FEATURING Association of the Luxembourg Fund Industry (ALFI) // Crestbridge // D.Law // LEXTRUST // Ogier // PwC Luxembourg // SS&C GlobeOp

INNOVATION Adopting a flexible legal framework

PIONEERING Dynamic market-leading ideas

PARTNERSHIPSWorking with the right people to develop funds

L U X E M B O U R G 2 0 1 6WEEKHFM

S P E C I A L R E P O R T

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H F M W E E K . CO M 3

I N T R O D U C T I O N

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hile the AIFMD attracted a great deal of criticism from many industry professionals when it was first presented, it seems that the alternative investment fund industry is now starting to reap the first benefits of this regulation.

Those who attended ALFI’s European Alternative Investment Conference in January could observe a growing confidence regarding the future development of the sector.

The increasingly regulated nature of alternative funds is changing investor perceptions. Institutional

investors, namely public bodies and pension funds, are prepared to increase their allocations to EU-regulated funds. This will lead AIF sponsors to launch new products onshore to meet the changing demands of investors and markets. Market observers believe that many of these may be parallel structures set up in jurisdictions like Luxembourg, rather than the relocation of existing funds.

These observations are supported by figures: Luxembourg now counts 212 authorised AIFMs, 626 registered AIFMs and 950 special limited partnerships used to a large extent for private equity investments.

Beside institutional investors, private investors are said to be looking increasingly to hedge funds in order to diversify their portfolios rather than to achieve relative outperformance.

The overall environment seems to provide the alternative investment fund industry with a stable platform for future growth. The Luxembourg legislator has made a highly appreciated contribution by adding another investment vehicle to the current range of products: the Raif.

The Reserved Alternative Investment Fund (Raif) is ‘reserved’ to authorised Alternative Investment Fund Managers (AIFMs), and, as a consequence, cannot be managed by registered AIFMs. The Raif itself does not have to be approved by the Luxembourg regulator. It is supervised via its manager which is subject to regular reporting in line with the AIFM directive.

The manager can be domiciled in Luxembourg or in another EU member state. Shares or units in a Raif can only be marketed to well-informed investors. These and many other features of the Raif are known to practitioners that operate already with Luxembourg Sif or Sicar structures.

The main benefit of the new vehicle is a reduced time-to-market. Moreover, being a fund, it is possible to set up multiple compartment structures implementing distinct investment strategies. This is a key difference compared to unregulated structures subject to Luxembourg company law.

Anouk Agnesdeputy general director at the Association of the Luxembourg Fund Industry (ALFI) since April 2012. Before joining ALFI, Agnes worked as an advisor at the Ministry of Finance, with her main responsibilities related to the government’s policy in favour of the development of the fi nancial sector.

WL U X E M B O U R G 2 0 1 6

4 H F M W E E K . CO M

L U X E M B O U R G 2 0 1 6 C O N T E N T S

FUND MANAGEMENT

MAINTAINING MARKET LEADERSHIPFanny Sergent and Michael Delano of PwC Luxembourg, explore how Luxembourg became the fastest growing hedge fund domicile in Europe

LEGAL

LUXEMBOURG UNREGULATED FUND: A PRAGMATIC DISRUPTION?Ingrid Dubourdieu of D.Law foresees an exciting future for the Grand Duchy and examines how the country aims to build on its already thriving fund industry

FUND SERVICES

KNOW YOUR MARKETNick Curwen of SS&C GlobeOp discusses Luxembourg’s dominant position in the Ucits fund domicile and cross-border distribution markets

FUND SERVICES

LUXEMBOURG: THE PERFECT COMBINATION?François Pfister, the practice partner of Ogier’s Luxembourg office, examines the catalysts behind Luxembourg’s rise as a domicile and the inevitable impact regulation has on the country’s market future

FUND SERVICES

THRIVING ON NEW LAWS AND REGULATIONS – THE AIFMD EXPERIENCEDaniela Klasén-Martin of Crestbridge, discusses Luxembourg’s flourishing alternative fund industry and how the Grand Duchy is embracing new laws

LEGAL

A NEW AGE IN THE INVESTMENT FUND INDUSTRYJonathan Burger, partner and founder at LEXTRUST, identifies what he believes the impact of the Raif in Luxembourg will be and notes the importance of the Raif Bill

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L U X E M B O U R G 2 0 1 6

FANNY SERGENT AND MICHAEL DELANO OF PWC LUXEMBOURG, EXPLORE HOW LUXEMBOURG BECAME THE FASTEST GROWING HEDGE FUND DOMICILE IN EUROPE

MAINTAINING MARKET LEADERSHIP

Fanny Sergent is the PwC Luxembourg hedge fund leader and an audit partner specialised in the financial services industry with a focus on asset management including hedge funds.

Michael Delano is an audit partner in the asset management practice in Luxembourg. He has over 18 years of audit experience, including 10 years in the US practice, in working with some of PwC’s largest asset management clients.

With more than 14,000 funds and over $3.7bn of assets under management at the end of 2015, Luxembourg is the second largest investment fund centre in the world, aft er the United States. Over the past fi ve years, Luxembourg

has had the largest growth in its worldwide share of hedge funds, from 6% of the global market in 2011 to 15.6% in June 2015. In addition, 46% of alternative Ucits funds are domiciled in the Grand Duchy. Th e megatrends described in PwC’s publication ‘Alternative asset management 2020 – Fast forward to centre stage’ will create further oppor-tunities for Luxembourg to strengthen its position in the hedge funds space.

ASSET MANAGEMENT MOVES TO CENTRE STAGE New source of funding: Regulation will continue to hin-der the ability of banks to fi nance the broader economy – for asset managers this will create signifi cant opportunities to further step into the funding gap.

New asset class/expertise: Asset managers will domi-nate the capital raising required to support growing ur-banisation and cross-border trade; growing asset classes in infrastructure and real estate play into alternatives fi rms’ areas of expertise.

An increasing investor base: Asset managers will be at the centre of eff orts by sovereign investors to invest and diversify their huge pools of assets and AIFMs are ideally positioned to partner with them.

Innovative products: As the world’s population ages, retirement and healthcare will become critical issues that asset management can solve; capital preservation and al-pha generation will be key.

