Answering to the growing need for a new fund vehicle after the implementation of the rules on alternative investment fund management, Reserved Alternative Investment Funds (or "RAIFs") have been introduced in the Luxembourg legal framework in 2016, following the adoption of the law dated 23 July 2016 on Reserved Alternative Investment Funds (the "RAIF Law"). The RAIF has quickly proved to be an efficient fund raising vehicle, adapted to the increasing regulatory burdens and costs linked to the European rules and regulations in the fund sector, notably pursuant to the directive on alternative investment fund managers (the "AIFM Directive") and the Luxembourg law on alternative investment fund managers implementing such directive (the "AIFM Law"), while reducing time-tomarket.
Its creation has been a real success so far, with around 1500 RAIFs listed with the Luxembourg Register of Commerce and Companies of Luxembourg (the "RCSL") as of 15 September 2021. RAIFs may invest in all types of assets and are now largely used in all fund investment segments, such as real estate, private equity, transportation, private debt and direct lending. Accordingly, many fund finance transactions involve RAIFs, whether acting directly or for a specific compartment. Knowing its main features is a key element to properly structure a fund finance deal, in particular subscription and management lines.
- What is a RAIF
A RAIF is an investment fund located in Luxembourg (a) which qualifies as alternative investment fund ("AIF"), (b) with a risk spreading investment policy , (c) which securities or partnership interests are reserved to one or several well-informed investors, and (d) which constitutional documents (articles of incorporation, the management regulations or the partnership agreement depending of the form) provide that it is subject to the provisions of the AIFM Law. The overall legal framework of RAIFs is similar to those of the traditional Luxembourg regulated funds, specialised investment funds ("SIF") and investment companies in risk capital ("SICAR").
Various corporate forms may be used to establish a RAIF. It may be incorporated as a common fund (fond commun de placement) ("FCP") or in the form of a company, such as a limited liability company (société anonyme or société à responsabilité limitée), special limited partnership (société en commandite spéciale), or corporate partnership limited by shares (société en commandite par action), with variable or fixed capital, in each case using the terms "reserved alternative investment fund" or "RAIF" in its corporate name. RAIFs may be set up as an umbrella structure, using compartments (See Section "How compartments work" below for more details).
The constitutional documents of the RAIF will depend on its corporate form: articles of association for limited liability companies or corporate partnership limited by shares, partnership agreements for special limited partnerships and management regulations for FCP. In addition, any RAIF must establish an offering document (also referred to as issuing document, prospectus or private placement memorandum). The RAIF Law does not provide for guidance as to the content of such offering document. Each offering document may provide for different information and provisions and shall be analysed carefully for the purpose of a borrowing.
It is often the case that such offering document contains supplemental terms and provisions to the constitutional documents (in particular regarding the investment policy, the borrowing provisions and commitments of the investors), to which the articles of association, partnership agreement or management regulations cross refer. As such, an offering document may be assimilated as a constitutional document for the purpose of financing involving the RAIF.
The management of a RAIF is similar to other AIFs (with a dichotomy between the management body of the RAIF, such as a general partner or board of directors, depending on the corporate form, and an alternative investment fund manager (an "AIFM") in charge of its portfolio management and risk management), except that a RAIF must appoint (a) an external and authorised AIFM (as opposed to be internally managed or managed by a registered AIFM), and (b) a depositary (or a branch of a depositary registered in another Member State) located in Luxembourg.
Unlike regulated Luxembourg funds, such as SIFs and SICARs, a RAIF is not subject to any approval or supervision from the Luxembourg Commission de Surveillance du Secteur Financier ("CSSF") either at its creation or during its lifetime. However, a list of RAIF is held by and publicly available at the RCSL.
- How compartments work
When set up as an umbrella structure, the RAIF will invest and act through different compartments. Each compartment is a distinct part of the assets and liabilities of the RAIF. It is managed by the management body or the AIFM of the RAIF independently of the other compartments. It pursues a specific investment policy, holding a specific investment portfolio, with its own allocated investors and its own creditors. To ensure the segregation of assets between compartments, each compartment would have its collection account, where its dedicated investors would pay their commitments. Accounting wise, separate annual report may be established for each compartment. For the purpose of the financing, referring to such separate annual report (or other separate financial statements) in the finance documentation is recommended.
The specifics of each compartment (such as investment policy, borrowing limits and, sometimes terms of drawdowns and commitments) are laid down in an additional and separate constitutional document, such as, in practice, a supplement or annex to the offering document or a separate offering document. In that respect, it is legally required that the offering document (or the separate offering document) describes the specific investment policy of the relevant compartment.
Towards creditors (such as lenders under a subscription line), a ring-fencing principle applies to the compartments. The rights of creditors concerning a compartment (such as lenders under a subscription line) are limited to the assets of that compartment, unless a clause included in the constitutional documents provides otherwise. The assets of a compartment are exclusively available to satisfy the rights of those creditors whose claims have arisen in connection with the creation, the operation or the liquidation of that compartment, unless a clause included in the constitutional documents provides otherwise. Accordingly, when a borrowing base is calculated, only the investors having a commitment towards the relevant borrowing compartment shall be taken into account. The constitutional documents and the subscription documentation shall clearly identify into which compartment an investor agreed to subscribe and contribute.
Because of the above segregation principle, cross collateralisation between compartments is barely permitted in practice by the constitutional documents. A cross collateralisation might indirectly occur when a compartment is permitted to invest in a second compartment. Such scenario is foreseen in the RAIF Law, subject to few conditions. In such case, the first compartment will be treated as investor in the second one, similarly to a master/feeder situation.
or the purpose of a subscription line granted to a compartment, the commitment of any "feeder" compartment may be part of the collateral provided by the borrower, with a cascading pledge structure, to the extent permitted by the constitutional documents of the "feeder" compartment. The cascading pledge structure would grant to the lenders access to the commitments of the investors of the "feeder" compartment, without breach of the ring-fencing principle, and allow them to consider such commitments for the purpose of the borrowing base calculation.
- Structure of commitments
The commitment structure of a RAIF is similar to those for other AIFs. A RAIF may be financed by its investors via equity or debt. Accordingly, investors may invest in a RAIF through any type of commitments, whether equity or debt, or combination of both, with or without issuance of shares, units, interests or notes.
The choice of the type of commitments will largely be based on the form chosen for the RAIF. RAIFs which are in the form of companies would likely to be financed via an equity commitment with issuance of shares, units or interests, while RAIFs in the form of partnerships are most of the time based on equity commitments without issuance of shares, units or interests. In the same way, compartments of the same RAIFs may have different natures of commitments. There is no golden rule and it is likely that each commitment structure is tailor-made. A careful reading of the fund documentation remains advisable.
Download:
SJL-Lexicon-Fund-Finance-Round-1-RAIF.pdf (sjl-legal.com)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.