SIF: Booming onshore, regulated fund for alternative strategies, by Pierre de Backer, Transaction Manager, Equity Fund Services
With nearly EUR2trn in assets under administration in investment funds, Luxembourg has long attracted investors worldwide in traditional asset classes. To compete with offshore centres and to leverage its broad experience in servicing hedge funds, private equity funds, real estate funds and other products tailored to sophisticated individual investors, the Luxembourg legislator introduced, back in February 2007, a new vehicle for institutional, professional and well-informed investors.
Although supervised by the Financial Sector Supervisory Authority in Luxembourg (CSSF), Specialised Investment Funds (SIFs) are only lightly regulated and their flexibility and tax-efficiency make them a viable onshore alternative to existing 'offshore' Cayman, BVI or Bermuda funds.
Replacing the so-called institutional investors' funds, SIFs are restricted not only to institutional and professional investors but also to well-informed individuals, for whom less investor protection is required. A SIF may invest in any type of asset and may choose any strategy, but is required to spread its risk - a CSSF circular imposes a limit of 30 per cent of the fund's assets on investment in securities of the same kind from the same issuer, unless the security itself is sufficiently diversified, such as another investment fund. Here again, derogations are possible.
SIFs may be set up either in a corporate form, as a public or private limited company or a partnership limited by shares, in a contractual form, as a unit trust, or even as a fiduciary arrangement. The equity interests are also adaptable since the minimum capital required by law (EUR1.25m within 12 months of authorisation from the CSSF) can be reached by either equity or debt contributions or both, and subscriptions in kind are permitted.
SIFs are also allowed to maintain segregated sub-funds under a single umbrella structure, thus protecting the assets of investors from creditors' claims against other sub-funds. SIFs can therefore lodge multiple asset classes, such as hedge funds, private equity and real estate, within a single legal structure. The three main alternative asset classes can be mixed together and with traditional strategies.
As for supervision, no prior approval or assessment of the promoter or of the investment manager is required. A SIF can even start its activity without CSSF approval, provided the application is filed during the month following the set-up of the fund. However, the management of the SIF - board of directors, managers or partners - need to demonstrate to the CSSF that they have appropriate experience in the fund's investment strategy.
Tax-wise, a SIF structure can also prove to be highly efficient, as it is exempted from distribution, capital gains, corporate and wealth taxes. The only levies due are the capital duty of EUR625 upon incorporation and an annual subscription tax of 0.01 per cent on the net assets of the fund. Currently, a SIF incorporated as a company can benefit from certain tax treaties concluded by Luxembourg.
Already it seems that SIFs are becoming a successful structure, with close to 500 new vehicles launched since the new law came into force, once again demonstrating that Luxembourg can look forward to substantial growth both as a domicile and as an administration centre for all types of alternative investment fund products.
Pierre de Backer is a transaction manager at Equity Fund Services in Luxembourg
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