With so-called Reserved Alternative Investment Funds (RAIFs), Luxembourg investment fund initiators are now offering throughout the world a first-rate, highly reputable alternative to offshore funds.

By Eduard von Kymmel, Head of VP Fund Solutions

Besides the existing, globally successful UCITS and proven Luxembourg specialised investment funds (SIFs), sophisticated investors now have at their disposal yet another compelling and truly versatile fund vehicle – the Reserved Alternative Investment Funds.

In fact, the acronym RAIF could just as well be interpreted as Revolutionary, Attractive, Innovative and Flexible.

Rapid Fund Setup

As a basic principle, a RAIF must be administered by an authorised, outside alternative investment fund manager (AIFM). What makes this type of fund special is that it requires no approval by the Luxembourg supervisory authority (CSSF).

This is because supervision takes place at the AIFM level, where the manager is subject to regulatory oversight. Here, the primary objective of the Luxembourg lawmakers is to ensure that subsidiary control of the investment fund is accomplished at the AIFM level. The manager may be domiciled in Luxembourg or any other EU member state.

Thus a RAIF can be set up in the shortest amount of time. For the initiator, this not only offers an optimal solution in terms of time-to-market; it also greatly facilitates the plannability and efficiency of the fund formation process.

Tremendous Flexibility

A RAIF has many of the characteristics of a Luxembourg SIF (i.e. a fund reserved for qualified investors). Depending on what the fund initiator has in mind, the RAIF can be configured very much like a SIF or SICAR (private equity/venture capital fund).

As to the RAIF’s legal form, the relevant law is accommodative and allows for a range of different structures. For instance, the fund can be set up as a contractually segregated pool of assets (Fonds Commun de Placement/FCP), a partnership/limited partnership (Kommanditgesellschaft auf Aktien/KGaA), or an investment company (GmbH, AG, SICAV/F).

It is also possible to structure the RAIF as an umbrella fund, with sub-funds and sub-segments. As an AIFMD-compliant investment vehicle, it benefits from the advantages of the AIFM passport and therefore can be marketed to qualified investors anywhere in the EU/EEA.

Inquiries have also been made by Asian initiators who wish to launch RAIFs that are distributable in Europe as well as in the Far East.

So long as the AIFM takes appropriate measures for risk diversification, there are no limitations on the asset classes and investment strategies applied in the RAIF. Hence, investments can be made in transferable securities, money market instruments, sight deposits, raw materials/commodities, real estate, credits, private equity/venture capital, and even other investment funds.

First-Rate Solution

Suitable (i.e. «qualified») investors for this type of fund are institutions and other sophisticated investors who commit to a minimum participation of 125,000 euros. Consequently, RAIFs are aimed at the same investor circles as SIFs and SICARs.

Likewise, the diversification rules are the same as those for existing SIFs; namely, no more than 30 per cent of the fund’s assets may be invested in a single product/entity/issuer. We anticipate that this model will be attractive not just for Asian initiators, but for a broad cross-section of qualified investors as well.

Investor protection is paramount

Notwithstanding the flexibility and designability of RAIFs, one aspect is of particular importance to Luxembourg’s lawmakers: investor protection. That factor is taken into account through the mandatory appointment of a certified AIFM, a custodian bank and a recognised auditing firm.

The latter two institutions must without exception be situated in Luxembourg. And these precautions are reinforced by the strict annual report requirements customary in Luxembourg.

To sum up: RAIFs are the product of choice for Asian fund initiators who seek the highest degree of design leeway, a short time-to-market, the protections afforded by the AIFMD directive, and an eminently logical alternative to offshore funds.

«VP Fund Solutions considers the RAIF to be one of the most attractive products on the Luxembourg fund palette, one which we – as an AIFM and custodian bank – together with our clients, wish to make a success. In recent months, we have been approached by a variety of Asian fund initiators who are keenly interested in this innovative investment vehicle. They range from family offices, to asset managers, to financial institutions; but they have one thing in common: the desire to find an alternative to SIFs, as well as an offshore domicile in a location with an excellent reputation.»

Eduard von Kymmel is the Head of VP Fund Solutions – the funds competency centre of internationally active VP Bank Group – as well as a member of the Board of Directors of VP Fund Solutions (Liechtenstein) AG and CEO of VP Fund Solutions (Luxembourg) SA.

He previously held several functions and management positions at Credit Suisse in Luxembourg and Zurich. He is a licensed German attorney and holds an MBA degree in finance from the University of Wales, Great Britain. This email address is being protected from spambots. You need JavaScript enabled to view it.

VP Bank Ltd was founded in 1956 and, with its 804 employees (738 in full-time equivalents) as at end-2016, ranks amongst the largest banks in Liechtenstein. Today, VP Bank is present with offices in Vaduz, Zurich, Luxembourg, Tortola (British Virgin Islands), Singapore, Hong Kong and Moscow. VP Bank Group offers tailor-made asset management and investment advisory services to private clients and financial intermediaries. Thanks to the Bank’s genuine open architecture, clients benefit from independent counselling: included in its investment recommendations are not just the Bank’s own asset management solutions but also the products and services of other leading financial institutions. VP Bank is rated «A–» by Standard & Poor’s, and its shares are listed on SIX Swiss Exchange. The Bank has a solid balance sheet and capital adequacy. Its anchor shareholders take a long-term view and stand squarely behind continuity, independence and sustainability.

Founded in 1988, VP Bank (Luxembourg) SA is a wholly owned subsidiary of VP Bank Group, with 95 employees at end-2016 (87 full-time-equivalent employees), and is the only bank in the Grand Duchy of Luxembourg that has a Liechtenstein-based parent company. As a Luxembourg-registered limited liability corporation it is subject to the regulatory supervision of the «Commission de Surveillance du Secteur Financier» (CSSF) and is a member of the Luxembourg Bankers’ Association (ABBL) and the AGDL deposit guarantee scheme. Its core competencies include asset management and investment advisory for private and institutional investors as well as institutional custody banking services. As from 1998, the asset management firm VP Fund Solutions (Luxembourg) SA (31 employees) also belongs to VP Bank (Luxembourg) SA. VP Fund Solutions is the preferred partner for professional, comprehensive fund solutions.