#1pwc www.pwc.lu/alternative-investments Introduction to Luxembourg Alternative Investment Vehicles#2Welcome to Luxembourg, the next location of choice for your investment vehicle LUXEMBOURG 1 × Luxembourg is only the size of Manhattan, but it is the biggest domicile for investment funds in Europe (including all related industries) and the second most preferred location for investment funds globally (after Manhattan). Luxembourg offers a full range of investment vehicles and its financial supervisory authority, the Commission de Surveillance du Secteur Financier (the "CSSF") is one of the major regulators in Europe and is recognised worldwide. Following the financial crisis, the latest EU Regulations have squeezed the financial markets tightly: new laws are entering into force and more and more corporate structures are available. How do we navigate among all these rules and structures without losing track? This brochure is for "beginners" to the alternative investment world and aims at giving a simple but comprehensive overview of the unregulated, indirectly regulated and regulated options for investment funds.#3Welcome to the unregulated world (no CSSF supervision) 1#4The unregulated world of investment vehicles No need for CSSF supervision Unregulated investment vehicles are mainly governed by the Law of 10 August 1915 on commercial companies, as amended. Various vehicles are available. types of S.A. SAS S.à r.l. SCA SNC SCSP SCS If you are a large group of people (even if you don't know each other), choose either the S.A. or the SAS ... is like a train If there aren't too many of you and you are happy to be driven by someone amongst you or by a stranger, is like a bus choose either the S.à r.l. or the SCA If there are only a few of you, you know each other and you want to be driven by someone amongst you, choose the SNC, the SCSp or the SCS is like a car#5S.A./SAS: What are these vehicles? S.A. = Public limited liability company (Société anonyme) SAS = Simplified public limited liability company (Société par actions simplifiée) In and out Shares are transferable as per the provisions of the articles of association Driver S.A.: Three or more directors, who may not be shareholders (only one director is allowed in some cases) SAS: A chairman (who may not be a shareholder) or one or more executive officers Incorporation In the presence of a Luxembourg notary public Shareholder(s) • Unlimited number Liability limited to their contribution Capital Minimum EUR 30,000#6SCA/S.à r.l.: What are these vehicles? In and out S.à r.l. = Private limited liability company (Société à responsabilité limitée) |SCA = Partnership limited by shares (Société en commandite par actions) S.à r.l.: Transferring shares is not easy as it requires the consent of the other shareholders and must be registered on the Trade and Companies Register and published SCA: Shares are transferable as per the provisions of the articles of association Driver S.à r.l.: One or several managers, who do not need to be shareholders SCA: Usually one general partner (a shareholder with full personal liability) or a third party Incorporation In the presence of a Luxembourg notary public Shareholder(s) S.à r.l.: From 1 to 100 members (shareholders) with liability limited to their contribution SCA: Unlimited number with liability limited to their contribution Capital S.à r.l.: Minimum EUR 12,000 SCA: Minimum EUR 30,000#7SNC/SCSP/SCS: What are these vehicles? In and out SNC = General partnership (Société en nom collectif) SCS = Limited partnership = (Société en commandite simple) SCSP = Special limited partnership (Société en commandite spéciale) The transfer of partnership interests requires the Partners' approval and must be registered Driver Usually one or more Partners (in practice the "General Partner"), but not a Limited Partner or a third party Incorporation Partnership agreement by private seal Shareholder(s) At least two shareholders (the "Partners") • SNC: All Partners are fully personal liable • SCS/SCSP: two types of Partners: (i) General Partners: fully personal liable; and (ii) Limited Partners: liability limited to their contribution Capital No minimum, no maximum#8Welcome to the world of indirect CSSF regulation 2#9The reserved alternative investment fund ("RAIF") A viable alternative to your SIF or SICAR New July 2016 RAIF All investment types possible • Umbrella structure and multiple classes available Sales prospectus necessary Public notary must be involved in and/or after establishing the fund ⚫ Risk-diversification requirements apply (like the SIF regime) unless investments are made in risk capital only (like the SICAR regime) Dedicated to "well-informed investors" (like the SIF and SICAR regimes) • Tax regime similar to SIF regime or special tax regime like for SICARS May opt for a variable-capital structure and may be created under various different legal forms (corporate partnership and contractual legal forms) • Annual accounts must be audited by an authorised auditor (réviseur d'entreprises agrée)#10Should I set up a RAIF or consider other options? The pros and cons of RAIFS New July 2016 Tax considerations must be made on a case-by- case basis RAIF Pros No prior CSSF approval, i.e. time-to- market advantage ⚫ I can avail of the umbrella-structure • I have the same investment possibilities and little investment restrictions like in SIF and SICAR structures • I can avoid on-going CSSF supervision (the AIFM will bear it) • RAIFS can "switch" to the SIF-regime at a later stage Cons ⚫ I must appoint a fully licensed AIFM, which could be expensive • When I drive my investment vehicle under the "de-minimis" rule (below the 100 mln / 500 mln € thresholds) and I need no EU-marketing passport, a regulated AIF could be cheaper but more time-consuming in the set-up phase (prior CSSF approval is required)#11Welcome to the world of CSSF regulation 0 3#12The CSSF-regulated world AIFS AIF Legislation ⚫ EU Directive 2011/61/EU (the "AIFMD") • Luxembourg Law of 12 July 2013 (the "AIFMD Law") Success ⚫ AIFs aim to replicate the success of UCITS for all investment funds that are not UCITS. Key for success • Once approved in one EU Member State, an AIF can be distributed in all other EU Member States using the EU Product Passport (exactly like UCITS), as the AIFMD aims to replicate the UCITS success story for alternative investment funds.#13Who is an "AIF investor"? Am I eligible? AIFs: target investors "Well-informed investors", i.e.: ⚫ Institutional investors (e.g. banks, insurance companies, pension funds, etc.) • Professional investors (e.g. high-net-worth individuals) • Any other investor who: ⚫ confirms in writing that they fulfil the status of "well-informed investor"; AND ⚫ invests at least €125,000; OR • provides a bank confirmation (or similar) Don't forget... • AIFs are lightly regulated and can follow different strategies (this means that they can be risky for ordinary people - so tell your grandma to invest in UCITS only!) ⚫ AIF-eligible investors can also invest in UCITS, but in principle not vice versa!.#14What are the key differences between UCITS and AIFS? A very quick overview EU cross- distribution thanks to the UCITS Product Passport UCITS Fits for retail investors with small investments • Investments are only possible in "safe" and liquid assets (e.g. shares, debt, bonds) Many investment restrictions are in place to prevent you from putting all your eggs in one basket Generally low performance ⚫ Listed UCITS that replicate a specific benchmark are called exchange- traded funds (ETFs) AIFS • Fits for investors with higher investments (e.g. institutional investors) • ALL investment types are possible (e.g. private equity, real estate, infrastructure, aircraft and any other investment that is ineligible for UCITS) • Lower investment restrictions, since the target investors need less protection than a retail client (like your grandma) Higher performance but riskier EU cross-border distribution thanks to the AIFMD Product Passport#15My target clients are institutional investors, so I'll go for an AIF: How does it work? A UCI ("Part II fund") is not a good option in this case (rigorous approval process and not viable when there are no retail targets). You would be better off going for a SIF (specialised investment fund) or a SICAR (investment company in risk capital). SIF • ALL asset classes are eligible, with or without leverage • Minimal investment restrictions apply (in principle, no more than 30% of the fund's assets in ONE single investment and about 4 or 5 investments in total) • A SIF can be an FCP or a SICAV/ SICAF SICAR Only risk capital is permitted, plus certain real estate with development factor (e.g. transforming London dock warehouses into exclusive lofts and then selling them on while realising gains) Only one (or more) investments are possible, no investment restrictions AIF#16Ok, I'll go for either a SIF or a SICAR: What else should I know? וחן AIFM SIFS and SICARS are AIFs and either need to appoint an alternative investment fund manager (AIFM) or can be self-managed internally. Chapter 15 or 16 ManCos or other companies can apply for an AIFM licence (Super ManCo), which is granted by the CSSF. Registration Authorisation The AIFM can obtain "registered" (so-called “de minimis") status if the SIF or SICAR's AuM remain below €100 million when leverage is used or below €500 million when no leverage is used and redemption is not possible for five years (the "thresholds"). Distribution No EU Product Passport for public distribution in the EU is available for de minimis SIFS or SICARS! ... Not a problem! When there is no active distribution or you are only selling to a few investors, you don't need to passport the fund: you can use the national private placement regimes (where available). Substance If the thresholds are exceeded, the AIFM requires full substance under the AIFMD Law: this means thorough organisation. If the set-up costs for a fully licensed AIFM are too high, the SIF or SICAR can appoint an existing fully licensed third-party AIFM.#17I've found my AIFM and I'm opting for a SIF or a SICAR with a SICAV/F structure: Which legal forms are available? SICAR SIF Latest market trend: Most structures are set up as a partnership (i.e. SCS/ SCSP) with an AIFM S.à r.l. SCSp S.à r.l. SCSp S.A. SCS Société coopérative SCA SCS SICAV Société SCA variable capital coopérative S.A. SICAF fixed capital SICAR S.A.. Société coopérative →. Société coopérative S.A.#18Here comes the ELTIF: What kind of vehicle is this? Regulated fund vehicle Priority according to European Commission Green Paper Long-term investment of 70% of the capital First-time EU Passport for pan- European retail distribution ELTIF European long-term investment fund Institutional and Various asset classes retail investors Financial vehicle corresponding to the Europe 2020 strategy Contributes to the implementation of the political objective: a high level of employment and smart, sustainable growth Regulated fund vehicle ELTIFS provide long-term and stable returns and pursue a long-term investment strategy 70% of the capital must be invested in more or less clearly defined long-term assets EU Retail Product Passport available Unlike other AIFS, ELTIFS benefit from the EU Retail Product Passport Various asset classes Private equity, infrastructure, specific real estate, listed SMEs, participations, debt instruments, other ELTIFS, EUVECAS or EuSEFS Institutional and retail investors Retail investors with a portfolio of up to EUR 500,000 may not invest an aggregate amount exceeding 10% of their portfolio in ELTIFS. Initial amount must be at least EUR 10,000. Written alert for ELTIFS whose lifecycle exceeds 10 years: "may not be suitable for retail investors".#19The ELTIF, the "European long-term investment fund" A pan-European regime for AIFS In order to pursue its Europe 2020 strategy, the EU identified long-term finance as a crucial element for implementing the strategy. To foster long-term financing, the EU created the European long-term investment fund. An ELTIF is designed to provide lasting financing to various infrastructure projects, unlisted companies or listed SMEs that issue equity or debt instruments. Application EU objective 5 1 Structure Capital-raising 3 AIFM 1 Raising capital towards European long-term investments in the real economy, in line with the European objective of smart, sustainable and inclusive growth 2 ELTIFS must appoint a fully authorised AIFM ELTIFS can raise capital from institutional and retail investors across the EU 3 and the EEA using the EU Product Passport (AIFMD rules) 4 Any AIF can apply for the ELTIF regime Closed-ended structure: redemptions not possible during the ELTIF's 5 lifetime - exceptionally after five years or the ELTIF's half-life point for a defined amount#20Contacts Amaury Evrard Partner, Real Estate Leader [email protected] +352 49 48 48 2106 Vincent Lebrun Partner, Private Equity Leader [email protected] +352 49 48 48 3193 Steven Libby Partner, Asset & Wealth Management Leader [email protected] +352 49 48 48 2116 Fanny Sergent Partner, Hedge Funds Leader [email protected] +352 49 48 48 2478 Xavier Balthazar Advisory Partner [email protected] +352 49 48 48 3299 Max von Frantzius Advisory Director [email protected] +352 49 48 48 4478#21PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,600 people employed from 58 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach. The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We are a network of independent firms based in 157 countries and employing over 208,000 people. Talk to us about your concerns and find out more by visiting us at www.pwc.com and www.pwc.lu. © 2016 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, "PwC" or "PwC Luxembourg" refers to PricewaterhouseCoopers, Société coopérative which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.