LUXEMBOURG: An Introduction to Investment Funds

Luxembourg and the Alternatives Fund Markets: A European Leader in Private Capital Fundraising, From Institutional to Private Wealth and Retail Investors

From a leader in UCITS to a leader in alternatives

Luxembourg has steadily built its position as the largest European fund centre (based on assets under management) and second worldwide, after having given birth to the UCITS (Undertakings for Collective Investment in Transferable Securities) structure by being the first country to implement the UCITS Directive in 1988. Based on the combination of an international and multilingual workforce, specialist service providers with a strong multi-sector expertise, a stable political and fiscal environment, as well as an experienced regulator, Luxembourg has over the past two decades progressively created a second, ever stronger, pillar in the funds market, namely in alternative investment funds. The creation of the SICAR (investment company in risk capital) and SIF (specialised investment fund) regimes in 2004 and 2007 respectively, the modernisation of the company law simultaneously with the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2013, as well as the creation of the RAIF (reserved alternative investment fund) regime in 2016 have each been milestones setting the stage for further growth in the alternatives market. While global alternatives markets are projected to reach over USD29 trillion by 2029, Luxembourg has become the largest single domicile for alternative funds in Europe, increasing its market share of European assets steadily from 2010 to 2022, growing from 15.6% to 61.8%. It is noteworthy that private debt has become increasingly important in recent years, as Luxembourg’s dominance in this segment had grown to 74% by 2022.

In the context of the democratisation of alternative investment funds, which has progressively emerged under ELTIF 1.0 (the original framework for European Long-Term Investment Funds), Luxembourg has started to position itself as the jurisdiction of choice for retail ELTIFs (with, to date, more than 60% of all ELTIFs being domiciled in Luxembourg). In addition, Luxembourg Part II UCIs have in experienced a resurgence in recent years, in particular thanks to US asset managers increasingly exploring ways to facilitate access by retail investors to private assets.

With a view to remaining agile– and based on years of regulatory and market practice, as well as developments at European and international levels, including ELTIF 2.0, and the increased appetite of non-professional investors for alternative asset classes – Luxembourg modernised its legal framework for fund managers and alternative fund regimes in 2023 to further align it with the needs of fund managers.

The rise of evergreen funds and increased attractiveness of Part II UCIs in the context of the democratisation of private markets

Evergreen funds, which have an unlimited term, ongoing investment capability and liquidity rights for investors, are gaining popularity in Europe, for institutional, as well as private wealth and retail investors alike. In this context, fund managers are increasingly considering launching institutional funds as limited partnerships with an unlimited duration (where these would typically once have been formed as closed-ended limited duration funds).

When it comes to private wealth and retail investors, the vehicle of choice would typically be the open-ended Part II UCI fund regime with variable share capital (SICAV). While in the past, Part II UCI SICAVs had to bear the form of a public limited company (société anonyme or SA), the new structuring options introduced in 2023 for Part II UCIs allow for the use of additional legal forms under which such funds can be established, including the partnership limited by shares (société en commandite par actions or SCA), the common limited partnership (société en commandite simple or SCS) and the special limited partnership (société en commandite spéciale or SCSp). These changes have acted as a further catalyst to the resurgent success of Part II UCIs, in particular as umbrella structures (ie, with the option to launch multiple sub-funds within the same legal entity), with or without ELTIF label at sub-fund level. It is very likely that specifically the SICAV-SCA will progressively replace the SICAV-SA as the form of choice for investor facing vehicles. Indeed, the combination of variable share capital and control through a manager-owned general partner provides the manager with operational flexibility and stable governance in the context of a retail or private wealth investor base.

Part II UCIs & ELTIF 2.0: a winning combination

While Part II UCIs were only used by a limited number of alternative investment fund managers over the past decade, they have been “rediscovered” over the last couple of years with private wealth investors’ growing interest in alternative asset classes and private markets players looking into broadening their investor base. Indeed, Part II UCIs allow for the launch of open-ended subscription-based funds, including as feeders or through fund-of-funds structures investing in traditional illiquid alternative investment funds that were, typically, restricted to professional investors only. Part II UCIs are also available for all types of investors with minimum investment tickets significantly lower than the EUR100,000, which apply under other Luxembourg product laws and the marketing to retail or semi-professional investors, subject to certain local restrictions, has been accepted in many European jurisdictions.

Due to their flexibility, Part II UCIs are also expected to remain the most popular vehicle for ELTIFs established under ELTIF 2.0, in particular for retail ELTIFs taking advantage of the EU distribution passport to retail investors.

Part II UCIs: more than just a resurgence

While there is no one-size-fits-all solution for alternative investment fund managers when it comes to tapping into the retail investor base, considering the very wide range of potential investors included in the “retail” space, Part II UCIs structured as umbrella funds, will quickly establish themselves as the fund regime of reference to cover the (real) retail and private wealth investor markets.

Indeed, in an environment where evergreen funds are poised to become ever more popular, the umbrella Part II UCI provides the ideal platform under which various (semi) open-ended strategies (through one or more sub-funds with an unlimited duration) marketed to private wealth investors, could be combined with either closed-ended (with limited duration) or (semi) open-ended ELTIFs (with longer duration, albeit mandatory specific term) marketed to either professional, private wealth or (real) retail investors. Considering also the costs of setting up and maintaining these regulated structures and the typical ROI being potentially hampered by the (required) liquidity pockets in the case of (semi) open-ended (sub-) funds, using an umbrella Part II UCI as platform assists in achieving substantial economies of scale, while facilitating the management from an operational side.

The solid success of Part II UCIs, as well as Luxembourg-based ELTIFs (75% of which have been launched as Part II UCIs) has also been further sustained by very efficient turnaround times at the Commission de Surveillance du Secteur Financier, the Luxembourg supervisory authority for the financial sector.

On the basis of the above, Luxembourg is poised to continue to strengthen its position as the leading pan-European hub for alternative investment funds in 2025 and beyond.