New Manager Led Products – What Are They?
With the AIFMD having imposed stringent regulatory and supervisory standards over EU Fund Managers (AIFMs), regulators and others have questioned the need for similar levels of regulatory oversight over funds – particularly those servicing the needs of the Professional and Institutional investors.
As a consequence there has been a rush to market of new “Manager Led” products one of which is the Luxembourg RAIF authorised by the Luxembourg Parliament within the last few days. The Luxembourg RAIF comes hot on the heels of the Guernsey MLP and the Maltese NAIF. So what are these new products all about?
The Guernsey MLP
Guernsey has previously regulated both the Manager and the fund – the MLP removes this regulatory duplication. Applicable to both open-ended or closed ended funds, the new regime allows for:
- A single regulated investment manager
- The manager to run multiple funds, once the manager has been granted a licence under the Guernsey POI Law
- A “one business day” fast track process is in place for the notification for funds and related entities
Some of the advantages of this new fund structure include:
- The MLP will be considered as an AIFM under Guernsey’s rules and will be able to “opt in” to an AIFMD equivalent regime
- The funds, which will be registered by the regulator, will not have to comply with any specific rules
- No specific form of offering document is required. An offering document may be required to comply with EU private placement regimes, but this aspect should provide greater flexibility for non EU offerings
- A single investment manager can notify and obtain registration for multiple funds and vehicles
- The Guernsey administrator (and custodian/trustee if required) will be regulated in Guernsey – providing further oversight and investor protection
The Luxembourg RAIF (Reserved Alternative Investment Fund) is defined as:
- A Luxembourg Alternative Investment Fund (AIF)
- Managed by an external authorised Alternative Investment Fund Manager (AIFM) established in Luxembourg or any other EU member state
- Subject to AIFMD requirements
- But not itself (i.e. the fund) subject to regulatory supervision by the CSSF
Given the reduced level of regulatory supervision, the RAIF structure will only be available to “well informed investors”. This includes institutional and professional investors.
The advantages of a RAIF are expected to be:
- The Fund will not be subject to any supervision or oversight by the CSSF or any other Luxembourg authority – and as a consequence any delays in launch, previously created by the regulatory approval process, will now be removed
- The regulated AIFM can be located anywhere within the EU
- A number of different types of structures can be used including the SCSPs (Partnerships)
- Umbrella Structures can be used
- Partnership interests can be issued in the form of Securities or Partners accounts
- Voting rights to be determined by the Partnership Agreement
- Freedom (within the terms of the fund documentation) to determine entitlements to profits and losses and the transfers of partnership interests
- SCS or SCSP structures investing in “Risk Capital” (defined by the CSSF as Private Equity and Venture Capital) can opt for a special tax regime which will be fully tax transparent and not subject to any Luxembourg direct taxes
To be compliant the RAIF will have to appoint a number of service providers and these will include:
- A duly authorised AIFM established and regulated in Luxembourg or any other EU member state
- A Depositary (subject to the AIFMD liability regime)
- An Auditor approved by the CSSF
- In addition it is envisaged that the central administration of the fund will be undertaken by a Luxembourg provider
And the NAIF?
Similar to the RAIF, the Maltese NAIF is intended to be able to get to market faster without the need for regulatory scrutinisation. A formal notification pack will need to be completed (the requirements of which have yet to be made public) and once filed, the MFSA will include the AIF on the List of Notified AIFs, with 10 days.
Like the RAIF:
- The AIFM can be situated anywhere within the EU
- Any fund structure authorised by Maltese law can be used
- The fund will benefit from passporting under the AIFMD within the EU
- But the fund will only be available to qualified or professional investors
So what does this mean?
Different levels of regulatory supervision exist around the world. US structures and managers (assuming they are Private Equity or Real Estate Managers managing institutional funds) have little regulatory oversight from the SEC or others. In the UK, the regulator has always maintained a rigorous and detailed approval process for managers, often taking many months before approving a fund manager. Oversight of a fund, especially one aimed at professional investors, is primarily limited to ensuring compliance with the AIFMD. Cayman, BVI and others have traditionally had a lighter touch facilitating speedy fund launches.
Regulators are now recognising that institutional investors into Private Equity and Real Estate funds are big enough to do their own due diligence on both fund managers and the structures they use. There is little added value in the eyes of investors in regulatory oversight of these funds – and regulators are recognising this. By removing this extra layer of oversight, delays and costs will be removed, creating a more efficient process. However at the same time the regulators are in effect saying “you are professional investors – and responsible for the risks”. Buyer Beware will be the name of the game.