Good News for Swiss Private Equity and Venture Capital Structures
At the end of June this year, the Federal Council opened the consultation process on the amendment of the Collective Investment Schemes Act ("CISA") to introduce the so-called Limited Qualified Investor Fund or L-QIF for short. This is intended to facilitate the market launch of innovative and flexible Swiss fund products. An L-QIF will be treated like a fund for tax purposes, but will not be subject to FINMA approval and will benefit from further exemptions and simplifications. It can thus be set up much more quickly and cost-effectively than previous Swiss fund products. In particular, Swiss providers of private equity or venture capital structures will also be able to benefit from this.
When the Limited Partnership for Collective Capital Investments ("LPCCI") and the Investment Company with Fixed Capital ("SICAF") were created with the Swiss Federal Act on Collective Investment Schemes (CISA) in 2006, the Swiss funds industry had high hopes that appropriate structures for private equity and venture capital investments would also be available in Switzerland. Unfortunately, these hopes have not been fulfilled. Today there are only 21 LPCCIs and no SICAF at all. The latter is due to the fact that the SICAF is not treated transparently from a tax point of view. Although the LPCCI is treated with transparency from a tax point of view, it is still not the first choice in international competition. This is primarily due to the lack of an EU third-country passport for Swiss fund products, which makes distribution to investors in the EU considerably more difficult. In addition, certain withholding tax rules make Swiss funds generally less attractive to foreign investors than foreign competing products.
Even for products aimed at Swiss investors, the LPCCI has not proven to be attractive compared to foreign funds. This is due, in particular, to the comparatively long authorisation or approval period (buzzword: "time to market") and the relatively high costs. The success of the LPCCI was further hampered by restrictions on permissible investments. The competitiveness of Swiss products also suffered after various EU member states introduced fund types in recent years that no longer require approval by the supervisory authority. A prime example is the successful Luxembourg "Reserved Alternative Investment Fund" or "RAIF" for short.
This is exactly where the new bill wants to start: Like comparable foreign products, the L-QIF should be exempt from the licensing and approval requirement, meaning that such products can also be set up quickly and cheaply. The L-QIF is also attractive because its legal form and investment policy can also be flexible. All previous legal forms for Swiss funds, i.e. contractual funds, SICAVs, LPCCIs and SICAFs, are also permitted in the form of an L-QIF. In addition, the law neither lays down requirements with regard to the distribution of risk nor with regard to possible investments. The only requirement is that these must be disclosed in the fund documents. This makes an L-QIF ideal for alternative investments and innovative fund strategies. Numerous other simplifications are planned: For example, there is no need to issue a prospectus for an L-QIF. Finally, it is important that an L-QIF (except in the legal form of a SICAF) be treated transparently from a tax point of view, so that taxation only takes place at investor level.
The lack of a licensing and approval requirement does not mean that the investors of an L-QIF are left without protection. L-QIFs are only open to qualified investors as defined in the CISA, such as banks, insurance companies, companies and pension funds with professional treasury departments and wealthy private individuals. Such investors can already invest in unregulated foreign funds today. They are in a position either to identify the corresponding risks or to bear them financially. The more vulnerable normal investors, on the other hand, cannot invest in an L-QIF.
Finally, the management and administration of an L-QIF may only be performed by an authorised and supervised fund management company. In turn, the fund management company may only transfer investment decisions to an authorised and supervised manager of collective assets. If the fund management company and the asset manager violate their obligations towards the L-QIF and its investors, they are faced with the imposition of regulatory measures by FINMA. In this way, investor protection can also be indirectly enforced in an L-QIF under supervisory law and the lack of authorisation and approval requirements can be compensated for.
From our point of view, the obligation to transfer the management to an authorised fund management company is an unnecessary Swiss finish for the L-QIF organised under company law (SICAV, LPCCI or SICAF). It would have been sufficient for investor protection if the investment decisions had been outsourced to an authorised asset manager and the L-QIF organised under company law had otherwise remained free to organise their management. We fear that the attractiveness of the new product for smaller private equity and venture capital structures will suffer under the proposed solution, as the corresponding costs cannot be allocated to large fund assets and the added value would have to be shared with two authorized entities. In addition, it is doubtful whether there are even enough interested fund managers for such highly specialized fund products. It would therefore be desirable if the proposal were amended accordingly after the consultation process has been completed.
Either way, with the flexible L-QIF there is a real chance that we will see an increase in fund products for alternative investments and in particular the number of private equity and venture capital investments being launched in Switzerland again in the future. This would also mean that a larger part of the value chain would remain in Switzerland. However, the proposal does not eliminate the existing general disadvantages of Swiss funds in connection with access to the EU market and withholding tax. The L-QIF is therefore likely to have most potential in funds for alternative investments, which are primarily aimed at qualified investors in Switzerland.
The consultation process on the changes to the CISA will last until 17 October 2019. It remains in the interests of the investment fund location Switzerland and the domestic private equity and venture capital industry that the submission will meet with a positive response and that the L-QIF will become reality as soon as possible.