The advantages for Asia-based managers of using Luxembourg funds

Monday 15 November 2021

Xavier Le Sourne
Partner, Elvinger Hoss Prussen, Hong Kong

Charlotte Chen
Counsel, Elvinger Hoss Prussen, Hong Kong

The advantages for Asia-based managers of using Luxembourg investment fund structures compared to offshore jurisdictions are based on: (1) an increased marketability; and (2) efficient fund structuring capabilities. Asian asset managers also need certainty to further sustain their international growth.

Passporting and enhanced ‘marketability’ of Luxembourg funds

Luxembourg funds managed or advised by Asian sponsors (as for the management structuration, see below under ‘Tailored to the Asian standards’) can access investors established within, or a resident of, the European Union.

Greater distribution capabilities to professional limited partnerships (LPs)

Access to European professional investors is operated through the appointment by the sponsor’s wholly-owned general partner of a Luxembourg (or another EU) alternative investment fund manager (AIFM), subject to the Alternative Investment Fund Managers Directive 2011 (AIFMD).

Although initially perceived as a major disruption to the industry, some substantial merits associated with the funds are now recognised, notably at the level of the funds’ AIFMs, whose passport appears as the most efficient solution when marketing shares or interests of alternative investment funds (AIF) throughout the EU, while approaching limited partners in Europe through private placement regime or reverse solicitation has now become very problematic for larger European pension funds and insurance companies.

Access to retail investors

In order to foster investments into the real economy, including small and medium-sized enterprises, a fund can also be subject to the Regulation on European long-term investment funds (ELTIF), which permits an extension of the passport to EU-based retail investors.1 Because of their exposure to retail, Luxembourg ELTIF must be authorised by the Luxembourg supervising authority (CSSF), it being noted that the authorisation process is usually made in parallel to the investment activity of the fund, whether in view of its upgrade or to prepare the setup of a second structure reserved to retail LPs and investing alongside the main fund. ELTIF can invest in equity or debt instruments, as well as act as lenders to their portfolio companies. The latter investment form has been very well perceived by the market and the ELTIF label really started to spread across the industry in 2018–2019.

An efficient fund structuring

The investment fund toolbox was extensively modernised in 2013 by creating two additional and unsupervised structures, namely the special limited partnership and the reserved alternative investment funds (RAIFs), which are very similar to traditional offshore partnerships and segregated portfolio company structures, respectively.

A competitive toolbox

Limited partnerships (LP) refer to a category of investment vehicles governed by the amended Luxembourg Law of 10 August 1915 on commercial companies, and which comprises both Luxembourg common limited partnerships (société en commandite simple) and special limited partnerships (société en commandite spéciale). Neither of them are supervised by the CSSF2 and can be formed very quickly. These vehicles are used for their flexibility, which is characterised by the contractual freedom in their structuration. Asian sponsors which are used to such structures, but willing to distribute funds' interests to European LPs, have chosen to set up Luxembourg special limited partnerships. Luxembourg partnerships permit to bring aboard investors irrespective of their status (regulated or not) or geographical establishment, and are largely seen as an optimised solution for Asian managers.

The second successful structure is the RAIF which is governed by the Luxembourg Law of 23 July 2016 (RAIF law). To the same extent as most of the partnerships formed since 2013, the RAIF is not subject to authorisation or supervision by the CSSF. The RAIF must designate a licensed AIFM, thus benefiting from the AIFMD passport and protection of the AIFMD framework. The possibility to have legally segregated sub-funds is one of the key features of the RAIF, making it an alternative to the above partnership.

Tailored to the Asian standards

Expectations of high returns, combined with structures familiar to investors, are the key factors that drive the ongoing success of Asian managers on other continents. The further involvement of a third party AIFM does not have a material impact on the operation of the fund compared to traditional offshore jurisdictions. Indeed. the asset management team based in Asia leads the operation of the fund by providing investment advice to AIFMs, which largely rely on the expertise of their clients. In cases where the Asian asset manager is subject to the supervision of a local regulator having a memorandum of understanding in place with the EU authorities (which, for example, is the case for Hong Kong or Singapore), the investment decision prerogative can also be delegated by the AIFM to such asset manager, which will then have discretionary powers to manage the fund out of its home jurisdiction.


1     The ELTIF Regulation provides for an initial minimum amount of investment of €10,000 (approximately US$11,500) where the financial instruments portfolio of a potential retail LP does not exceed €500,000 (approximately US$585,000).

2     Unless the sponsor decides otherwise, for example, to comply with the ELTIF Regulation.