ALTERNATIVES ARE INCREASINGLY MAINSTREAMTh e growth of liquid alternatives has been prolifi c. Th ey are primarily Ucits funds in Europe and mutual funds reg-istered under the Investment Company Act of 1940 in the US, known as ’40 Act funds. With greater transparency, a strong regulatory environment, appealing liquidity terms, oft en lower fees and the ability to access a range of alterna-tive strategies, growth in liquid alternatives is not surpris-ing. By 2020, alternative asset management will become synonymous with ‘active asset management’ and, increas-ingly, ‘multi-asset class solutions’. Alternatives will become part of the selection of retail products available as investors seek strategies with the prospect of alpha and protection against downside risks.

Th e recently published AIMA/PwC survey bears this

out, with 81% of fi rms that manage Ucits funds reporting rising assets under management (AuM). In addition, 87% of US managers of liquid alternative funds questioned in the survey say AuM are rising in their strategies. Liquid al-ternative funds are likely to increase in the future, with half of survey respondents in the UK planning to launch one in 2015-16. Nearly a third of the US fi rms are planning a liquid alternatives launch.

DISTRIBUTION CHANNELS GAIN IN FOCUSBy 2020, alternatives fi rms will adopt many ideas and practices from the broader fi nancial services industry and from traditional asset managers. Th ey will develop more sophisticated market strategies; more focused distribution channels and bett er recognised brands. Most alternative fi rms will work out exactly which investor channel or chan-nels they want to target and will develop relevant strate-gies and products. Some will focus more systematically on sovereign investors, pension funds, other sophisticated institutions and private wealth markets. Others will target emerging markets or pursue the potentially huge asset fl ows through liquid alternative products. A small number of mega-managers in the alternatives space will operate across all major geographies, channels and strategies.

In the wake of new regulation, many fi rms are develop-ing sophisticated processes to choose investor channels, the markets to target and, consequently, what regulatory regimes they will need to address. Conversely, regulatory changes create opportunities for hedge funds distributing in Europe, the US and Asia.

RESPONDING TO INCREASED REGULATIONTh e introduction of AIFMD has been a catalyst for fi rms to reconsider their distribution strategies. More than three quarters of managers surveyed said that they had changed where or how they market non-EU Alternative Investment Funds (AIFs) to EU investors in the wake of AIFMD. In the meantime, a considerable number of managers in charge of non-EU funds marketed in the EU have decided to create their own EU AIFMs or become sub-advisers for EU AIFMs instead of using a non-EU AIFM. AIFMD appears as the next big opportunity for Luxembourg, if the Grand Duchy can replicate the success of Ucits with alternative products. With one third of Ucits assets domi-ciled in Luxembourg and two-thirds of Ucits registrations worldwide coming from Luxembourg-domiciled funds, the country can easily leverage on its expertise.

Th e European Council have approved a regulation which creates a new investment vehicle designed to

F U N D M A N A G E M E N T

H F M W E E K . CO M 7

channel European investment directly to the real economy. Th e European Long Term Investment Fund (ELTIF) vehicle sits in between the AIFM and the Ucits rules. Th is means that, in addition to institutional investors, an ELTIF can be sold to retail investors with certain conditions. An ELTIF must be an EU AIF, must be managed by an EU-authorised AIFM and invest (at least 70% of its capital) in illiquid assets such as shares of non-listed companies, certain loans and infrastructure projects. Th e ELTIF seeks address the growing need to fi nance infrastructure projects throughout Europe which is key as we see the increased regula-tory constraints on banks leading to a reduction in their capacity to fi nance the economy.

Th e work on new regulation of the fi nancial mar-kets has also reached the tax sphere; supported by all major countries, the OECD fi nalised its measures tackling ‘Base Erosion and Profi t Shift ing’ (BEPS) practices in late 2015. Countries and the European Commission are now working on related legislation and respectively EU directives. Th e most visible so far are the steps that enhance transparency and the exchange of information. Here, the common report-ing standard and country-by-country reporting of transfer pricing outcomes rules are already coming into force. Lux-embourg is fully supporting the BEPS initiative, while also considering the concerns for alternative, as well as main-stream funds. Th is is particularly important, as BEPS is not a harmonisation of the global taxation systems but rather a collection of coordinated specifi c measures.

THE RAIF: FAST LANE TO EUROPEAN DISTRIBUTIONAIFMD has introduced the concept of ‘unregulated’ AIFs benefi tt ing from a European marketing passport through the passport of its authorised AIFM. Th is passport is avail-able in Luxembourg to either regulated AIFs or unregu-lated structures under commercial company law managed

by an authorised AIFM. In order to bett er adapt to alternative asset managers’ need for tailored structures, the Luxembourg government is about to approve a law creating the Reserved Alternative Investment Fund (RA IF). Th e RA IF is not subject to regulatory pre-approval, which signifi cantly re-duces the time to market. It will be dedicated to well-informed investors and will qualify as an AIF with a passport permitt ing distribution to well in-formed investors in any of the EU member states.

Th e RA IF has already generated a signifi cant amount of interest among assets managers in US and Asia as a way to reach high net worth and in-stitutional investors in Europe. We expect the Raif to further strengthen Luxembourg’s position as an att ractive domicile for alternative funds.

IN THE WAKE OF NEW REGULATION, MANY

FIRMS ARE DEVELOPING SOPHISTICATED PROCESSES

TO CHOOSE INVESTOR CHANNELS, THE MARKETS

TO TARGET AND, CONSEQUENTLY, WHAT REGULATORY REGIMES THEY WILL NEED TO

ADDRESS

”

8 H F M W E E K . CO M

L U X E M B O U R G 2 0 1 6

INGRID DUBOURDIEU OF D.LAW FORESEES AN EXCITING FUTURE FOR THE GRAND DUCHY AND EXAMINES HOW THE COUNTRY AIMS TO BUILD ON ITS ALREADY THRIVING FUND INDUSTRY

Ingrid Dubourdieu has more than 15 years’ expertise in the Luxembourg fund industry, where she advises and assists institutional clients to structure and operate their investment funds and/or management companies. Prior to joining D.Law in 2013, Dubourdieu spent nearly 14 years with Luxembourg’s leading law firm where she focused on collective asset management, investment funds (UCITs and alternative funds) and related matters.

