Lux the builder
Luxembourg recently updated its fund legislation toolbox with the aim of maintaining a competitive and attractive edge in the alternative investment industry.
But what exactly are the implications of the amendments?
Luxembourg is attempting to remain competitive in the funds industry as it incorporates a wider range of legal structures, like the recently revised European Long Term Investment Fund (ELTIF), into its offerings.
A minor change includes reducing the minimum threshold for a ‘well-informed investor’ from €125,000 to €100,000.
Beyond this, Dr Marcel Bartnik, partner at Bonn Schmitt, explains to The Drawdown that certain updates, such as the possibility for AIFMs to appoint tied agents, mirrors the older UCITS directive.
However, he adds that there are still barriers to their use: “Managers still need to apply for an additional MiFID licence for this, which requires some investment in terms of time, money and potentially staff.”
If the licence can be obtained, fund managers marketing their funds into the EU would have a third option, aside from reverse solicitation or the presence of a MiFID II marketing entity in the EU. Charles-Alexandre Houillon, director at Zedra, adds: “The tied agent would be regulated for distribution of funds in the EU and can implement a simple and robust structure focused on ensuring all the regulations are met, so that distribution in the EU can occur in a compliant manner.”
Houillon anticipated an increase of oversight of distribution capacities, and therefore an increase in workload for AIFMs because of this update.
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Luxembourg also issued a favourable subscription tax for emerging European products – the ELTIF and the Pan-European Individual Pension Product (PEPP). Both products will be exempt of such tax, instead of the standard rate of 0.50% or 0.01%, respectively.
The aim of this initiative is to encourage the market to start using these kinds of products, with Luxembourg positioning itself as a favourable jurisdiction. The question is whether this incentive will be enough, when other jurisdictions are equally competing. For example, Ireland does not levy a subscription tax.
Calling all capital
Finally, Luxembourg has issued an extension of the time given for SICARs, SIFs, UCIs (Part II) and RAIFs to raise their minimum capital; firms now have 24 months rather than 12.
This can be seen as Luxembourg adapting to the current market conditions, as high interest rates are making it more difficult for investors to commit to capital.
However, Bartnik notes that the requirement of 24 months does not necessarily mean investors have to wire the money to the fund. “Instead,” he clarifies, “it simply means that managers have to collect commitments of such an amount within that timeframe and investors are only required to pay once some targets for the fund have been identified, which can happen after more than just two years. Still, in practice it's a good change because there is more time for fundraising.”
In short, the updates to the toolbox have proven to be small building blocks centred around keeping Luxembourg competitive. Only time will tell if a bigger shift is needed.