New access to real assets

As of August 2016, Luxembourg has offered a new legal framework to investors in real assets: the Reserved Alternative Investment Fund (Raif).

Raifs are a new subcategory of alternative investment funds managed by an authorised alternative investment fund manager (AIFM), and offer another option to the existing Specialised Investment Funds (Sifs).

In contrast to Sifs, which require the approval of Luxembourg regulator the CSSF (Commission de Surveillance du Secteur Financier) in order to launch, Raifs are only indirectly supervised and therefore easier to create.

The driving force behind this new regulatory framework is growing demand for alternative investment strategies, as Gold explains.

“The reasons for growing demand for alternatives are obvious; considering the current low yield environment and stock market volatility, real assets offer an attractive alternative. We have certainly witnessed growing levels of demand among all our client groups.”

While Luxembourg aims to establish itself as a hub for alternative investments, the combination of sharply growing demand and relatively stringent regulatory criteria for launching AIF compliant funds means that there has been a bottleneck, with asset managers restricted in their ability to offer new investment products.

OPPORTUNITIES
The new framework offers opportunities for Universal Investment. The German asset manager, which is set to be acquired by British private equity firm Montagu, currently has about 10% of its institutional and 5%-10% of its €277bn in assets under administration invested in real assets such as infrastructure.

So, just how does it aim to benefit from the Raif structure? “In contrast to Sifs, Raifs offer more flexibility to react to market opportunities. It will be much faster to launch a Raif fund rather than a Sif, and Raifs offer a greater degree of flexibility because a change in constitutional or information documents does not require regulatory approval,” explains Harrschar.

“We consider the Raif structure a meaningful addition to our 360O approach, which aims to offer our clients all asset classes and all legal structures in all geographical regions. The introduction of Raif means that Luxembourg has introduced an important new structure, which allows us to be even more flexible in offering clients new opportunities,” she adds.

According to the Universal Investment team, this does not mean a risk of insufficient regulatory oversight under the new structure. “The issue with the existing Sif structure is that it includes a quasidouble level of regulation, with both the fund manager and the fund vehicle being subject to CSSF supervision.

It is important to note that Raifs are not completely unsupervised; the fund manager still has to report to the CSSF.

Besides, the Raif fund would be part of a broader AIFM structure, which is also regulated by the CSSF, but the new framework does offer a greater degree of flexibility,” he explains. Moreover, the legal framework of the Raif structure specifies that it is currently only available to professional and not to retail investors.

PARADOX
There is of course a certain paradox at hand, with illiquid assets classes such as infrastructure constituting a key element of real assets. Is there even a need for such assets to be offered in a more
flexible manner?

For Gold, that is certainly the case: “The opportunity to invest in alternative assets such as infrastructure can sometimes arise very quickly. For asset managers, it is crucial that they are able
to respond swiftly and if their product is not yet on the market, they might well miss out on it,” he explains.

Regardless of that, the Raif does not impose restrictions by asset class. It could also be relevant for more exotic investments such as wine or art, adds Harrschar.“For us at Universal Investment, it will mainly be relevant in key areas such as infrastructure or private equity,” she adds.

With the new law just having entered into force in August, it remains to be seen whether demand for Raifs will pick up. “At Universal Investment, we have already received a lot of requests for Raif structures. They should progress throughout the fourth quarter of 2016,” Harrschar predicts.

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