A recent publication underlines that many people use the term ‘disruption’ too fre-quently in a loose way to invoke the con-cept of innovation in support of whatever they wish to do. Without being polemical and in a nutshell, one may define disruptive

innovation as the process whereby a new market is created by outsiders and established market leaders are eventually challenged.

It might be too early to state whether the upcoming Luxembourg innovative unregulated AIF is actually dis-ruptive for the fund industry, but it is definitely a hot topic.

SMALL NATION, PROSPECTIVE VISIONLuxembourg’s pragmatism is unquestionable when it comes to the fund industry. The Grand Duchy has been successful in becoming the second largest fund centre worldwide, after the US, with 3,878 fund structures repre-senting €3.5bn of assets under management (AuM) within a well-developed range of regulated funds benefitting from a well-established brand worldwide.

Luxembourg now confirms its progressivism by disrupt-ing its traditionally regulated fund offer with an innova-tive unregulated AIF regime expected for mid-2016 – the Raif. By accommodating market demand for an improved

regime of the Luxembourg unregulated limited partner-ship, alongside a new fund displaying the features of ex-isting regulated funds while being non-regulated, Luxem-bourg is well equipped to further increase its market share of the world fund market.

Luxembourg’s regulatory burden is often highlighted when compared to AIFs setup in offshore jurisdictions and will not apply anymore when considering the Raif; it is not required to seek any authorisation before or after its launch and will not be subject to any changes to its structuring or documentation. The absence of ex-ante or ex-post authori-sation is key to ensure a speed-to-market strategy so that offering to investors becomes possible in the blink of an eye. In this respect, contrary to some other jurisdictions such as BVI, Bermuda or Cayman, no registration is need-ed even if the Raif is open-ended and counts more than 20 investors.

The absence of regulatory burden and restrictions in terms of investment strategy or leverage is particularly ap-pealing for any investment portfolios, including loan origi-nations, and well adapted to tangible asset classes such as diamonds, gold, musical instruments, jewellery or art, for which, Luxembourg services providers (more than 100 international fund administrators and more than 70 inter-national banks) are well positioned.

LUXEMBOURG UNREGULATED FUND: A PRAGMATIC DISRUPTION?

L E G A L

H F M W E E K . CO M 9

The Raif may also be appropriate to embody the cross-border vehicle necessary for global trades such as financing for aircraft, shipping or reinsurance of medical facilities.

ABSENCE OF REGULATION VS INVESTOR PROTECTIONAlthough unregulated, the Raif offers multiple layers of investor protection through the requirement to appoint:

• An authorised AIFM required to ensure compli-ance with the AIFMD as transposed

• Luxembourg-established depositary bank re-quired to act independently, honestly, fairly, pro-fessionally and in the best interest of investors

• An independent auditor to audit its financial state-ments on a yearly basis

Regarding the role of the depositary bank of a Raif, inves-tor protection is far stronger than in some offshore juris-dictions where there is not always the requirement to have a depositary bank, or even less so entrusted with the duties to keep safe the assets (sanctioned by a strict liability in case of loss) and to perform ongo-ing monitoring.

Additionally, investors will benefit from strong disclosure requirements including the issue, be-sides annual reports, of an offering document con-taining the information necessary for investors to be able to make an informed judgment of the investment proposed to them and, in particular, of the risks attached thereto, all pursuant to the terms of the AIFMD as transposed.

The investors’ protection package also comes with requirements on risk diversification and ad-vanced risk management processes, notwithstand-ing the appointment of an authorised AIFM and, as appropriate, of an asset manager duly licensed.

ANTICIPATING THE END OF PRIVATE PLACEMENTSIn terms of marketing, the authorised AIFM per-mits the Raif to benefit from easy access to the EU markets through an EU passport. The fact that the authorised AIFM can be located either in Luxem-bourg or in another EU member state and, shortly, in a non EU country, is certainly key for asset managers not located within the EU, who are currently resorting to PP rules and willing to continue marketing in the EU.

This access is somehow broaden by the fact that, while being dedicated to institutional investors, professionals or otherwise sophisticated investors generally investing at least €125,000, it could be possible that units/shares of a Raif be distributed to underlying retail investors investing through portfolio managers under discretionary mandate or insur-ance undertakings.

RAIF STRUCTURE: CHOICE OF OPTIONS FOR ANY NEEDS In terms of structuring, the Raif can adopt a corporate or a contractual form, each time with a variable share capital and limited liability for investors.

By using a Luxembourg limited partnership form (SCS or SCSp), the Raif may be more attractive to Anglo-Saxon and US investors used to this type of structure. It offers a strong value option to the offshore segregated portfo-lio companies (or SPCs) or other non-regulated limited

partnerships not benefitting from the variable share capital and umbrella structure. Moreover, considering tax treat-ment, the Raif under the SCA form should be eligible for the ‘check the box’ tax treatment as a partnership for US tax purposes.

For those concerned by confidentiality, the Raif under the form of a Luxembourg special limited partnership (SCSp) allows for keeping the identity of the LPs confi-dential and may offer a good option to offshore jurisdic-tions. It’s often pointed to as an opaque tax haven or not deemed equivalent in terms of the rules on anti-money laundering and terrorism financing.

By opposing unregulated LLPs, the Raif may addition ally resort to a multi-compartment structure (umbrella), allowing it to create compartments on an as-needed basis without any prior or subsequent regulatory approval. In such umbrella structure, each compartment is segregated from the others, having thereby its own investment policy

and strategy without any contamination from one compartment to the others in case of insolvency or liquidation or other similar event. Each such com-partment may in addition have its own portfolio manager/investment adviser/investment commit-tee as appointed by the AIFM and may determine its own fee structure.

