The Limited Qualified Investor Fund (L-QIF): a new flexible investment fund vehicle

The Limited Qualified Investor Fund (L-QIF) is devised as a new fund vehicle under Swiss fund regulations. No approval or authorisation by the Swiss Financial Market Supervisory Authority (FINMA) will be required to launch the product. L-QIF should be available in 2023.

In this current issue of Law-Now, we provide practical insights on certain key aspects of the L-QIFs.

Background

At present, all Swiss collective investment schemes (i.e. funds) must obtain FINMA approval prior to their launch, irrespective of their legal form (whether Swiss partnership, or SICAV, contractual fund, etc.). Time-to-market, costs and flexibility are often key factors for investors, particularly for sophisticated (qualified) investors in alternative investment vehicles. As a result, the Swiss market has suffered from stiff competition from other jurisdictions, such as Luxembourg, which is generally viewed as offering more attractive market conditions and has thus established itself as a preferred destination for fund incorporation and domiciliation.

The forthcoming introduction of the L-QIF in the Swiss legal framework demonstrates the efforts of authorities to remediate the current market shortfalls in Switzerland and increase the country's attractiveness as a fund location. According to Swiss authorities, L-QIFs are expected to become the Swiss alter ego of Luxembourg's RAIFs: the official dispatch of the Swiss Federal Council makes no secret about this and contains various references and comparisons with the RAIF regime. In addition to institutional investors, such as pension funds, which have already expressed interest in L-QIFs, this vehicle may be suitable for other sophisticated private investors, such as family offices or wealthy private investors.

Available structures: legal forms and investment management

According to the current draft law, L-QIFs can be structured as:

• Swiss contractual funds (SCFs);
• Swiss investment companies with variable capital (SICAVs); or
• Swiss limited partnerships for collective investment (Swiss LPs).

L-QIFs, therefore, do not constitute a new legal form inasmuch as they must be structured according to pre-existing legal forms already set out under Swiss fund regulations. Since the product will not need FINMA approval, a L-QIF must be managed by a supervised entity, which will be ultimately responsible for ensuring proper management and compliance with all applicable regulations, including all specific limits or restrictions that will be set forth in the fund documentation.

Based on current draft legislation, this new vehicle will have the following profile:

• L-QIFs structured as Swiss LPs must delegate their executive management, including investment decisions, to a manager of collective assets (an investment fund manager regulated under the Financial Institutions Act - FinIA). However, there will be no such requirement if the general partners of the Swiss LPs are banks, insurance companies, securities firms or fund management companies, or managers of collective assets.
• L-QIFs structured as SICAVs will be required to delegate both the administrative and investment decisions to a single fund management company, which may sub-delegate the portfolio management to a manager of collective assets;
• L-QIFs structured as SCFs may only be managed by a fund management company, which may, in turn, delegate the investment decisions to a manager of collective assets.

Managers of collective assets, as defined in the FinIA, must be fully-fledged regulated investment fund managers and not mere individual portfolio managers. De minimis asset managers are, in principle, not considered as managers of collective assets but rather as individual portfolio managers.

Conversion in a regulated structure

L-QIFs will be convertible into FINMA regulated structures. This option will allow for a quick product launch with the possibility of conversion at a later stage, depending on the development of the AuMs and the investor basis. In practice, any future conversion should be planned in advance as much as feasible given that the full compliance and approval process may have operational and business ramifications on the pre-existing structure.

Fund documentation

L-QIFs will have no obligation to prepare prospectuses. However, investors could expect to receive similar information, depending on market practice, habits and expectations. Furthermore, Swiss LPs will have to implement robust contractual documentation (i.e. a partnership agreement). Depending on the structure and the investor basis, particularly for venture capital and private equity L-QIFs, this contractual documentation may require some "fine tuning" with attention on certain clauses, such as waterfall structures and other key provisions (e.g. key man clause, remuneration structure, etc.).

On a positive note, L-QIFs will not be required, in general, to produce and provide key information documents (KIDs). This may be explained by the fact that L-QIFs are reserved for "sophisticated investors". However, depending on how the L-QIFs are marketed, KID requirements may still be triggered. This will typically be the case for L-QIFs that are personally recommended to private (i.e. retail) clients by a financial institution under a long-term (non-discretionary) investment advisory relationship.

If an L-QIF invests in alternative investments, the specific risks associated with these investments must be detailed in the name of the product, the relevant fund documents and advertising.

Investment restrictions / risk diversification

The current draft legislation does not contain restrictions on potential investments or on risk diversification. The fund documentation alone will determine eligible investments and potential restrictions. Additional specifications will be included in the implementing regulations.

Reporting requirements

L-QIFs are required to report all management and statistical data to the Swiss Federal Department of Finance (SFDF). The SFDF will publish a register of all L-QIFs. According to the current draft legislation, any intentional breach of this reporting requirement will be subject to a sanction of up to CHF 500,000.

Audit requirements

L-QIFs will be subject to financial and prudential audits. Additional details on the audits will be provided in the implementing regulations.

Outlook

The L-QIF is a welcome new vehicle, which should make Switzerland a more attractive and competitive place for fund incorporation and domiciliation. Furthermore, re-domiciliation of offshore funds could become an option, which would be of interest for maintaining on-going costs under control. In addition, L-QIFs are expected to boost the Swiss venture capital and private equity markets by opening up new horizons for pooling assets in a more efficient way.

For more information on L-QIFs and fund regulations in Switzerland, contact your CMS client partner or local CMS expert: