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Ready for the RAIFolution

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The recently introduced Reserved Alternative Investment Fund (RAIF) is compelling to fund managers because although it is not subject to direct supervisory authority from the CSSF, it is still a fully AIFMD-compliant product, benefiting from the European passport for marketing to professional investors in Europe. 

"The time to introduce an unregulated AIF is a strong message and part of the construction of a new alternative investment fund norm in Europe," says Jean-Florent Richard (pictured), Head of Fund Engineering Services at BNP Paribas Securities Services, Luxembourg branch. 

"The RAIF allows the bank to once again position itself as one of the European leaders of depositary bank services and administration services to these new types of investment vehicles." 

The timing of the RAIF's introduction could be a masterstroke, helping to cement Luxembourg's reputation as the jurisdiction of choice, not just for UCITS funds, but AIFs as well. 

Until August 2016, qualified investors were able to invest in two types of vehicle – those not subject to such pre-authorisation from the CSSF or those subject to pre-authorisation, but that were unable to utilise structuring flexibilities available to Luxembourg investment funds, such as sub-funds/compartments or variability of capital.

"However, following the introduction of the AIFMD three years ago, there was a risk that some qualified investors, such as pension funds, would no longer view product supervision as a `must-have'," adds Richard. 

AIFMs in Europe are highly regulated under the AIFMD and as such, there were concerns that Luxembourg could appear overly protective as a fund domicile, suggests Richard.

"The RAIF helps address this concern head-on, instantly removing the dual layer of regulation that, while necessary when selling UCITS products to retail investors, but unnecessary when selling to a professional investor base under AIFMD.

"The RAIF is creating a buzz among fund managers because although Luxembourg is well known as a longstanding regulated product jurisdiction, the RAIF is not subject to any clearance by the CSSF. It is a revolution, but one that is perfectly in line with the AIFMD," explains Richard, adding, "The perception among some qualified investors is that product regulation may no longer be useful since the implementation of the AIFMD and the shift in European regulatory focus. Retail products need to be regulated under the UCITS Directive, but in the alternative investment fund world a double layer of supervision may be perceived as useless."

He says that one important consideration for fund managers is that the RAIF allows them to better manage the expected time of launch because there is no reliance on CSSF approval. 

"Another consideration is that there is no limitation or restriction on the type of assets that a RAIF may invest in," Richard adds. 

This means that, in theory, the RAIF could be used for investing in private equity, real estate, infrastructure or plain vanilla long-only portfolios. 

"That said, we expect the RAIF to be primarily used by private equity, real estate or similar fund managers and hedge fund managers," says Richard, who adds that the bank is already working on four RAIF projects.

"I think mindsets are changing about how to leverage the AIFMD, and the RAIF is a way of achieving this. Alternative fund managers now have an innovative, compliant and very flexible tool for structuring their products", he concludes. 

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