A WORD ON TAX ASPECTSUnder its tax regime by default, the Raif is not sub-ject to income tax, but however subject to an annual subscription tax (Taxe d’abonnement) which applies at a rate of 0.01% (subject to various exemptions). Alternatively, when the Raif is dedicated to risk capital assets, it is subject to income tax and mu-nicipal business tax but any income from transfer-able securities and from temporary investments are exempted and no annual subscription tax applies. Under both regimes, there is no tax on speculative capital gains or withholding tax on distributions and no Luxembourg VAT on management, per-formance and/or investment advisory fees paid in consideration for the management of the Raif.

It is also worthwhile mentioning that there is a substance convergence between BEPS substance con-siderations and AIFM substance requirements, thereby pleading for a unique convergence centre. Within this con-text, a Raif under the Luxembourg special limited partner-ship form (SCSp) being tax resident where it is effectively managed will significantly reduce substance/permanent establishment issues by having its authorised AIFM lo-cated in Luxembourg.

WHAT TO EXPECT FROM THE RAIFThe Raif is a remarkable multi-purpose vehicle for finan-cial institutions, asset managers, wealth management plan-ners or SMEs looking for structuring flexibility. It offers speed to market in a steady and AAA environment and it can also be created by redomiciliation from existing juris-dictions without loss of legal personality.

By introducing the Raif, Luxembourg is surely revolu-tionising its habits and its own legal framework of tradi-tionally regulated AIFs, but only time will tell us whether it actually disrupts the global fund market.

LUXEMBOURG NOW CONFIRMS

ITS PROGRESSIVISM BY DISRUPTING ITS

TRADITIONALLY REGULATED FUND OFFER WITH AN

INNOVATIVE UNREGULATED AIF REGIME EXPECTED FOR

MID-2016 – THE RAIF

”

1 0 H F M W E E K . CO M

L U X E M B O U R G 2 0 1 6

NICK CURWEN OF SS&C GLOBEOP DISCUSSES LUXEMBOURG’S DOMINANT POSITION IN THE UCITS FUND DOMICILE AND CROSS-BORDER DISTRIBUTION MARKETS

KNOW YOUR MARKET

Nick Curwen is director at SS&C GlobeOp, responsible for European onshore funds, and head of SS&C’s Luxembourg office. Prior to moving to Luxembourg in 2012, Nick ran SS&C’s Dublin office. Before joining SS&C GlobeOp, Nick was head of client services at a European fixed income asset manager.

HFMWeek (HFM): How long has SS&C GlobeOp been in Luxembourg and what led you to enter this market?Nick Curwen (NC): SS&C GlobeOp has been off ering fund administration services in Luxembourg since the summer of 2013. We entered the Luxembourg market in anticipation of the introduction of AIFMD and because our clients wanted us here. SS&C GlobeOp is one of the world’s largest fund services companies. As we grow our European onshore presence, it makes sense for us to be in Luxembourg, the second largest fund domicile in the world.

HFM: What trends have you seen in the last two years?NC: Th e two biggest hedge fund trends we have seen in the last two years are alternative Ucits and hybrid funds. In 2015, alternative Ucits was a big story, especially for hedge fund clients who launched onshore vehicles. Undeniably, the key driver behind this is investor demand. With the current low-interest environment, institutional investors continue to show an appetite for alternative investment strategies in a search for increased yield. With AIFMD still considered a relatively new product, the 30-year his-tory and reliability of Ucits are att ractive to investors. Th e Ucits distribution channels are well established, and in re-cent years, it’s been proven that if an investment manager’s strategy can be adapted to the Ucits rules, it att racts more investors.

However, it is important to be cautious. Ucits are expen-sive to launch, so the barriers to entry are higher than some hedge fund managers may be used to. Ensuring the launch size makes sense is key to the ultimate success of the prod-uct. Also, just because an investment strategy can be made to fi t the Ucits rules does not inherently make it any less risky to the investor. An investor must assess whether the extra costs are worth it. As an industry, we need to ensure the products we off er can weather future storms. During the last fi nancial crisis, Luxembourg proved it can make the tough decisions needed to ensure success during vola-tile markets.

In 2015, many clients also launched hybrid funds, which invest in multiple asset classes, including real estate, private loans, listed equities, and bonds. Th is, again, was driven by client demand for higher yields and the need for new investment opportunities with structural characteris-tics that are att ractive to investors.

Both these types of funds come with servicing challeng-es. For example, the fund’s service provider may be a Ucits specialist and may not have the expertise to service the

alternative strategies completely. Likewise, we have clients whose service providers struggle when the investment manager wants to invest in more diverse asset classes but does not have private equity or real estate asset expertise. SS&C GlobeOp is a market leader that expertly supports the unique characteristics of these funds.

HFM: What diff erentiates SS&C GlobeOp?NC: Our parent company, SS&C Technologies, is a NASDAQ-listed fi nancial technology company. SS&C GlobeOp is an alternative fund services division that pro-vides independent fund administration, middle and back offi ce solutions, regulatory reporting, and other services. We believe that these services are fundamentally technol-ogy-based activities, as opposed to traditional banking services. SS&C GlobeOp owns all of its technology and develops it directly in line with clients’ requirements. We support our technology research and development with a signifi cant percentage our of soft ware revenues. Th is means SS&C GlobeOp runs a committ ed and sustainable alternative fund services business with limited technology overhead.

We tailor our solutions to meet our clients’ unique needs. For example, we can provide regulatory report-ing services to investment managers even if we do not administer all of their funds. We can also tailor solutions with a combination of soft ware deployment, outsourced solutions, and service solutions – something none of our competitors off er. We work hand in hand with our clients to take on any industry challenge and clients oft en ask us to work on joint solutions (for example Solvency II).

HFM: What do you see in the investment fund future for Luxembourg?NC: Luxembourg is undoubtedly the world’s leading Ucits fund domicile and the leader in cross-border distribution. It is well positioned to win more than its fair share of the continued growth in alternative Ucits, as well as a large share of the onshore European hedge fund market. In ad-dition, Luxembourg continues to be a fund domicile of choice for investors, particularly those based in continen-tal Europe.

Luxembourg has astutely added to its fund toolbox with the new Reserved Alternative Investment Fund (RA IF), off ering the same fl exibility as the successful Sif. Th is al-lows for the creation of compartments with no limitation on investment policy. It also provides access to the EU passport under AIMFD. Luxembourg continues to off er the highly successful regulated Sif- and Ucits-type funds.

