Luxembourg’s strength is its regulatory backbone
Luxembourg will always be a very heavily regulated jurisdiction. When the Alternative Investment Fund Managers Directive was introduced in 2011, the Grand Duchy was well prepared in advance of this new post-financial crisis environment of global regulation.
"I believe the most important thing to have happened to Luxembourg in the last few years has been the global trend towards greater regulatory legislation being imposed on asset managers and service providers," says Peter Jakubicka (pictured), Business Development Manager at Circle Partners, an independent fund administrator.
"A few years ago," he continues, "many European fund managers typically chose a Cayman or a BVI fund, especially those with less than EUR100 million. Now, they are launching funds in Luxembourg because they see a heavily regulated jurisdiction as a viable option, despite the costs and all the compliance requirements. It has always been the most prominent jurisdiction in Europe but it is even more so today."
Be that as it may, Luxembourg does not over-regulate. It tries to keep the right balance.
Take the Reserved AIF (`RAIF'), for example, which was introduced in 2016. This was something that many smaller and mid-sized managers were waiting for. The RAIF is an unregulated fund product, unlike the SIF, and puts the burden of oversight squarely with the approved AIFM.
"In my opinion, SIFs are no longer the flavour of the month," says Jakubicka. "Based on recent discussions that I have had with a number of hedge fund clients, it is the number one fund structuring choice. Private equity managers will typically use the SCSp, or Special Limited Partnership."
Luxembourg never rests on its laurels. The success it has enjoyed for the last 20 years under the UCITS regime, making it Europe's number one centre for regulated long-only funds, puts it in a prime position to become well known as an alternative funds jurisdiction under AIFMD.
"I think the concept of the SIF today, if adjustments are not made, will end up becoming a bit in the shade compared to other fund structures. UCITS will remain an important product for the jurisdiction, along with the RAIF and the Lux SP (SCSp). For hedge funds, I think the future lies with the RAIF," says Jakubicka.
As a result, Circle has been focused on two key objectives this year. Firstly, to bring as many RAIFs as possible to market. "It's a new concept for everybody so the more we work with it the more experience we will gain," states Jakubicka.
Secondly, making even more connections with local service providers: mainly custodians and AIFMs but also law firms. As Jakubicka puts it, "It's a case of connecting as many dots as possible."
"We have the majority of mid-sized service providers established in our network and that is helping to get our clients the best possible fees in the market and the best level of service.
"We believe the administrator should be independent of the AIFM and keep its duties separate from the investment manager as well. We effectively act as a conduit between the AIFM and the underlying fund manager," he adds.
"AIFMs must have the right level of experience to service particular fund strategies and have to be licensed by the CSSF. In that sense, at the AIFM level, Luxembourg is a very regulated market," concludes Jakubicka.