Developing a Luxembourg AIFM label
Leveraging on strong UCITS position
Positioning as pan-European and global AIF distribution platform


The EU Alternative Investment Fund Managers Directive emphasises that the activities of alternative investment fund managers (AIFMs) may serve to spread or amplify risks through the financial system. However, it also recognises that the impact of alternative managers on the markets in which they operate is largely beneficial.

Alternative managers, such as venture capital managers, undoubtedly play an important role in supporting innovative entrepreneurs that operate in sectors with high development potential. Private equity managers clearly stimulate economic growth by contributing capital to, and creating value in, promising entities which need support in order to develop and improve their performance.

Luxembourg has a longstanding reputation for financial innovation. It is recognised as a leading platform for undertakings for collective investment in transferable securities (UCITS) and is the second-largest fund centre in the world after the United States in terms of assets under management. It anticipated the largely beneficial impact of the private equity sector by developing regulated, tailor-made investment vehicles, designed for institutional, professional and well-informed investors. In particular, the Investment Company in Risk Capital (SICAR)(1) and the Specialised Investment Fund (SIF)(2) - created in 2004 and 2007, respectively - have greatly contributed to the positioning of Luxembourg as a leading platform for the private equity business (for further details please see "Key features of private equity vehicles").

Thus, the directive ratifies Luxembourg's early initiatives. It offers a harmonised European framework which will allow Luxembourg to stretch its domestic market and replicate the UCITS success story in the alternative investment fund (AIF) sector.

By granting a passport for the marketing of alternative investment funds (AIFs) to professional investors within the European Union, the directive offers Luxembourg an opportunity towards positioning itself as an alternative investment fund pan-European and global distribution platform, alongside its long-standing track record in the retail cross-border investment fund distribution. This should attract more AIFMs and give them the opportunity to locate and develop their activities in and from Luxembourg.

Developing a Luxembourg AIFM label

In principle, the Luxembourg vehicles that are covered by the directive(3) include:

  • undertakings for collective investment that are governed by Part II of the Law of December 17 2010;
  • SICARs governed by the Law of June 15 2004, as amended; and
  • SIFs governed by the Law of February 13 2007.

The directive may also have an impact on some other non-regulated vehicles in Luxembourg.

For Luxembourg, this means in effect that all investment funds that are not UCITS, that do not benefit from an exemption or that are not excluded from the scope of the directive are covered by the directive.

A number of requirements in the directive will apply at the level of the AIF. The regulation that already applies to Luxembourg undertakings for collective investment, SIFs or SICARs that invest notably in private equity already requires, among other things:

  • the appointment of a depositary with similar custody functions, oversight duties and monitoring duties - for now, monitoring duties apply only to undertakings for collective investment that are governed by Part II of the Law of December 17 2010;
  • the appointment of a central administration agent with responsibilities including valuation of the fund's assets;
  • transparency rules through the issuance of a placement memorandum or issue document; and
  • the production of an annual report and appropriate reporting to the authorities and the investors.

Hence, the directive will not have a significant impact on these types of vehicle, as they are already subject to similar requirements under Luxembourg regulations.

The fact that Luxembourg's regulated AIFs are already subject to requirements that are similar to those in the directive constitutes a real opportunity. This is especially the case for internally managed AIFs - that is, those whose legal form permits internal management, such as the public limited liability company or the corporate partnership limited by shares. If an internally managed AIF decides not to appoint an AIFM, the AIF itself becomes the AIFM.

In addition, Luxembourg-based service providers, such as central administrations or depositary banks, already benefit from an adequate regulatory framework and strong experience in servicing investment funds and their managers. Luxembourg is also known as a centre of excellence in risk management, and the directive's requirements for appropriate procedures and systems for managing liquidity and risk do not represent a challenge for Luxembourg.

Leveraging on strong UCITS position

A number of requirements in the directive are UCITS-inspired, especially in terms of substance requirements and operating conditions. Luxembourg can leverage on its strong UCITS position to develop a robust AIFM model.

AIFM licence requirements are substantially similar to the authorisation requirements for UCITS management companies. Moreover, UCITS management companies may apply for an AIFM licence, and such companies are not required, when applying for authorisation as an AIFM, to provide information or documents already provided when applying for authorisation under the UCITS regime. This represents an opportunity for many existing Luxembourg UCITS management companies to develop their business in the AIF sector.

Positioning as pan-European and global AIF distribution platform

Where AIFMs manage several AIFs, they may wish to appoint an AIFM-licensed Luxembourg management company, not only from a substance and monitoring perspective, but also in order to benefit from the passport under the directive from 2013, instead of 2015. This may be particularly relevant to non-EU AIFMs which, for that two-year period, cannot benefit from the passport, but may continue to market their AIFs on a private placement basis. This would then allow the management company - that is, the AIFM - to delegate the investment management to a non-AIFM, including a third-party investment manager, under the conditions of the directive. In this regard, Luxembourg already benefits from an efficient network of memoranda of understanding and cooperation agreements with leading asset management jurisdictions, such as the United States, Hong Kong, Switzerland, the Channel Islands and Singapore. By the same token, the AIFM offers Luxembourg the chance to become a pan-European and global AIF distribution platform for AIFMs and the AIFs that they manage and market within the European Union.


Luxembourg offering opportunities to AIFM
Luxembourg has an opportunity to position itself as the premier jurisdiction for pan-European alternative investment fund marketing and distribution platforms, as a centre of excellence for AIFMs in terms of substance, risk management and expertise of service providers. It has the potential to be a globally recognised brand in both products and managers. In addition, Luxembourg offers AIFMs an attractive location for their activities, as well as a regulated and confidence-inspiring environment for investors.

Some will enquire about why an AIFM which is already subject to the requirements of the directive would make its obligations heavier by choosing a Luxembourg-regulated product. However, regulation has become the rule and investors' expectations in the new European regulated environment should not be undermined. One may question in turn whether this question is relevant in the context of the European Commission's consultation of June 15 2011 on a new regime for Venture Capital which contemplates to exclude this sector and rather provide an adapted passport.

There can be no doubting Luxembourg's legendary pragmatism with regard to finding innovative solutions through new or adapted structures. It will indisputably contribute to attracting and developing a strong business model for AIFMs and the AIFs they manage. This is the clear and promising message which the Luxembourg investment fund industry, and the private equity community in particular, is actively circulating and promoting.

For further information on this topic please contact Myriam Moulla at Arendt & Medernach by telephone (+352 40 787 81), fax (+352 40 780 4) or email ([email protected]).


(1) In 2010 there were 247 SICARs in Luxembourg. In December 2010 they had a net asset value of €13.86 billion for private equity investments alone.

(2) The 1,192 SIFs in Luxembourg had a net asset value of €214 billion in December 2010.

(3) The directive indirectly regulates AIFs, which it broadly defines as collective investment undertakings "raising capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of such investors".