F U N D S E R V I C E S

H F M W E E K . CO M 11

In 2015, Luxembourg also saw a large uptake of the Special Limited Partnership structure (SCSp). All of this, along with the other Luxembourg fund structuring tools, provide investment managers with a wide range of options with which to launch products and att ract investors.

In addition, many specialised service providers have entered Luxembourg in the last few years, and there have been redomiciliations of funds from the Cayman and Channel Islands.

Finally, Luxembourg invests in its infrastruc-ture and understands the importance of the fund industry. Recently, there have been signifi cant transformations in real estate development, technology infrastructure, and educational infrastructure. All of this investment makes Luxembourg an important strategic consideration for investment managers.

HFM: FinTech is currently a hot topic. What is your view on this?NC: FinTech can mean many things, but the industry is usually talking about two areas: more innovative tech-nologies, like blockchain, and disruptive technologies that

aff ect the way we interact with the end client (for example roboadvisors and socialised investment platforms). It’s crucial not to overlook the impor-tance of industry regulation and the impact it will have on any future technological evolution. Can someone who does not understand our industry truly revolutionise it?

SS&C is an established and successful FinTech company that employs more than 1,000 technol-ogy professionals. Last year, SS&C reinvested 24% of its soft ware revenue into soft ware R&D. Th e soft ware solutions from SS&C cover portfolio management, reconciliations, valuations, perfor-

mance and att ribution, reporting, risk management, regu-latory reporting, investor servicing, accounting, and train-ing. SS&C supports more than 10,000 blue chip clients including asset managers, wealth managers, family offi ces, real estate management companies, insurance companies, pension funds and banks.

Th is gives the SS&C Luxembourg team access to a broad range of expertise, providing value to our clients and to the industry as a whole. Our technology and service so-lutions are some of the best in the business.

AS AN INDUSTRY, WE NEED TO ENSURE THE PRODUCTS WE OFFER CAN WEATHER

FUTURE STORMS

”

1 2 H F M W E E K . CO M

L U X E M B O U R G 2 0 1 6

FRANÇOIS PFISTER, THE PRACTICE PARTNER OF OGIER’S LUXEMBOURG OFFICE, EXAMINES THE CATALYSTS BEHIND LUXEMBOURG’S RISE AS A DOMICILE AND THE INEVITABLE IMPACT REGULATION HAS ON THE

COUNTRY’S MARKET FUTURE

LUXEMBOURG: THE PERFECT COMBINATION?

François Pfister is the practice partner of Ogier’s Luxembourg office. A member of the Luxembourg Bar since 1991, François is recognised by industry commentators for being a ‘top act’ in the Luxembourg funds market. His areas of expertise are investment funds, private equity, real estate and international taxation..

The Luxembourg fund industry has always been characterised by an environment of investor protection-led regulatory con-straints imposed by either European or national legislators, or by increasingly com-plex and intrusive prudential rules from our

domestic fi nancial sector regulator, the CSSF.

LUXEMBOURG’S DEVELOPMENTTh e approach taken so far has been to dictate rules around the fund products (so-called ‘products laws’) on one hand. While on the other, imposing more or less burdensome licensing requirements on most fi nancial service fi rms active in the production and distribution of fund products (managers, depositary banks, fund administrators, IT sup-port, distributors and advisors, etc).

Th is regulated environment has been benefi cial to the development of Luxembourg’s role as a global fund domicile by creating a brand for its products (Ucits and Sifs) and a label of quality. Th e downside, however, has undoubtedly been costs, entry barriers and slowness in the regula-tory approval process.

With the implementation of the AIFMD into Luxembourg law in July 2013, a further layer of regulation was introduced. International fund promoters, although att racted by the EU distribution passport created by the AIFMD, feared – rightly so – increased compliance costs and even further delayed approval processes by the CSSF.

A TALE OF REGULATIONTh e prospect of dual regulations under the products laws, and the new regulation of managers through the AIFMD, have accelerated the emergence of new, unregulated in-vestment fund vehicles taking the form of common or special limited partnerships (introduced under Luxem-bourg law simultaneously with the transposition of the AIFMD). Th ese transparent, and thus neutral, fund ve-hicles would appoint an authorised AIFM (fully subject to the AIFMD), opt-out of the products laws and have

access to the European marketing passport to profession-al investors. More regulation on the manager has there-fore enabled less regulation on the products. Good news!

In reality, the emergence of an unregulated fund prod-ucts segment was, and remains, an absolute necessity. A double layer of regulation (manager and products) was not sustainable and risked creating a competitive disadvantage for Luxembourg as a domicile compared with its traditional competitors (both onshore and off-shore).

Constantly improving the jurisdiction’s legal and regulatory infrastructure is key, and the recent initiative

from the Luxembourg government to introduce a bill on Reserved Al-ternative Investment Funds (Raifs) indicates an informed policy com-mitment to the appropriate direction of travel.

Th e bill on Raifs (if enacted, which is likely during the fi rst semes-ter of 2016) introduces the possibil-ity to create, using a variety of con-tractual and corporate forms (some of which today are still reserved to regulated funds), unregulated alter-native investment funds having the same features as regulated vehicles (typically Sifs and Sicars). Such fea-tures include variable capital, segre-

gated compartments, multiple classes, easy capital calls and redemption mechanics as well a neutral tax regime. Because the Raif is managed by an authorised AIFM, indirect supervision of the Raif is ensured through the regulated AIFM’s supervisory oversight, making sure the Raif complies with AIFMD.

All other requirements are similar to those of exist-ing regulated AIF such as Sifs and Sicars. Raifs will ap-point a Luxembourg-based central administration agent, a depositary and an external auditor. Depending upon its investment policy, the Raif will follow Sifs’ or Sicars’ portfolio diversifi cation requirements and tax regimes. If the Raif adopts the Sif model it will be subject to an an-nual subscription tax of one basis point on its net assets, whereas if adopting the Sicars model, the Raif will be fi scally treated as a Sicar.

