Traditionally, Luxembourg's fund industry has always been based on the products being regulated. Both UCITS funds, and Specialised Investment Funds (SIFs) under AIFMD, work on this premise. However, the Grand Duchy was quick to realise that given AIFMD is manager regulation, it created a double layer of regulation for alternative investment fund managers (AIFMs) wishing to run alternative investment fund (AIF) products.
As Kavitha Ramachandran (pictured), Senior Manager Business Development & Client Management at Maitland, explains, this was a potential problem where time to market was essential.
"This is what led to the creation of the Reserved Alternative Investment Fund (RAIF), which enables the manager to launch a fund product without having to go through the regulatory process with the CSSF. The key requirement is that the RAIF appoints an authorised AIFM, based in the EU," says Ramachandran.
As the RAIF is a Luxembourg product it needs a Luxembourg administrator, depositary and auditor. Also, the AIFM is expected to apply to the CSSF to passport the RAIF across Europe with respect to capital raising. This means that the CSSF has full knowledge of the RAIF's activities, as all marketing notifications must go through it.
"The RAIF legislation was passed through quite quickly and a number of RAIFs have been launched since last July," confirms Ramachandran, adding:
"As the AIFM is responsible for launching a RAIF, there's a whole legal process in terms of getting the agreements together, making sure due diligence is done on all the key parties to the RAIF, such as the portfolio manager and distribution partners, and that the right people are appointed to the board.
"It is, therefore, important that the AIFM has the proper checks and balances in place."
From a governance perspective, Maitland is uniquely positioned. Conducting all the compliance and oversight functions of an AIFM ideally requires an integrated process, especially when dealing with investment managers in the PERE space where complex structuring and tax elements need to be taken into consideration. Maitland is more than a fund administrator. It is a global advisory group, with its roots in Luxembourg dating back to 1976.
"The fact that we can run the product as an authorised AIFM is important but also, it helps us to work with legal firms as we understand the legal process, how to review the documentation and so on.
"If a fund manager comes to us to set up a RAIF, we can carry this out as an end to end service. There are, though, instances where the fund manager wants to work with certain law firms because they have an existing relationship with them and we have no problems linking through them," explains Ramachandran.
She says that the profile of investors looking for a RAIF is different to those looking for a SIF. "Certain investors want both the product as well as the manager regulation and will opt for the SIF, whereas others have more flexibility in their investment allocation criteria and are happy with the RAIF because it offers quicker time to market."
She confirms that Maitland has completed a few RAIFs and the pipeline is growing, mostly for PERE strategies.
"We can delegate portfolio management to the investment manager if it is a liquid strategy but for a PERE strategy we may not be able to fully delegate. In this case we would retain the portfolio management function as the AIFM, which we would run within an investment committee. The manager would then be invited to sit on that investment committee," concludes Ramachandran.
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