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By Marc Meyers, Co-managing Partner of Loyens & Loeff Luxembourg and Dr. Sebastiaan Niels Hooghiemstra, Senior Associate in the investment management practice group of Loyens & Loeff Luxembourg as published in Insight Out #29.
Fund sponsors increasingly explore ways to facilitate access by retail investors to private assets. Part II UCIs have been instrumental in this development.
With a view to remain agile and based on years of regulatory and market practice, as well as developments at European and international levels, including ELTIF 2.0, and the increased appetite of non-professional investors for alternative asset classes, Luxembourg modernized its Part II UCI regime in 2023 to further align it with the needs of fund managers. This contribution highlights some of the most important changes, with a focus on the increased success of the Part II UCI fund regime with private markets firms accessing the private wealth market.
1. Part II UCIs & Impact of the Modernization of the Luxembourg Fund Structuring Toolbox
1.1 The Introduction of Partnership Structures for Part II UCIs
On 11 July 2023, the Luxembourg legislator adopted the bill of Law N°8183 (the Law). The Law, amongst others, increased the structuring options for Part II UCIs by adding additional legal forms under which such funds can be established. Till the adoption of the Law, SICAVs (société d’investissement à capital variable) were required to be incorporated as a public limited company (société anonyme or SA). However, the Law changed this as such a limitation was not anymore in line with the needs of the market, in particular in light of the resurgent use of Part II UCIs by alternative investment fund managers, who would typically launch their funds as a limited partnership. Therefore, since the entry into force of the Law, SICAVs under Part II of the Law of 17 December 2010, as amended, can also be established in the form of, amongst others, partnerships limited by shares (société en commandite par actions or SCA), common limited partnerships (société en commandite simple or SCS) and special limited partnerships (société en commandite spéciale or SCSp).
The addition of these legal forms is of great value and will, moving forward, constitute a further catalyst to the resurgent success of Part II UCIs, in particular as umbrella structure, with or without ELTIF label at sub-fund level. In particular, we expect that the SICAV-SCA will progressively replace the SICAV-SA as the form of choice as investor facing vehicle. Indeed, the SICAV-SCA combines the variable capital and control through a manager-owned general partner with an opaque legal form, which is typically preferred in an open-ended structure with retail or private wealth investors.
1.2 Exemption from Subscription Tax
Recently, the subscription tax regime with respect to, amongst others, Part II UCIs that are established as ELTIFs were altogether being exempted from subscription tax. This forms the regulator’s response to the recommendations that have been made in light of the European Capital Market’s objectives on the European level to take measures on the national level to fiscally support these (European) initiatives.
2. Part II UCIs & ELTIF 2.0: Where do we stand?
It is clear that the Luxembourg toolbox updates discussed bring Luxembourg law further in line with recent developments, such as the amendments made to Part II UCIs, ELTIFs on the European level and the ongoing tendency to make AIFs more accessible to retail investors.
In this context, while the Part II UCI regime was only used by a limited number of alternative investment fund managers over the past decade, including under ELTIF 1.0, it has been “rediscovered” over the last couple of years with private wealth investors’ growing interest in private markets and private markets players looking into broadening their investor base. Indeed, Part II UCIs allow for the launch of open-ended subscription-based funds that sponsors launch, including as feeders or fund-of-fund structures (“FoF”) investing in traditional illiquid AIFs that are, normally speaking, restricted to professional investors only. Part II UCIs are also available for all types of investors with minimum investment tickets significantly lower than the EUR 100K, which apply under other Luxembourg product laws and the marketing to retail or semi-professional investors, subject to certain local restrictions, has been accepted in many European jurisdictions.
Due to their flexibility, Part II UCIs are also expected to remain to be the most popular vehicle for ELTIFs established under ELTIF 2.0, in particular for retail ELTIFs availing of the EU distribution passport to retail investors.
3. Part II UCIs: More than just a Resurgence
While there is no one-size-fits-all solution for alternative investment fund managers when it comes to tapping into the retail investor base, considering the very wide bandwidth of the retail concept, we are convinced that the Part II UCI, structured as an umbrella fund (with the option to launch multiple sub-funds within the same legal entity), will quickly establish itself as the fund regime of reference to cover the (real) retail and private wealth investor markets.
Indeed, in an environment where evergreen funds are poised to become ever more popular, the umbrella Part II UCI provides the ideal platform under which various (semi) open-ended strategies (through one or more sub-funds with an unlimited duration) marketed to private wealth investors, could be combined with either closed-ended (with limited duration) or (semi) open -ended ELTIFs (with longer duration, albeit mandatory specific term) marketed to either professional, private wealth or (real) retail investors. Considering also the costs of setting up and maintaining these regulated structures and the typical ROI being potentially hampered by the (required) liquidity pockets in the case of (semi) open-ended (sub-) funds, using an umbrella Part II UCI as platform assists in achieving substantial economies of scale, while facilitating the management from an operational side.
The solid success of Part II UCIs will only be further sustained by regulatory updates expected during 2024, including clarifications as to the applicable investment restrictions (considering that the CSSF Circulars 91/75 and 02/80 are in practice not strictly applied as such anymore) and a, potentially, faster regulatory approval process.
Irrespective of how regulatory developments with respect to ELTIF 2.0 crystallize, Luxembourg is on such basis, either way, expected to increase its attractiveness as an attractive pan-European hub for retail AIFs.
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(*) Marc Meyers is co-managing partner of Loyens & Loeff Luxembourg and heads its investment management practice group.
(**) Dr. Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and Senior Fellow/Guest Lecturer of the International Center for Financial Law & Governance at the Erasmus University Rotterdam.