IN REALITY, THE EMERGENCE OF AN

UNREGULATED FUND PRODUCTS SEGMENT

WAS, AND REMAINS, AN ABSOLUTE NECESSITY

”

F U N D S E R V I C E S

H F M W E E K . CO M 13

EXPERIENCEHaving appointed an AIFM (based in the EU), the AIF will have access to the EU marketing passport available to this AIFM under AIFMD. The Raif may appoint any fully authorised AIFM in any EU country including any such existing resource the promoter may have already avail-able in Europe. If the fund’s sponsor has no such presence in Europe, it may consider using the services of so-called ‘third-party management companies’ (ManCos). These, at that time, are fully authorised AIFMs who provide specialised investment management services (portfolio and/or risk management) to third party sponsors.

The Luxembourg market is seeing a growing number of these entities offering their services, typically risk-manage-ment services, being delegated back to an affiliate of the fund sponsor’s group. The long-experience gained by Lux-embourg in the Ucits environment (which had a similar model co-existing with the traditional in-house manage-ment and research model) is clearly helpful and is enabling the emergence of well-equipped management companies, with capable and experienced directors and officers, tested processes and the relevant technical infrastructure.

Having access to the European institutional and profes-sional investors market certainly must have a value. Al-though the use of a third-party ManCo comes with a cost, the economies realised the savings of the costs of regula-tion of the Raif itself may justify using the third-party man-agement company solution. For bigger players, the set-up of its own, proprietary AIFM remains an alternative.

The addition of the Raif and of unregulated invest-ment vehicles in general to the Luxembourg toolbox of investment vehicles constitutes more than an improve-ment of Luxembourg legal and financial infrastructure.

It potentially places Luxembourg on the same level play-ing field as offshore jurisdictions such as Cayman or the Channel Islands. These jurisdictions have traditionally been and still are able to offer solid and cost-efficient in-vestment platforms. However, they may not yet offer the marketing passport to EU investors. The passport will not be available until such time as the European Com-mission extends the AIFMD passport to non-EU AIFMs. This is a work in progress and unlikely to happen before a number of months if not years in certain jurisdictions. Thus, the use of a third-party AIFM may well be an av-enue to explore for many promoters.

A POSSIBLE GAME-CHANGEROne likely phenomenon to be anticipated is the transfor-mation of existing regulated structures (Sifs and Sicars) into unregulated Luxembourg limited partnerships or Raifs once the Raif legislation is adopted. However, evi-dently the ambition of the Raif legislation is to widen the marketability of Luxembourg investment funds products, which were handicapped by the requirements of comply-ing with products law. With this constraint disappearing, investors and fund sponsors familiar with unregulated or lightly regulated structures may well find the new features introduced in Luxembourg’s fund offering attractive. This is likely to appeal to US managers and also emerging Asian asset managers seeking European investors. They like Cay-man funds (rightly so), but may also find useful the Lux-embourg version, a combination of being a perfect design to satisfy non-EU and EU investors.

Does the emergence of unregulated alternative invest-ment funds in Luxembourg constitute a disrupter? May-be not, but possibly a game-changer.

1 4 H F M W E E K . CO M

L U X E M B O U R G 2 0 1 6

Daniela Klasén-Martin joined Crestbridge in Luxembourg in September 2010 as country head to help develop onshore services and launch management company services. She has more than 20 years’ experience in areas including risk management, financial management and corporate governance across various jurisdictions.

HFMWeek (HFM): Two years since its implementa-tion, is the AIFMD passport system for AIFs working and what challenges have you faced to date?Daniela Klasén-Martin (DKM): Th e passport works. We are distributing in most European countries and are seeing that the regulators have responded to this very quickly. We can defi nitely see that the 20 business days that are required for the marketing notifi cation are going well, there are not many questions and most of the time it goes even quicker than the 20 days.

To understand the challenges, we need to look back to the management company model and the regulatory requirements. In Luxembourg, we have been able to use our knowledge and experience with Ucits. Indeed, there are similarities between the Ucits and the AIFM direc-tives with regards to the organisation and governance re-quirements, the requirements with regards to the control, functions and the independence in the risk management function from the portfolio management function. Giv-en these similarities, we have been able to transpose the models, including the third-party management company model that we had put in place for Ucits within AIFMDs. Th e AIFM covers basically all funds that are not Ucits.

Th e real challenge was having the right people for each

investment strategy. Within our organisation we cover real estate and private equity, in addition to hedge funds and Ucits. Th e challenge was to ensure that we had the right people at board level, and particularly senior man-agement level, as well as risk management level. For in-stance, our risk managers have taken certifi cation in real estate and private equity. Having the right experienced professionals is of the upmost importance.

Another challenge is that ultimately, this is very new for alternative funds, and in particular for those who have not been working in the regulated space until recently.

Within a regulated fund structure you have a few ad-ditional parties to consider, such as the depositary and eventually a third-party management company like us, in addition to the central administrator. As a third-party AIFM, we have to be careful not to disrupt the existing operational processes and at the same time ensure that we can exercise the control functions in compliance with the regulation.

HFM: Going forward, what has the AIFMD system meant for the Luxembourg AIF industry and what have been the most signifi cant changes since its intro-duction?

THRIVING ON NEW LAWS AND REGULATIONS –

THE AIFMD EXPERIENCEDANIELA KLASÉN-MARTIN OF CRESTBRIDGE, DISCUSSES LUXEMBOURG’S

FLOURISHING ALTERNATIVE FUND INDUSTRY AND HOW THE GRAND DUCHY IS EMBRACING NEW LAWS

F U N D S E R V I C E S

H F M W E E K . CO M 15

THINK STRATEGICALLY, DO YOU REALLY WANT TO HAVE A FULLY-FLEDGED

AIFMD COMPLIANT SUBSIDIARY IN EUROPE WHEN YOU ARE BASED

SOMEWHERE ELSE?

”

DKM: The most interesting change is that there has been a huge increase in the amount of alternative funds. It is difficult to know exactly how that trend will develop further, but we have seen many more AIFs. Statistically, most of the new funds in Luxembourg are alternative funds, and we also see more fund managers choosing Luxembourg as the domicile for their management company and/or funds.

