its benefits, Francois Pfister of Luxembourg law firm Oostvogels Pfister Roemers says: ?The new legislation is a significant development for Luxembourg and the fund industry as a whole. Funds created under this new regime have the benefit of having modern and recognized supervision while also providing the flexibility much welcomed by sponsors and investors worldwide.?

There is one concern that's been raised since the new laws were passed, and it returns us to the point about being able to register funds before getting approval. The potential problem with this, say some onlookers, is that it might subsequently transpire that you have failed to meet the necessary legal requirements ?while having wasted several months of time, money and effort before finding out. The push for greater flexibility and less formality arguably, therefore, has a downside.

On the whole, though, the new laws appear to incorporate many of the changes that fund managers were hoping for. Luxembourg's reputation as a location for the establishment of private equity funds is likely to be enhanced.

The lure of Luxembourg
A brief overview of the main changes stemming from Luxembourg's new Specialised Investment Funds (SIF) legislation:

  • ? Eligible investors will now be defined as well-informed investors, meaning any institutional investors (as in the past) and professional investors or any investor who invests a minimum of €125,000.
  • ? Greater scope for investing in a wider range of asset classes, offering a broader range of industries the option to launch investment funds.
  • ? Smaller funds can now launch products while investors work more closely with their advisors to create more personalised investment products.
  • ? Neither a promoter nor Commission de Surveillance du Secteur Financier (CSSF) supervision of a promoter's financial status will be necessary. It will be possible to set up a SIF as soon as the file is registered with the CSSF, prior to the CSSF's approval. The professional reputation and expertise of the SIF managers will, however, be subject to the CSSF's examination.
  • ? There will be lighter disclosure requirements and fewer quantitative investment restrictions. The existing requirements for a semi-annual non-audited report or long form report will be replaced with an annual audited report for the relevant financial year.
  • ? Several corporate forms are available and ?umbrella funds? will be permitted to be set up.