“The Special Limited Partnership (SCSp) has been successfully introduced into Luxembourg law. It is set to benefit from onshore fund activity following the AIFMD and is of particular interest to Anglo-Saxon managers and investors given their familiarity with limited partnership structures,” explains Paul Van den Abeele (pictured), Partner at Clifford Chance (Luxembourg).
In essence, what Luxembourg’s lawmakers have done is modernise what was quite an antiquated limited partnership regime in the SCS (société en commandite simple) based on the 1915 company law.
Alternative fund managers – in particular private equity and real estate managers – can now choose to either avail of the SCS regime, which is invested with legal personality, or use the SCSp, which is invested with no legal personality.
“The existing SCS was not extensively covered in Luxembourg company law; given the legal uncertainty, there was less use of this legal structure. Now, with the AIFMD implementation, Luxembourg has seized the opportunity to introduce an efficiency package. What this involved was revamping the SCS and creating the SCSp, a counterpart that has no legal personality. The driver was essentially to offer a competitive answer to the UK, Delaware and Cayman limited partnership structures,” comments Van den Abeele.
Previously, the unregulated market was dominated by so-called SOPARFIs (société de participations financières) – private holding companies that limit themselves to small groups of investors and remained outside the scope of supervision of Luxembourg’s regulator, the CSSF. The SCSp now adds to Luxembourg’s toolbox and is available to both unregulated structures and regulated funds.
From a Luxembourg perspective, the SCS and SCSp have a fairly similar tax and corporate treatment. “The SCSp’s lack of legal personality is more important for other jurisdictions where it is considered equivalent to domestic partnership structures, such as the UK LP and the German KG. This means that investors can obtain a similar tax treatment as the SCSp is considered by tax authorities to be equivalent to the local structure,” adds Van den Abeele.
The Luxembourg SCSp has a number of distinguishing features. Unlike partnership structures in other jurisdictions such as the UK LP, the GP is not required to disclose the identity of every limited partner in the partnership. In addition, there is substantial flexibility within the limited partnership agreement, including with regard to voting rights and distribution of the economic benefits of the partnership. Also, there is now more clarity around LPs engaging in the management activities of the SCSp in terms of the risk of losing their limited liability status.
“We are working more and more with global clients on real estate, debt funds and private equity structures, some of which would, in the past, probably have adopted UK LP structures but are now choosing the Luxembourg SCSp. It’s very important that we don’t have legal personality from a tax perspective, particularly in markets like the UK. It’s a big advantage,” explains Van den Abeele.
It is a strong message for managers – especially those outside Europe, particularly in the US and Asia – to be able to say to investors that they now have a fund structure that is more to their liking. For EU managers that tap into the European market to raise capital, the AIFMD has become a given, something that has to be, or has been, dealt with. However, not all institutional investors are looking for additional regulation (e.g. UK pension funds). Therefore, where managers used to choose offshore locations to structure funds, they can now come to potential investors with a similar vehicle that is subject to regulation and onshore, which makes for a more compelling proposition.
Van den Abeele says that there is already clear evidence of managers beginning to use the SCSp structure, in and out of scope of the AIFMD, especially as debt funds and other alternative funds are en vogue right now. UK and US managers are choosing to go with the SCSp “almost without exception” confirms Van den Abeele, whereas German managers, for example, are favouring the updated SCS.
“Germany made changes to its investment and tax laws. The revamped SCS structure has become interesting to German insurance companies and other investors as an alternative to the mutual fund structure (FCP) used in the past. As a result, they have tended to launch Luxembourg funds (debt, infrastructure, real estate) using this structure.
“Post-AIFMD, our fund structuring work for German clients has been heavily weighted towards regulated SCS vehicles, particularly in structuring real estate and private equity funds for German insurance companies, which form an important part of the client base of our Luxembourg and Frankfurt offices,” explains Van den Abeele.
Managers now have a full complement of options both for the legal structure of the manager and the fund itself. More specifically, on the funds side, managers have the option to run regulated or unregulated funds and either can adopt the legal form of an SCS or an SCSp. With respect to Luxembourg’s regulated fund suite, the two main options are to run a SICAR (société d’investissement en capital à risque) or the more popular specialised investment fund (SIF).
If in scope of the AIFMD, the manager can remain subject to the so-called small manager regime if its assets under management remain below the EUR100m (leveraged) or EUR500m (unleveraged and closed-ended) thresholds, even though the manager will need to be registered as an AIFM. The point here is that they would not need to comply with the full extent of the AIFMD, thus giving managers the opportunity to gradually build interest in the fund, without immediately incurring the full burden of regulation as a fully in-scope AIFM or through a regulated fund product.
“The advantage to having an in-scope AIF is that it makes it easier to market due to the marketing passport available to investors. Some investors on top require the fund to be regulated because of their own regulations. That generally results in a SIF structure, which is exempt from most taxes. There’s only one tax that is levelled at the fund and that is an annual subscription tax (taxe d’abonnement), which equates to one basis point applied to the fund’s net assets,” says Van den Abeele.
Moreover, regulated funds allow the benefit of the VAT exemption on management services.
“The SICAR fund structure really focuses on risk capital: private equity and venture capital investments. The main difference between this and a SIF is that there is no diversification requirement. With a SIF, it is not possible to hold more than 30 per cent of the fund’s assets in a single investment, which does not apply to the SICAR. Otherwise there aren’t that many differences between the two structures other than the risk capital nature of the SICAR.
“A lot of private equity vehicles have been structured as SIFs but the SICAR is still available and is something that works well for particular markets. For example, in Spain it is used quite often because from a structuring and tax perspective it can be used quite effectively,” says Van den Abeele, also confirming that this year, one clear trend that has emerged has been for managers to obtain authorisation as AIFMs and launch unregulated vehicles.
In conclusion, Van den Abeele encourages non-EU managers to consider the SCSp as part of their European fund strategy.
“It is a good solution that combines the LP structure that they are familiar with the tax efficiency they require. At the same time, managers will have the ability to tap into the EU investor market and benefit fully from the AIFMD marketing passport.”