If you want to market in Europe, Luxembourg is a great choice: looking into the latest statistics we have more than €3.5trn of assets under man-agement, 383 ManCos, 158 fund administrators and 70 custodians, all well versed in working with asset managers from across the globe. In ad-dition, Luxembourg is a place that is well-known for distribution. At the start, we did not know what the changes were going to bring, but now we are able to confirm that it has brought much more business to Luxembourg.

HFM: What is a third-party AIFM and how can it be interesting for US manager?DKM: We are a so-called ‘SuperManCo’, which means

that we combine both a Ucits and AIFM licence. A manager that does not want to open an AIFM in Europe can appoint us to be the AIFM manager to their Lux-embourg- (or European-) domiciled fund. Our main functions will be risk management and portfolio man-agement, which we may or may not delegate.

There are a few advantages: 1. Time to market: if you had to create your own AIFM

it would take a minimum of six months to one year to get an approval as manager; appointing a third-party management company is a lot quicker

2. Cost-effectiveness: if you have your own AIFM you need to have full substance (a competent board, sen-ior managers with knowledge on the specific asset and a risk management function that is independ-ent from the portfolio management function). This could represent a substantial investment

3. If you appoint a third-party ManCo you can concen-trate on your core expertise, for example portfolio management, while outsourcing compliance to an ex-ternal party. Think strategically, do you really want to have a fully-fledged AIFMD-compliant subsidiary in Europe when you are based somewhere else?

HFM: What are the fund structures that you see mainly used by managers to access the EU market?DKM: What we see in Luxembourg traditionally is that alternative fund managers have been using the special-ised investment fund (Sif ) structure. With the AIFM Law, a more flexible structure – the special limited part-nership (SLP) – has been introduced, which has been used substantially. These structures are not supervised by the CSSF and therefore there is no prior approval needed from the regulator, which has a big advantage with regards to time to market. They are, however, in-directly regulated through the appointed AIFM, which means that they benefit from the passport.

Typically non-EU managers will create a paral-lel fund in Europe to capture the European investors, while keeping their existing structures in Delaware or elsewhere for the non-European investors. A new prod-

uct that is currently under scrutiny and should be approved around the second quarter of 2016 is the reserved alternative investment fund (Raif ). This product will have all the advantages of a Sif, for ex-ample the possibility to create compartments for different strategies or currencies, while also being unsupervised by the regulator and therefore not needing to pass through a lengthy approval pro-cess, provided they appoint an AIFM.

HFM: What are the main factors that lead man-agers to launch AIFM compliant funds?DKM: The main factor is investor demand; two years ago when we were going to the US to explain about Luxembourg and what the AIFMD is, it was early in the industry timeframe and most of the managers were not interested in Europe. Now we see that many are starting to become increasingly interested because of demands from institutional

investors, such as pension funds,which will only invest in an AIFM-regulated fund.  

© 2016 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC” or “PwC Luxembourg” refers to PricewaterhouseCoopers, Société

Luxembourg: a hedge fund centre “par excellence”

With more than 14,000 funds and approximately USD 3,700 bn of assets under management as at the end of 2015, Luxembourg is the second largest investment fund centre in the world after the United States and the fastest growing alternative investment funds domicile.

attracted hedge fund managers from all over the world.Combining global presence and local leadership, we have a team of experts with extensive experience in hedge funds who is well placed to help you take up the challenges posed by investors demand and regulatory change. We offer audit, tax and advisory services tailored to the needs of hedge funds managers, their funds and their service providers.

www.pwc.lu/alternative-investments/hedge-funds

Fanny Sergent Partner, Hedge Funds Leaderfanny.sergent@lu.pwc.com+352 49 48 48 2478

Michael Delano Hedge Fund Audit Partnermichael.delano@lu.pwc.com+352 49 48 48 2109

Your contacts

lternativesShaping

the Alternative landscape

Hedge Funds

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L E G A L

H F M W E E K . CO M 17

L U X E M B O U R G 2 0 1 6

JONATHAN BURGER, PARTNER AND FOUNDER AT LEXTRUST, IDENTIFIES WHAT HE BELIEVES THE IMPACT OF THE RAIF IN LUXEMBOURG WILL BE AND NOTES THE IMPORTANCE OF THE RAIF BILL

A NEW AGE IN THE INVESTMENT FUND INDUSTRY

Jonathan Burger is a partner and the founder at LEXTRUST. Burger specialises in the structuring, setting up and operation of the full spectrum of regulated and unregulated investment funds, including Ucits and Alternative Investment Funds (Sifs and Sicars), financial holding undertakings, securitisation vehicles and private asset management companies.

On 27 November 2015, the Luxembourg Government Council adopted a draft bill introducing a new type of alternative invest-ment fund, the Reserved Alternative Invest-ment Fund (Raif)/Fonds d’Investissement Alternatif Réservé (Fiar) published on 15

December 2015 (Raif Bill). Th e Raif Bill is expected to be adopted by the Luxembourg Parliament during the second quarter of 2016.

Th e Raif will have similar legal framework and fl exibility to the Specialised Investment Funds (Sifs) with the main diff erence that (i) the Raif will not be subject to the su-pervision of the Luxembourg Com-mission de Surveillance du Secteur Financier (CSSF) (ii) the Raifs will have to appoint an authorised AIFM. Cost and time effi ciencies off ered by this new investment vehicle should att ract the investment management fund community responding to the needs of promoters while preserving investors’ interests.

THE RAIF’S REGIME IN A NUTSHELLUnder the Raif Bill, the Raif will not be subject to any authorisation and supervision from the CSSF but it must be managed by a duly authorised external AIFM.

Th e Bill provides that Raifs must (i) qualify as an Alternative Invest-ment Fund within the meaning of the law of AIFM Law (ii) be managed by an external authorised AIFM (iii) off er its shares, units of partnership interests to well-informed investors only (iv) comply with risk diversifi cation limits.

Th e Raif may be established as a contractual common fund (FCP) or a corporate legal form as a public (SA) or private limited liability company (Sarl), a partnership limited by shares (SCA) or a partnership form as a lim-ited partnership (SCS) and special limited partnership (SCSp). In all these cases, the Raif may be structured as an investment company with variable of fi xed capital (Sicav-Raif or Sicaf-Raif). Th e subscribed capital of the Raif will be set at €1.2m and this minimum must be reached within a period of 12 months following its establishment.

WHAT MAKES THE RAIF DIFFERENT?In comparison with other regulated investment funds, the Raif may be set-up with lower costs within a short timeframe.

Under the current regime, unregulated funds in Luxem-bourg may not be structured as umbrella vehicles. Th e Raif

Bill will off er the ability for a non-regulated fund to adopt the umbrella structure with several compartments, each comprising a distinct portfolio of assets and liabilities.

Th e Raif will also be able to operate any fund strategy, invest in any asset class without restrictions in terms of eli-gibility of assets.

Concerning the tax regime, the Raif will be exempt from corporate income tax, municipal business tax and net worth tax. Th ere will not be withholding taxes on distri-butions or any tax on capital gains for investors. Only the subscription tax will apply. However, the Raif investing in risk capital will be entitled to opt for a special tax regime,

which will be identical to that appli-cable to investment companies in risk capital (Sicars).

NOTICEABLE INVESTOR PROTECTION Th e innovation of the Raif consist in avoiding a double layer of supervi-sion: one at the AIFM level and one at the AIF level. Th e Raif will benefi t from investor protection aff orded by the CSSF through the supervision performed on its AIFM. Indeed, the Raif may only be managed by a duly authorised external AIFM, estab-lished in Luxembourg or any member state of the European Union or any other third-party providing that the AIFM holds an AIFM licence. Th e AIFM Law will be fully applicable

with the related investor protection and the Raif will ben-efi t from the marketing passport granted to the AIFM.

In order to provide more comfort to investors, the Raif Bill provides that the Raif will have to appoint a Luxem-bourg based central administration and an independent auditor. Assets of the Raif must also be entrusted to a de-positary.

Under the Raif Bill, the establishment of the Raif must be recorded by notarial deed, published in the Luxem-bourg Mémorial and registered with the Luxembourg Trade and Companies’ Registry. Th e Raif will also be re-quired to provide investors with an issuing document, in-cluding the necessary information for investors to be able to make an informed judgement of the investment pro-posed by the Raif and the risk att ached thereto. Th e Raif will have to issue audited annual reports, fully available to the investors.

LEXTRUST would be delighted to help you in assess-ing this new opportunity which will revolutionise the Lux-embourg investment fund environment.

THE RAIF WILL BE ABLE TO OPERATE ANY FUND STRATEGY AND INVEST IN ANY ASSET CLASS

WITHOUT RESTRICTIONS IN TERMS OF

ELIGIBILITY OF ASSETS

”

1 8 H F M W E E K . CO M

S E R V I C E D I R E C TO R YL U X E M B O U R G 2 0 1 6

SS&C GlobeOp, José Santamaria // T: +352 2675 7204 // jsantamaria@sscinc.com // Nick Curwen // +352 2675 7201 // ncurwen@sscinc.com

SS&C GlobeOp® is among the largest and fastest growing fund administrators in the world. We offer the deep expertise, independence, transparency, and a comprehensive powerhouse of world-class technology that you won’t find at any other service provider. We own and maintain the best technology in the industry. That’s why we can deliver the speed and agility to service any new market, instrument, asset class, or regulation in your future without having to rely on third-party technology. Contact us at www.sscglobeop.com to learn more. We are the future. We are SS&C.

PwC Luxembourg, Fanny Sergent, Partner, Luxembourg Hedge Funds Leader // T: +352 49 48 48 2478 // fanny.sergent@lu.pwc.com Michael Delano, Hedge Fund Audit Partner // T: +352 49 48 48 2109 // michael.delano@lu.pwc.com

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu.

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Crestbridge Management Company S.A., Daniela Klasén-Martin // Daniela.klasen-martin@crestbridge.com // T: +352 26 215 420

Crestbridge is a leading independent provider of fiduciary, governance and administration services.We offer a comprehensive range of services including UCITS and AIFM Management Company services and Independent Risk Management solutions. Our team of experts provides governance and substance solutions to a wide range of fund structures and strategies, whether you are looking for independent risk management and oversight services to meet regulatory requirements or for a full management company service.

Association of the Luxembourg Fund Industry (ALFI), Anouk Agnes, Deputy Director General, Director Communications & Business Development

The Association of the Luxembourg Fund Industry (ALFI) is the representative body of the Luxembourg investment fund community. Created in 1988, the As-sociation today represents over 1,300 Luxembourg domiciled investment funds, asset management companies and a wide range of service providers such as depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax experts, auditors and accountants, specialist IT providers and communication companies. The Luxembourg Fund industry is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg-domiciled investment structures are distributed on a global basis in more than 70 countries with a particular focus on Europe, Asia, Latin America and the Middle East. For further information, do not hesitate to consult our website at www.alfi.lu. You can also keep up to date with the discussion by following @ALFIfunds on Twitter or join ALFI’s LinkedIn group.

D-Law, Ingrid Dubourdieu, Partner // T: +352 270 477 405 // F: +352 270 477 01 // idubourdieu@dlaw.lu D.Law is a Luxembourg based independent law firm allied with a network of 1700 lawyers over 70 countries. We advise multinational corporations, PE/RE houses, international and local banks, financial institutions, investment funds, etc. Our main practice areas range between corporate and mergers & acquisitions, banking and finance and investment funds, both in transactional and advisory work.

Lextrust, Jonathan Burger // T: +352 27 21 41 1 // burger@lextrust.lu

Jonathan specialises in the structuring, setting up and operation of the full spectrum of regulated and unregulated investment funds, including Ucits and Alternative Investment Funds (SIFs and SICARs), financial holding undertakings, securitisation vehicles and private asset management companies. Within the framework of his practice, he advises national and international fund promoters, Alternative Investment Fund managers, distributors, investment banks, asset managers, custodian banks, government authorities and other agents providing fund-related services.

We get straight to the point, managing complexity to get to the essentials. Every piece of work is a collaboration. We listen actively, asking the right questions, focused on what really matters. We deliver targeted, pragmatic advice with absolute clarity.

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